o organization has been more alarmed about America's
constantly rising deficit in global transactions than the Institute for
International Economics, a center of expertise in this field. A disaster
in the making, declares the institute's director, C. Fred Bergsten - and
one coming soon.
But month after month, indeed year after year, the disaster has failed
to occur and now one of the institute's own trade experts, Catherine L.
Mann, has stopped, as she puts it, crying wolf.
"Because nothing happened, I did a lot more analysis," Ms. Mann said,
"and I have come to the conclusion that a co-dependent relationship exists
between the United States and its trading partners.'' That situation "may
not be healthy for either side,'' she added, but it "can last for quite
some time."
For Americans, the positive side of this equation - known as the
balance on current account - is that they get to consume much more in
goods and services than they produce. As for America's trading partners,
particularly China, Japan and the Asian tigers, they gain from an overseas
marketplace that allows them to expand production and job creation beyond
what their own population can consume.
The downside for the United States is that most of its imports are
purchased on credit extended by its trading partners. The overall indebtedness is now about $4.4
trillion, nearly twice what it was in 2000 - an
increasingly costly arrangement for Americans and a potentially risky one
for the nation's foreign creditors.
While Mr. Bergsten, one of the better-known commentators on the global
economy, remains alarmed that the arrangement could unravel abruptly, with
the dollar plummeting in value and inflation rising, Ms. Mann represents
an alternative view held by a growing number of economists. This group
argues that rather than crisis, the United States is caught in a gradual,
almost imperceptible deterioration brought on by the yawning deficit in
trade and other international transactions, and the deterioration could
continue for a long time.
"If there has been no crisis, there has to be a counterweight that
keeps the crisis from happening," Ms. Mann said. "The counterweight is
that the United States and its main trading partners have a vested
interest in the status quo.''
No one knows how this situation will unwind. The willingness of the
United States to accumulate more and more debt could indeed end painfully
or it could play out gradually and mildly as the nation's trading partners
pull back on their lending and Americans slow their consumption of
imported goods and services.
"I think in the long term what is happening is unsustainable but it is
very hard to predict a turning point in an unsustainable situation," said
Robert Blecker, an economist at American University who, like Ms. Mann,
describes himself as a former Chicken Little. "You can see why something
cannot keep going,'' he said, "but you can also see why it keeps going."
The scorecard in this process is the current account, which encompasses
the imbalance in the trading of goods and services as well as the
shortfall in all other cross-border payments, from interest income and
rents to dividends and profits on direct investments. The current account
deficit was equal to 5.7 percent of all domestic economic activity in the
second quarter, the Commerce Department announced this week.
That was a record and an unusually rapid rise from 4.5 percent of
G.D.P. in last year's fourth quarter and 5.1 percent in the first quarter.
The trade deficit, the biggest single component, has risen to $447 billion
over the last year, a 10 percent increase.
What could turn things around? Interest payments on the debt could
finally get too burdensome for American borrowers, for example, or the
Chinese, the centerpiece among the nation's trading partners, could
discover that they finally have enough customers at home and do not need
to sell so much to the United States on credit.
The dollar, in response, would fall sharply in value, forcing prices to
rise in the United States for a vast array of imported goods and services,
leaving Americans, in response, much more dependent on their own
inadequate production.
"At some point the music stops, or slows down, as the two sides become
too unhinged,'' said Lee Price, director of research at the Economic
Policy Institute.
The focus on whether or not the rapidly growing current account deficit
will produce an abrupt crisis draws attention away from the continuing
deterioration in America's global economic status.
Interest income that once went to lenders within the United States now
seeps overseas to foreign lenders. Foreigners own more than 40 percent of
all Treasury securities, up from less than 15 percent a decade ago. They
purchase these securities with the dollars American consumers pay for
imports, in effect lending the dollars back to Americans for more
purchases. The money collected through the Treasury sales finds its way
back to the public through the Bush administration's deficit spending, and
the cycle of purchasing on credit continues.
"The budget deficit is essentially consumption supported by foreign
lending," said Stephen S. Roach, chief economist at Morgan Stanley, the investment bank.
China and Japan held $1.3 trillion in Treasuries through June,
according to the International Monetary Fund. That continuing willingness
to invest surplus dollars in Treasuries helps to explain why the dollar
has fallen in value by only about 10 percent over the last year against a
market basket of currencies representing the nation's trading partners. So
far the dollar's preeminence as a reserve currency and America's
importance as a consumer market outweigh the dangers of one or two lenders
holding so much American debt.
"My hope prior to the Iraq war was that the ministers of the major
nations would sit down and address the United States problem," said
Christian Weller, a senior economist at the Center for American Progress,
a research institute. "But the war overshadowed the discussions and the
trade deficit became a sideshow."
The last time something similar happened, in the mid-1980's, America's
trade problems focused more on Germany, France, Britain, and Japan.
Recognizing the crisis, these countries reached an agreement with the
Reagan administration to manage the fall of the dollar against their
currencies. As imports became more expensive, American production revived,
particularly in manufacturing.
This time, China, Japan and other Asian countries are the focus of
trade, and lacking enough demand at home for all their production, they
are eager to keep their goods and services as inexpensive as possible for
American consumers. So they resist letting the dollar fall in value,
defying market forces and ignoring mild prods from the Bush
administration.
While Senator
John Kerry, the Democratic presidential candidate, has said he will "take
America in the right direction on trade," Tim Adams, policy director for
the Bush campaign, has said, "We will continue to work with the Chinese
toward a flexible exchange rate."
For the United States, however, the gradual deterioration is bringing
the country to a turning point. Until now, despite the growing imbalance,
income earned by Americans on all of their investments abroad as well as
their exports has exceeded the earnings of foreigners on their holdings in
the United States and their exports to this country.
Only occasionally have the roles reversed, and then only briefly. But
now a heavy swing in the net income flow appears to be developing, Mr.
Roach says, as interest payments rise on the hoard of Treasuries held by
foreigners.
The net income flow favored the United States by $64 billion in last
year's fourth quarter, but that net dwindled to less than $10 billion in
the second quarter "and it will keep falling sharply," Mr. Roach said.
Production and job creation also suffer as imports substitute for goods
and services made in America. These imports now account for nearly 15
percent of total consumption in the United States, up from 12 percent in
the mid-1990's and 9 percent in the mid-1980's, according to government
data. Manufacturing within the United States has simultaneously fallen to
less than 13 percent of the gross domestic product from 15.4 percent in
1998.
With less and less production at home, stimulating the economy in
periods of sluggish growth is becoming gradually more difficult, some
economists argue. The Federal Reserve, for example, was forced to cut
interest rates to rock-bottom levels before the economy started to
recover, in part because a growing portion of the goods and services
Americans buy are imported, diluting the stimulative effect on domestic
production.
How long can this imbalance between the United States and the rest of
the world continue? Indefinitely, says Albert Wojnilower, a Wall Street
economist who argues that no other country has a currency as reliable and
attractive as the dollar.
The downside is that a strong dollar forces the least competitive
American companies to give up or shift operations abroad.
"If this went on forever, ultimately we would import everything," Mr.
Wojnilower said. "But that is not going to happen."