Floyd Norris, writing in the New York Times, explains that Foreigners May Not Have Liked the War, but They Financed It. This is one of the many perversities of the world wide dollar reserve system. The US imports more goods than it exports, which must be balanced by exporting more financial assets than it imports. Firms in foreign countries sell America goods for dollars that must be either held as dollars or converted back into their local currency. The holders of dollars turn around and use them to purchase financial assets, mainly US treasuries and GSE bonds at this time. In this way, they finance the US federal debt and the housing bubble. Norris also takes on the oft-made ridiculous claim that the US trade deficit is a sign of American strength and vitality. The argument runs that our capital markets are so dynamic and promise such a superior return that Americans must import large volumes of goods in order to provide foreigners with enough dollars to buy all of the financial assets that they want.
