IN OTHER WORDS: Deficit binge

When a country buys more from foreigners than it sells to them, the result is a trade gap that must be plugged by selling off American assets. On Friday, the government reported that the US trade imbalance with the rest of the world hit $58.8 billion in June. It was the third-biggest monthly deficit on record and it led to market jitters over the government’s ability to finance its huge deficits on favourable terms. However, the Treasury announced that foreigners poured $71.2 billion into the US in June, comfortably covering that month’s trade gap.

The markets could continue to breathe easy if the foreign capital flowing into the US were purely a sign of American economic vitality. But that’s not the case. A big reason that foreign money is coming into the US is that America’s interest rates are higher than elsewhere. When conditions change, the focus of investors and traders shifts to fundamental strengths and weaknesses. More disturbing still, the trade gap is likely to grow and require ever greater foreign financing.

The question is how high the interest rates will have to go. The answer depends in large part on getting the fundamental weaknesses under control. But the US is crowing about long-term budget deficit targets it cannot reach under any set of reasonable assumptions, while Congress is blaming China.