The US as a Net Debtor:
The Sustainability of the US External Imbalances

Nouriel Roubini, Stern School of Business, New York University, November 2004

The large and increasing balance of trade deficits that the United States has been accumulating for many years have made many people nervous.

This article is essential background reading in professor Brad De Long's macroeconomics class at UC Berkeley. To give you some idea of what it is about, here's a small quote:

The rapid deterioration of US net external debt position implied by large trade and current account deficits cannot continue indefinitely. At some point, the interest rate that the U.S. needs to pay to attract the external financing it needs to run ongoing deficits will rise, slowing the U.S. economy and improving the trade balance even as higher interest rates increase the amount the U.S. must pay to its existing creditors. The vulnerabilities associated with being a major net debtor are attenuated by the dollar’s continued position as a reserve currency, but not entirely eliminated.

Large current deficits in the U.S. have to be offset by current account surpluses elsewhere. Rising U.S. debt implies that foreigners are increasingly their holdings of financial claims on the U.S.. Both Europe and East Asia (taken as a region) run substantial current account surpluses vis-à-vis the U.S.. However, the major European currencies float freely against the dollar while most Asian currencies do not. China, Malaysia, Hong Kong explicitly peg their currencies to the dollar, and other countries often intervene heavily to prevent their currencies from appreciating against the dollar (and the Chinese renminbi)...The U.S. trade deficit, in turn, provides an enormous stimulus to East Asian economies...

So far, the U.S. has been able to pass most major financial risks off to its creditors – a most unusual outcome. But that means that the United States’ creditors are taking on the risk. East Asian central banks and many other U.S. creditors risk large losses should the dollar eventually depreciate against their currencies, and those U.S. creditors holding long-term bonds risk additional losses should U.S. interest rates rise." (pages 3-4)