The US balance of payments deficit is now 5.5 per cent of gross domestic product, nearly double the previous trough in 1986. The dollar's exchange rate against other major currencies has fallen about 30 per cent since 2002 and this will mitigate the deteriorating trend. But against other trading partners, including China, the dollar has not fallen at all and the enormous accumulation of foreign liabilities generated by the deficits, in combination with a continuing rise in US interest rates, is set to raise progressively the net outflow of interest payments.

So long as GDP continues to grow at a satisfactory rate, this outflow will increase the overall balance of payments deficit to perhaps 7 per cent in two years time and 8.5 per cent in 2008. Those who write about the current account deficit generally address the dangers specific to external affairs, the need to import huge amounts of capital and so on.