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Friday, February 25, 2005
The Trade Deficit and the Falling Dollar
As this article in today's Washington Post points out, America's overall indebtedness to foreigners now totals approximately $3 trillion dollars. The trade deficit in 2004 grew 24 percent to a record $617.7 billion.
While the administration and Secretary of the Treasury John Snow are touting the trade deficit as economically beneficial, many economists are wary. In an op-ed piece in the Financial Times a few months ago, Snow wrote, "The deficit reflects foremost the strengths of the U.S. economy -- high productivity, strong U.S. growth relative to growth abroad, and the relative attraction of investing in our robust, dynamic economy, which has the deepest and most resilient capital markets in the world."
Many economists, however, see problems in the fact that as our trade deficit is growing, the money streaming into our country from foreign markets is not helping to finance a boom in assets such as factories and machinery; instead it is contributing to record levels of consumption based on credit by U.S. citizens. This consumption includes the ever-important oil, which our country continues to consume in very high levels. As Thomas Friedman writes in a New York Times column today, "We are importing too much oil, so the dollar's strength is being sapped as oil prices continue to rise. And we are importing too much capital, because we are saving too little and spending too much, as both a society and a government." This falling dollar without any checks on spending, he points out, could lead to problems down the road. He quotes former Clinton Commerce Department official David Rothkopf as saying "Given the number of people who have refinanced their homes with floating-rate mortgages, the falling dollar is a kind of sword of Damocles, getting closer and closer to their heads. And with any kind of sudden market disruption - caused by anything from a terror attack to signs that a big country has gotten queasy about buying dollars - the bubble could burst in a very unpleasant way."
See this editorial in today's Times for more information on why the weak dollar is not currently helping our economic situation.
Posted by Becky Lewis
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