- The Washington Times - Monday, November 29, 2004

In the wake of the federal budget deficit piercing the $400 billion ceiling for the first time and the personal saving rate plunging to a record-low annual rate of 0.4 percent in the third quarter, Federal Reserve Chairman Alan Greenspan recently issued a warning about the America’s skyrocketing current-account deficit. Mr. Greenspan delivered his warning Nov. 19 at the 2004 European Banking Congress in Germany as the dollar continued its record-shattering descent against the euro. All of these factors are interrelated.

The numbers are noteworthy in their magnitude. In the third year of an economic expansion following the relatively shallow 2001 recession, the U.S. budget deficit reached $413 billion in fiscal 2004. Without the benefit of the Social Security surplus, which exceeded $150 billion in 2004, the budget deficit would have been more than $560 billion in fiscal 2004. Meanwhile, the U.S. current-account deficit, which essentially reflects the expanding trade deficit, continues to soar this year after reaching a record level of $531 billion in 2003. After hitting 4.8 percent of gross domestic product (GDP) in 2003, the current-account deficit reached 5.7 percent of GDP during the second quarter of 2004. Together, these unfavorable developments represent structural imbalances in the economy that are unlikely to be sustainable.

The current-account deficit represents the combined balances on trade in goods and services, investment income and unilateral transfers. By far the largest of the three components is the trade balance on goods and services. Last year’s trade deficit, for example, totaled $497 billion, accounting for 94 percent of the 2003 current-account deficit.

According to what economists call the macroeconomic identity, the current-account balance represents the difference between saving and investment. Saving is broken down between public saving and private saving. In turn, private saving is divided between personal saving and business saving. Public saving represents the difference between government’s revenues and expenditures. A budget deficit reflects public dissaving. Investment primarily includes residential investment and nonresidential investment. When saving is less than investment, the United States effectively imports foreign saving by running a current-account deficit.

As Mr. Greenspan diplomatically noted in his remarks, “[c]urrent-account imbalances, per se, need not be a problem, but cumulative [his emphasis] deficits, which result in a marked decline of a country’s net international investment position — as is occurring in the United States — raise more complex issues.” Future editorials will examine the long-term problems and possible solutions of these burgeoning, related deficits.

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