Do current account deficits matter? I have argued that they can, most recently last week. The view that I am wrong has been advanced both in letters published in the Financial Times and in private e-mails. Since the high and rising US current account deficit is one of the most remarkable features of the world economy, deciding whether it matters is of some significance.

The argument that deficits are unimportant goes back to Adam Smith's assault on mercantilism in The Wealth of Nations. The aim of economic activity is consumption, he insisted, not the accumulation of treasure. Trade deficits permit a country to consume more than it produces. This then is a good thing.