The External Deficit and the Value of the Dollar Hu's in Charge?

Not long ago, one could safely ignore the value of the US dollar and the external deficit (imports exceeding exports) when studying the US business cycle. Back in the 1950s and 1960s, the US exposure to international markets was pretty minimal. The ratio of imports to GDP was only 4% compared with 15% today. The external deficit as a fraction of GDP was a small surplus of +1% compared with a deficit of −6% today. Many foreign exchange rates were held firmly in place by governments around the world. And the US government maintained the real value of the US dollar by fixing the price of gold firmly at $35 per ounce compared with a fluctuating rate around $900 per ounce today.

The subtitle quip “Hu's in charge?” is a reference to Chinese Paramount Leader Hu Jintao and to Chinese official purchases of US dollar-denominated assets that are partly responsible for the elevated value of the dollar, the flood of Chinese imports coming to the US, and, most importantly, to the growing dependence of the health of the US economy on decisions made by a small group of gentlemen in Beijing.