It is the gap between what the country spends and what it earns in its dealings with the rest of the world through trade and investment.
The deficit has to be funded by borrowing more from, or selling assets to, the rest of the world, which in turn increases future deficits.
It was $10 billion in the year ended June 2012, equivalent to 4.9 per cent of gross domestic product, and is forecast to be above 5 per cent of GDP for the foreseeable future.
That almost certainly means New Zealand's net foreign liabilities, already $149 billion, will grow faster than the economy that has to service them.
We have got away with this for decades but there is always a risk of a "sudden stop" if global financial markets go off New Zealand for some reason and refuse to roll over that debt as it falls due.
Even if that is averted it is "wealth-sapping" as Fletcher says, to have such a gap between what we produce and what is ours to keep and spend as we see fit.
He is attracted to the idea of a levy or tax which could be used to create a wedge - on top of the margin that ordinarily exists - between what borrowers have to pay and what savers, including the foreign sources of bank funding, receive.
The idea is to provide a way of dampening demand in the context of, say, a housing boom, without pushing up interest rates as far as would otherwise be necessary, with collateral damage to the tradeables sector via the exchange rate.
"It would be a levy on all New Zealand borrowers so that the combination of the official cash rate and the levy would be at the level that you want to control inflation, because that's the cost borne by borrowers, but the interest rate is all that foreigners would be getting for their money," he said.
"The other great thing about a levy is that it could deliver a couple of billion dollars of tax revenue."
A discretionary levy, though confined to mortgage debt, was looked at when officials were sent on a quest for supplementary stabilisation instruments six years ago at the height of the housing boom.
They envisaged the Reserve Bank being given the power to apply such a levy, subject to statutory criteria such as whether the housing market was, or was likely to be, materially overvalued, the overall pressure on resources in the economy, the size of the gap between New Zealand and key foreign interest rates, and whether the OCR had already been set at a contractionary level.
The levy would be removed when the conditions which warranted it no longer applied and would be capped at 2 percentage points.
Officials acknowledged that "exchange rate cycles would be likely to be somewhat more muted, especially at peaks" but pointed out that that would advantage New Zealand producers at the expense of consumers, who benefit from cheaper imports when the dollar is high.
It would also disadvantage savers, domestic as well as foreign, whose returns would be lower than otherwise, which would run counter to any other policies to encourage domestic savings.
Like any tax it would give rise to boundary issues and encourage people to find ways around it.
And it would be constitutionally problematic, at odds with the principle that taxes can only be imposed by Parliament. Violating that principle, after all, cost King Charles I his head.
But Fletcher is unconvinced. "You could build safeguards around it, that it is a recommendation to the Minister [of Finance] from the Reserve Bank," he said.
"People always say there will be unintended consequences and we don't know what the costs are. On that basis we would never have had income tax because it has had unintended consequences and there are people cheating all over the place."
As for the impact on domestic savers - household deposits fund about 35 per cent of banks' lending - the wedge might instead be inserted between them and foreign sources of funding, by taxing the flow of interest payments to the latter, Fletcher suggests.
That does not happen now, beyond the "approved issuer levy" of 2 per cent, on the grounds that subjecting foreign suppliers of bank funding to non-resident withholding tax would only mean they would demand a higher pretax return to compensate. The economic burden of the tax would be borne by New Zealanders.
"I'm not an expert in these matters," Fletcher says. "I'm saying that to just say there is nothing we can do is simplistic. There are things you could look at. There should be a discourse and people more knowledgeable than myself should engage in the debate and it should be out in the open. And let's not be afraid that initiatives may give rise to problems, because there are problems with staying with the status quo."
Quite.
Market economists argue that it is simplistic to assume, as people often do, that it is interest rate differentials between New Zealand and other countries which drive the exchange rate.
There have been several periods over the past 20 years when interest rate differentials and the exchange rate have moved in opposite directions.
And when there is a correlation, that does not mean that one causes the other. It might be that both sets of prices reflect the same underlying fundamentals about the state of the economy.
But the fact that interest rate differentials are by no means the only influence on exchange rates does not mean they are never important.
All through 2006 the Reserve Bank kept the OCR on hold, only to have to hit the brakes again when it became apparent that it had not, in fact, tamed the housing boom.
Part of the reason for that pause, Alan Bollard has said, was concern about the exchange rate and mindfulness of the policy targets agreement's injunction for him to avoid unnecessary instability in the exchange rate.
