This identity is true whether we are talking about budget deficits building up the stock of outstanding government debt (a liability of the government sector to the private sector), or trade deficits building up the stock of external debt (the net stock of accumulated foreign claims against the United States).2 Economists have worried for years about optimal stocks of government and external debt.
For government debt, the optimal stock turns out to be related to the optimal level of national saving, which can be defined as the level that maximizes the nation’s long-term path of consumption per worker. The optimal stock of net external debt can be determined in the same framework from an open economy perspective.