Mankiw forgot to mention the large jolt

Want to Rev Up the Economy? Don’t Worry About the Trade Deficit

Economic View

The most important lesson about trade deficits is that they have a flip side. When the United States buys goods and services from other nations, the money Americans send abroad generally comes back in one way or another. One possibility is that foreigners use it to buy things we produce, and we have balanced trade. The other possibility, which is relevant when we have trade deficits, is that foreigners spend on capital assets in the United States, such as stocks, bonds and direct investments in plants, equipment and real estate.

In practice, these capital inflows from abroad have been large. Net foreign ownership of American capital assets has risen to about $8 trillion from $2.5 trillion at the end of 2010. American companies moving production overseas get a lot of attention, but this data shows that capital has, over all, moved in the opposite direction.

Then Greg goes on assuming we ate a compressible fluid.

We are not, we left and re-entered the old standard twice, one per each of two generations since 1929. We will do it again, and all of Greg's assumptions will be forced into one generational adjustment, followed by years of repricing costs..