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Trade Deficits Leave America Vulnerable??

Record United States trade deficits leave some economists worried that the dollar could collapse, sending interest rates sharply higher and the economy reeling. U.S. workers, meanwhile, worry that American jobs are increasingly susceptible to outsourcing overseas.

A recent report from McKinsey & Co. suggests, however, that America is not nearly so vulenerable as first envisioned. "Far from reflecting the weakness of the U.S. economy, at least a third of the current-account deficit is actually evidence of its strength," the report says. "The U.S. acts as the world's financial intermediary, gathering up and allocating global savings to companies that then invest them around the world," it later concludes. Diana Farrell is director of the McKinsey Global Institute and co-author of this study on multinationals.

Edward McKelvey, a senior economist at Goldman Sachs, argues the flip side of the McKinsey conclusions. He suggests that it does not matter who is driving the deficit wider. The end result is still that the world is awash in dollars and because of that, the U.S. currency is still prone to sharp -- and potentially destabilizing -- depreciation.