Abstract
This chapter begins by considering the factors that contributed to a ballooning of the US trade and current account deficits since the early 1980s. The conventional explanation is that it stems from outsized budget deficits that began during the Reagan administration. This is consistent with the data until the mid-1990s. Thereafter, the US budget balance swung from deficit to surplus in the second term of the Clinton administration, but the US current account deficit widened steadily, which suggests other forces were at play. The discussion highlights the critical role that international capital flows have played in determining the value of the dollar and the US trade imbalance.
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