Wednesday, March 14, 2012

The U.S. International Deficit: A Dilemma

The Lehmann Letter (SM)

Today the Department of Commerce announced that the US current-account deficit grew to $124.1 billion in last year's fourth quarter:

If you put this number in perspective by placing it on the chart, it appears unremarkable. If you take a longer view, you might think that matters look pretty good. The current-account deficit plunged for 20 years and then moved back toward positive territory during the recent recession. Was that a good sign?

US Current Account Deficit
(Click on chart to enlarge)

(Recessions shaded)

Therein lies the dilemma. During the boom years our economy was on a borrowing binge - both public and private. Our government borrowed, but so did the private sector. We borrowed from the rest of the world in order to buy homes and cars and travel to places from which we were borrowing: More prosperity here at home meant greater indebtedness to lenders abroad. That's why the line in the chart went south.

We stopped borrowing as much when the economy shrank during the recession: Less borrowing from abroad went along with less spending here at home. That's why the chart went north for a while.

Now that the economy is recovering, we are beginning to borrow more here at home and abroad. Our current account deficit is growing and the line in the chart is falling once more.

We have become so dependent on debt that we can't expand without borrowing overseas. More prosperity at home goes along with our greater indebtedness to the rest of the world.

Expect this dilemma to sharpen as the economy gains strength.

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© 2012 Michael B. Lehmann

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