- The Washington Times - Wednesday, February 15, 2006

When economists express concern over the growing imbalances in the U.S. economy, they refer to the soaring budget and trade deficits, as well as the related decline in net national saving. Coming on the heels of a worrisome report on personal saving in 2005, last week proved to be a bad week for deficits.

On Monday, the Bush administration projected that the budget deficit for this fiscal year, which began Oct. 1, would reach a nominal record of $423 billion, exceeding the 2005 budget deficit by $105 billion. Excluding Social Security, which is currently running a surplus, the so-called on-budget deficit will reach $602 billion this year. On Friday, the Commerce Department reported that the 2005 trade deficit reached a record $726 billion, reflecting a $108 billion increase over 2004. Petroleum imports cost $243 billion in 2005, representing a $69 billion increase over 2004. Meanwhile, the merchandise trade deficit with China, which reached a bilateral record of $202 billion in 2005, increased by $40 billion over 2004. The budget deficit for fiscal 2005, which ended Sept. 30, was $318 billion, or 2.6 percent of gross domestic product (GDP). The 2005 trade deficit of $726 billion was 5.8 percent of GDP.

Two decades ago, the trade deficit and the federal budget deficit — which had simultaneously reached record nominal levels — were known as the “twin deficits.” They have clearly returned, but this time they are being accompanied by the disappearance of personal saving.

In 1986, when defense spending was 6.2 percent of GDP, the budget deficit hit a nominal record of $221 billion (5 percent of GDP). That same year the trade deficit reached a record level of $139 billion (3.1 percent of GDP). Partially offsetting these deficits was an 8.2 percent personal saving rate. Ten years later, the budget deficit was down to 1.4 percent of GDP (en route to a surplus of 2.4 percent of GDP in 2000); and the trade deficit had fallen to 1.3 percent of GDP by 1996.

Forecasting national-defense spending at 4.1 percent of GDP this year, which is more than 2 percentage points below the 1986 level, the Bush administration projects the 2006 budget deficit to be 3.2 percent of GDP. Given the surging trade deficit’s built-in momentum, which has contributed to its 100 percent increase over the past four years, the trade deficit could easily reach 6.2 percent of GDP in 2006. Thus, the budget deficit has deteriorated from a surplus of 2.4 percent of GDP in 2000 to a projected deficit of 3.2 percent in 2006. And the trade deficit, measured as a percent of GDP, will have doubled from its then-worrisome 1986 level. Meanwhile, the personal saving rate plummeted to a negative 0.5 percent in 2005, compared to 8.2 percent in 1986.

As Morgan Stanley’s Stephen Roach observed Monday, “America’s net national saving rate,” which includes business, household and government saving, “fell into negative territory for the first time in modern history in late 2005.”

These ominous trends explain why the American government had to rely on foreign investors to finance more than $1 trillion of the $1.27 trillion in cumulative U.S. budget deficits over the last four years. And that doesn’t include a dime of financing requirements for the $423 billion budget deficit projected for 2006.


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