Wall Street economic consultant Peter L. Bernstein points out that federal deficit reduction is not coinciding with a decline in the U.S. trade gap.

• In the 1980s, economists noted that as deficits grew, so did the U.S. balance of payments -- leading them to believe that the two were linked.

• As interest rates rose, foreign investors sent funds into the U.S., the dollar rose, imports increased and U.S. exports lagged.

• But the prospect of budget surpluses along with increasing trade deficits has left economists suspecting other factors are involved -- such as monetary policy, relative interest rates, the business cycle and shifting conditions abroad.

• Particularly noteworthy is the fact that as the public sector's savings rate has grown, the private savings rate has plummeted to its lowest level in 39 years -- leaving the U.S. still highly dependent on foreign capital.

The upshot is that the dollar has risen 12 percent over the past year, while the merchandise trade gap could rise as much as $40 billion in 1998, by some estimates. While not a problem now, Bernstein is concerned foreign investors could massively shift out of dollar assets sometime in the future.