What does external deficit mean for U.S.?

The U.S external deficit has an internal counterpart: the budget deficit. Higher budget deficits generally increase domestic demand for foreign goods and foreign capital and thus promote larger current account deficits. But the two deficits are not "twin" in any mechanistic sense, and they have moved in opposite direction at times, including at present. The latest projections by the Obama administration and the Congressional Budget Office (CBO) suggest that both in the short run, as a result of the crisis, and over the next decade or so, as baby boomers age, the U.S. budget deficit will exceed all previous records by considerable margins. The Peterson Institute for International Economics project that the international economic position of the United States is likely to deteriorate enormously as a result, with the current account deficit rising from a previous record of six percent of GDP to over 15 percent (more than $ 5 trillion annually) by 2030 and net debt climbing from $ 3.5 trillion today to $ 50 trillion (the equivalent of 140 percent of GDP and more than 700 percent of exports) by 2030. The United States would then be transferring a full seven percent ( $ 2.5 trillion ) of its entire economic output, to foreigners every year in order to service its external debt.
This untenable scenario highlights a grave triple threat for the United States. If the rest of the world again finances the United States large external deficits, the conditions that brought on the current crisis will be replicated and the risk of calamity renewed. At the same, increasing U.S. demands on foreign investors would probably become unsustainable and produce a severe drop in the value of the dollar well before 2030, possibly bringing on a hard landing. And even if the United States were lucky enough to avoid future crisis, the steadily rising transfer of U.S income to the rest of the world to service foreign debt would seriously erode Americans' standards of living.
Hence, new record levels of trade and current account deficits would likely levy very heavy costs on the United States whether or not the rest of the world was willing to finance these deficits at prices compatible with U.S. prosperity. Washington should seek to sharply limit these external deficits in the future - and it is encouraging that the Obama administration has indicated its intention to move in that direction, opting for future U.S. growth that is export-oriented, rather than consumption-oriented, and rejecting the role of the United States as the world's consumer of the last resort.
Balancing the budget is the only reliable policy instrument for preventing such a buildup of foreign deficits and debt for the United States. As soon as the U.S. economy recovers from the current crisis, it is imperative that U.S. policymakers restore a budget that is balanced over the economic cycle and, in fact, runs surpluses during boom years. Measures that could be adopted now and phased in as growth is restored include containing the cost of medical care, reforming Social Security, and enacting new taxes on consumption.
The U.S. government's continued failure to responsibly address the fiscal future of the United States will imperil its global position as well as its future prosperity. The country's fate is already largely in the hands of its foreign creditors, starting with China but also including Japan, Russia, and a number of oil-exporting countries.
Unless the United States quickly achieves and maintains sustainable economic position, its ability to pursue autonomous economic and foreign policies will become increasingly compromised.

Without a doubt, the financial melt-down and its horrors began on Wall-Street. Even though " Wall-Street" means the nation's big financial and investing operations, not a geographical location, a disproportionate number of Street people live in Manhattan.
In the real world (outside New York City), a bonus is generally a payment for extraordinarily good performance. But on Wall-Street, what's called a bonus is generally part of base pay. That's especially true for worker bees, who far outnumber CEOs.
A fair number of Wall-Streetters got wiped out because their wealth was tied to their firm's stock price. Dick Fuld, the former CEO of Lehman, had shares and options worth about $1 billion at their peak. He got less than $1 million when he sold them after the firm went bankrupt.
The two biggest basket cases - AIG and CITY got into trouble because they didn't know they were taking risks.
The two divisions at AIG that brought down the firm - financial products and stock-lending - didn't understand what they were doing. Financial products wrote credit-default swaps that they thought were riskless but turned out to be ultra-risky.
The stock-loan department, AIG's other disaster, took the cash it got for lending out stock owned by AIG and invested the money in esoteric securities rather than in risk-free Treasuries, the standard practice. In the end, the problem isn't really pay: it's competence. The CEOs didn't understand the fine point. These firms collapsed out of ignorance fueled by avarice - a particularly toxic combination.

It is not essential for the United States to fully eliminate its external imbalances. Theory and history suggest that a deficit of around three percent of GDP would be sustainable because U.S. foreign debt would then grow no faster than the domestic economy on which it rests - especially if foreign capital were used for productive investment (as during the 1990s) rather than for private consumption and government spending (as during this decade). Maintenance of the deficit at this level would permit the U.S. net foreign debt to stabilize at about 50 percent of GDP - uncomfortably high but probably manageable.