- The Washington Times - Friday, March 17, 2006

Reflecting the massive dissaving in both the federal-government and household sectors, the United States recorded a current-account deficit of $805 billion last year. The current account is the broadest measure of U.S. international transactions. The $724 billion trade deficit in goods and services comprised 90 percent of last year’s current-account deficit. As Federal Reserve Chairman Ben Bernanke recently noted in congressional testimony, “The immediate implication is that the U.S. economy is consuming more than it’s producing, and the difference is being made up by imports from abroad, which in turn are being financed by borrowing from abroad.” To prevent business investment from collapsing, the U.S. economy effectively has been forced to import savings from abroad.

The Commerce Department reported Tuesday that the fourth-quarter current-account deficit soared to $225 billion, reflecting a 21 percent increase over the third quarter. For 2005, that deficit was 20.5 percent above the 2004 record level. As a percentage of gross domestic product (GDP), which measures total economic output, the 2005 current-account deficit reached nearly 6.5 percent, significantly above 2004’s record-level 5.7 percent. Coming in at an annual rate of $900 billion, the fourth-quarter current-account deficit exceeded 7 percent of GDP.

Unless the price of oil collapses, which is unlikely, there is now a very good chance that the 2006 current-account deficit will closely approach $1 trillion. The trade deficit for goods in January was $68.5 billion, representing an annual rate of nearly $825 billion. Meanwhile, the debt-service chickens, which are the result of cumulative current-account deficits exceeding $4 trillion over the past decade, are now coming home to roost. Perhaps the most distressing statistic in the fourth-quarter report was the $7.3 billion deterioration (compared to the third quarter) in net income payments. The income section of the current account tracks U.S. income payments (dividends and interest, for example) on foreign-owned assets in the United States (stocks and bonds), on the one hand, and U.S. income receipts from foreigners on U.S.-owned assets abroad. For only the second time since the end of World War II (2005’s April-June period was the first occurrence), U.S. income payments exceeded U.S. income receipts in the fourth quarter. Most economists expect U.S. debt-service costs to increase exponentially in the future.

Indeed, as this page has noted, foreign governments and foreign private investors have been purchasing the vast majority of Treasury securities issued to finance record-level U.S. budget deficits in recent years. Interest payments on that debt will be made to foreigners. Given that short-term interest rates have increased by 3.5 percentage points since mid-2004 and will likely increase at least another half-point before by mid-year, the income-payments deficit is likely to soar. So, too, will the current-account deficit. As a result, the structural imbalances in the U.S. economy are likely to worsen.

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