Thinking about this some more, I have tried to take money out of the picture. (When I get stumped by an economic question I find it helps to eliminate the concept of money and think only of the flow of goods and services).

Consider an economic universe with only two people in it, Drew and Khobrah. Both produce goods and services and both consume goods and services.

Drew wants to consume more goods and services than he produces. The only way he can do this is if Khobrah (the only other person in that universe) produces goods and services, consumes less than he produces (ie Khobrah saves) and then Khobrah lends the unconsumed goods and services to Drew. Since Khobrah is a member of the species Rational Economic Man (Homo Economicus Rationalis), Khobrah is willing to do this (loan stuff) only because he expects to be repaid at some future time when Khobrah will choose to consume more than he produces.

So Drew can consume more than he produces, but only for a time. Eventually Khobrah has to consume more than Khobrah produces and Drew consume less than Drew produces.

(This doesn't mean that Drew ever has to consume fewer goods and services than he is currently consuming. For example Drew could even consume 25% more tomorrow than he is consuming today if he produces 50% more than he is producing today, and ships the surplus to Khobrah.

Now replace "Drew" with "Everybody in the US" and "Khobrah" with "Everybody in China". All that still holds true. All the people in the US can consume more than they produce (for a while) because all the people in China are producing more than the Chinese are consuming, and loaning the excess to the US. But eventually the current accounts deficit has to correct.

Now replace "Drew" with "All the people in Nevada" and "Khobrah" with "All the people in Wyoming". Doesn't it still hold true? All the residents of Nevada, singly or as a group, can't consume more than they produce indefinitely. So why doesn't Nevada run a current accounts deficit with Wyoming and Wyoming a Current Accounts surplus?

Is it because in the case of states (not countries) Drew and Khobrah have an uncle, Sam, who quietly taxes both of them and shifts that tax money around without either of them noticing, so the current accounts deficit is corrected? I can't see it being because Wyoming and Nevada have the same currency, bond market and central bank. If Drew and Khobrah as individuals use the same monetary units and same bank, Drew still can't consume more than he produces indefinitely.

The Quantum view (a collection of individuals) and the Classical view (US States as entities) seem to give different answers. Anybody see how US states (or any other collection of individuals that are _not_ a country) correct production/consumption imbalances?

If you simplify things to the point where we are just talking about shirts and oranges, there are no differences between intrastate commerce and intracountry commerce. Currency exchange and the role of government intervention (e.g,. Taxing Khobrah and subsidizing Drew) do have an impact, but for the sake of discussion let's ignore these. You can have countries with a common currency (e.g., Euroland) and while a tax-free government is a stretch, we can imagine two governments with similar taxation schemes that do not impact trade).

However, while I do not see a necessary difference between intrastate and intracountry trade (one of your main issues), I do have a problem with oversimplifying the model to just Drew and Khobrah. This makes trading a zero-sum game where trade deficits always have long-term implications.

Now I don't believe this is true in the real world. Let's create a slightly more complex model. Assume country La Mancha with two states (Drewtopia and Khobrahstan) and country LowWagesRUs. La Mancha is very productive. The innovative Drewtopians and Khobrahstanis are constantly trading amongst themselves and creating new products that create new wealth for their citizens. With some of their ever increasing wealth, they also buy items from LowWagesRUs.

The citizens of LowWagesRUs do not buy much from La Manchans since they prefer to use the profits from their trading surplus to develop their country. Some La Manchan's are concerned about running a trade deficit with LowWagesRUs. However, all international purchases accounts for about 10% of La Manchan spending. Is this a problem?

My perspective, which may not be shared by economists, is that this is perfectly fine so long as the La Manchan economy wealth continues to grow (or even stays the same). It only becomes a problem, when La Manchans start importing so much that they lose wealth in doing so.

Real life economics is not a zero-sum game. So if new wealth is being created, it needs to be considered in all discussions about trade.

Yes, I know the example was simple. And there are ways out if you have different currencies (you can devalue or have a different rate of inflation than the other guy).

And yes, the absolute dollar (or utile) value of the trade deficit is not a problem as long as the size (and debt service) are manageable given your overall size.

But I am still bothered that Interstate and International current accounts deficits don't seem entirely the same.

Perhaps I misunderstood your question. Let me try another tact (and if that doesn't work, please elaborate your question).

Ignoring models altogether (and still ignoring the role of government) there are two big differences between interstate trade and international trade. The currency exchange, as you mentioned, is a large issue. Countries like China deliberately peg their currency to be worth much less than the dollar to help their exports. Other currencies (such as the Euro) will gain or lose value against the dollar and may be used as balancing issues.

Another issue is how country A pays for the trade imbalance. In my opinion, this is one of the more important factors in the discussion. If country A goes into debt to pay for the goods from country B, then this is bad for country A over the long-term. If the debt grows large enough (both in absolute terms and/or as a percentage of country A's wealth), then it will adversely impact the value of country A's currency relative to adjustable currencies (e.g., the dollar will drop against the euro, but not against the Chinese yuan).

Now, absent the currency issue, this situation might be going on with interstate trade (e.g., Californians may be buying goods from Vermont on credit and plan on paying for them with the appreciation of their real estate). However, no one seems to think interstate commerce is a bad idea, even if some states have imbalances (as they must unless you think all states perfectly average out). This is why I think the issue that should be cause for concern is not who you trade with, but how you pay for your purchases (cash vs. financing). (Caveat – the other big difference is the one I was trying to ignore for simplicity's sake. The Federal government does redistribute wealth from some parts of the US to other parts of the US and this may serve to compensate for some trading imbalances).

So due to the US current accounts deficit the Chinese now have a bunch of US
Dollars. They can a) spend those (buy stuff from us with dollars or buy
stuff from somebody else, say buy oil from the Saudi's with dollars). If
they buy stuff from the Saudis that basically doesn't change anything
(right?). The dollars are still out there, held by someone not inside the
"membrane" of the US (I think of trade in terms of flux across a
semipermeable membrane). Those outside-the-membrane dollars can go back
inside the membrane if the Chinese or Saudis buy stuff _from somebody inside
the membrane. That is a current accounts surplus and everything is now back
to zero net current account surplus/deficit.

If they don't buy anything from somebody inside the US they can hold the
dollars in a strongbox. They can turn the dollars into US Treasuries (which
does nothing, right? Those turn back into dollars-outside-the-membrane when
the Treasuries are eventually cashed in.)

Hmm, "So what" I can hear you say. Is that the answer? If the Chinese hold
US dollars that is their business. There is a potential effect on the US
Bond Market lurking in there. If the Chinese have lots of US Treasuries they
can suddenly not be interested in rolling them over any more, but that is
true of any other holder of US treasuries. The likelihood of the Chinese
losing interest in US Treasuries is a little different than the likelihood
of me, say losing interest. The Chinese are assuming a currency exchange
risk by holding US dollars but I am not. So they are more likely to lose
interest some future day.

Is the answer (to the little question of whether a current accounts deficit
ever has to come back to zero at some future date) "not necessarily because
the guy holding the dollars might choose to do that ad infinitum"?

(The original question of whether a US State or county can have a current
accounts deficit we can deal with in a bit. I just thought of someone else
to ask)

I'm starting to better understand your point. I think part of the confusion is that we are talking about two different issues: trade deficits and oversea dollars. To add to the confusion, these issues may impact each other.

I do not believe trade imbalance is a major issue. If we bought the Chinese goods with gold (so currency and debt issues never arise), there would be no problem so long as we were still producing or otherwise obtaining enough wealth that our stockpiles of gold continued to grow. Agreed?

I now believe your main concern is the issue about having massive amounts of dollars overseas (and the related issue of owing foreigners massive amounts of debt). Let me know if this is correct before I spend time on this.