The excess of US imports over exports continued to provide dollars to the rest of the world, which were invested in the US bond market.

The graph shows that foreign investments flowed into the market for US fixed income securities in Q1 2006, at a rate 25% greater than in 2005. (See Table F107, Rest of the World).

	Foreign Purchases of US Fixed Income Securities

Although foreign central banks reduced flows into US treasuries and agencies after the high point of 2004, the shortfall has been more than covered by flows into bonds from foreign private sources.

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Recent statistics released by the OECD confirm what we have long known: Euro Area unemployment runs about twice that of the United States. Projections released by the OECD on 07-Feb-2006 show that this trend is expected to continue through 2007:

	US Unemployment Compared to Europe

The Wall Street Journal, in an editorial on 08-Feb-2006 (”The European Disease”), citing the same OECD report, said that the rate of GDP growth per capita for Germany, France, and Italy is falling, relative to the U.S., and that Jean-Phillippe Cotis, chief economist at the OECD said that at this rate, in twenty years, the average U.S. citizen would be twice as rich as a Frenchman or German.

So, what does this have to do with the price of U.S. bonds?

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The correct answer to this question is, “Of course, the U.S. trade deficit is not sustainable.”

But then, what is? Neither the Roman nor the British Empire endured. Economic and political phenomenon eventually fade and die. Indeed, the U.S. trade deficit, one day, like everything else will be a thing of the past.

A more practical question would be, “How much longer might the U.S. trade deficit last? One year? Ten years? Thirty years?”

Some observers may presume that the demise of the trade deficit is imminent, perhaps by the end of 2006; but, it this reasonable?

The trade deficit has been growing for thirty years — which almost qualifies as a Keynesian ‘long-run’ . Since no clear mechanism exists whereby the trade deficit must end in, say, six months or a year, it could be that in thirty years our children will still fret about a trade deficit that has grown even larger.

The longevity of the U.S. trade deficit is quite germane to Capital Flow Analysis, since it is the dollars earned by foreign exporters that support the price of American bonds.

(See: “Trade Deficits Have Depressed Bond Yields for Twenty Years.”)

It is worthwhile to speculate about the sustainability of the trade deficit.

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