...once American households rebuild their retirement accounts, they may return to their profligate ways. Indeed, the Obama administration and the Federal Reserve are doing all they can to pump up US spending. The only reason the US trade deficit is falling is that the country remains in a severe recession, causing US imports and exports to collapse in parallel.The answer depends a lot on decisions outside the US. For example, will China continue to lend to the US. A disaster could arise if China turns away from holding US assets. He concludes:
With recovery, both may recover to previous levels, and the 6%-of-GDP US external deficit will be back. In fact, there has been no change in relative prices or depreciation of the US dollar of a magnitude that would augur a permanent shift in trade and spending patterns.
There are two hopes for avoiding this disastrous outcome. One is relying on Chinese goodwill to stabilize the US and world economies. The other is for the Obama administration and the Fed to provide details about how they will eliminate the budget deficit and avoid inflation once the recession ends. The second option is clearly preferable. After all, it is always better to control one’s own fate.