What the trade deficits have wrought

Time Magazine columnist and blogger Justin Fox's latest article is must-reading for anyone who doesn't realize just how badly our trade deficits and the declining value of the dollar have imperiled this country's economic stability. He notes that countries like China, Japan and the Persian Gulf dictatorships own a large chunk of the this country's debt and that it's really just a matter of time before they call to call in all of their chits.

Importantly, according to recent researh by Bank of International Settlements (as cited by the Economic Policy Institute), foreign central banks financed 75% of the U.S. current account deficit in 2004, providing an inflow of $498 billion. The EPI notes that "Official reserve transactions by foreign central banks were somewhat larger than the net deterioration of NIIP. Foreign governments served as the lender of last resort to the United States in 2004, as they did in 2003. Most of that capital came from China, Japan, and other Asian countries, which sought to reduce pressure on their currencies to appreciate against the dollar. Without that intervention, the dollar, which declined 5.8% in 2004 in real terms, would have fallen more rapidly than it did. Were the dollar to decline, the competitiveness of U.S. export- and import-competing industries would improve, and production and jobs in industries in manufacturing and other sectors would strengthen."

Ultimately, Fox correctly observes that we are in a situation where "the US will effectively be sending big checks abroad each year to pay for good times past. Which is money Americans won't be able to spend on oil, cars and consumer electronics."