Do a little thought experiment: Imagine that your country is the world's most attractive country in which to invest capital, because it has the biggest and richest market in the world, and the world's most used and tradable currency, and it is scrupulous about protecting the rights of investors. Imagine further that its advanced economy is leading the world in the transition to a service-based economy, and as a result, it runs the world's biggest services trade surplus -- by a factor of more than two over the next biggest surplus in the world.

Per standard macroeconomic theory, this imaginary country would run the world's biggest deficit in traded goods. And it would have absolutely nothing to do with its being uncompetitive or its people profligate. It can't be the best place to invest and the best service exporter without running a huge goods trade deficit. (Because, remember, all three things have to sum to zero.) Well, the mystery country is, of course, the U.S. -- and the U.S. trade deficit, according to this argument, is a logical consequence of America's success and superior know-how relative to other countries. On this basis, the trade deficit should be something to brag about rather than denounce.

In an inflows-causes-deficits narrative, the trigger for the rise in the U.S. trade deficit is not cheap overseas labor or American profligacy. Rather, it is President Nixon's 1971 decision to take the U.S. off of the gold standard and end the postwar Bretton Woods period of fixed exchange rates. That decision launched what has turned out to be a nearly half-century period of upward-trending deficits in the trade of goods with other nations. What President Nixon could never have guessed is that when he triggered the end of Bretton Woods, he made it much more important for global investors to choose wisely when deciding where to invest their capital internationally.

Prior to August 15, 1971, it didn't matter as much because your currency was fixed against the U.S. currency, and the U.S. promised to give you one ounce of gold if you used your currency to buy $35. So, you could invest in France and not have to worry about your francs becoming worth less in U.S. dollars than when you first invested. After 1971 it was really helpful to invest your capital in the most robust and open market in the world, and the world's investors have increasingly figured that market is the U.S. -- not Japan with its shrinking population, or China with its rampant corruption, or Europe with its economic sclerosis.

Since 2000 the U.S. has received, on average, a net capital inflow of over half a trillion -- per year! And to put more upward pressure on the goods trade balance, the U.S. services trade balance, which was trivial as late as 1985, is now in the neighborhood of one-quarter of $1 trillion dollars per year.