I think I can now welcome Brad DeLong to the "gloom and doom caucus, trade deficit division."  He joins some pretty good company:  Paul Volcker, Robert Rubin, Larry Summers, Warren Buffet, Martin Feldstein (bipartisianship!), Stephen Roach and Bill Gross (at least some of the time).   But not Ben Bernanke.  Bernanke anchors the "don't worry" camp.

DeLong highlights why we should worry.   At some point, the deficit will have to correct.   And that correction implies huge changes in the US economy - and in the composition of employment in the US.  And equally huge changes in the Chinese economy - and the composition of Chinese employment.   China here is a metaphor for all the countries that have grown fat and happy exporting to the US.  

The question that the doom and gloom caucus cannot answer is when will the correction start.  Tis pretty clear that the trade deficit cannot continue to widen for ever.  But it has widened a lot recently, in the face of a lot of hand-wringing.  DeLong's Socratic dialogue:

"Agathon: And when do your models predict the dollar will fall?

Kapelikos: 2003.

Agathon: Three years ago?

Kapelikos: Yep.

Agathon: But as long as people believe the argument on the other side, the dollar doesn't decline, and the argument looks correct?

Kapelikos: Yep--for one more year.

Agathon: How many more yars are you going to be saying, "Wait just one more year"?

Kapelikos: Until I can say, "I told you so." (End of DeLong insert)

Ironically, the models that suggested that the deficit should have started to correct in 2003 were not totally off.

Why?  Because the deficit would have corrected in 2003 but for a change in official policy - one which led to surge in reserve growth and a surge in central bank financing of the US. 

Continues, with charts on global reserve growth and central bank financing of the US!