Other Voices: Our economic Achilles’ Heel
According to the International Monetary Fund in 2005, the U.S. is the fourth richest country in the world ranked by per capita gross domestic product (Luxembourg, incidentally, is the world’s wealthiest country). However, as a major economic superpower, America suffers from a chronic economic Achilles’ heel. In short, a huge trade deficit.
The trade deficit doesn’t seem to be a problem. After all, we’ve been having back to back trade deficits for many years now without any detrimental effects to our healthy economy. In fact, it can be shown that net wealth has actually increased in spite of our perennial trade imbalances.
Surprisingly, some argue that having trade deficits is good for the U.S. Not only do they claim both government and consumers make out because they’re able to spend more than what they actually earn, but also believe that we’re doing countries, such as China and Japan, good by giving them a market for their goods as well as producing much needed employment for their populations, spurring highly beneficial economic growth for their nations in the process.
But many economists maintain that, down the road, our continuing habit of importing far more goods than we export will eventually bury our next generation under inextricable debt. And a gargantuan trade deficit could cause irreparable damage to our economy. As a worst case scenario, an unsustainable debt could bring the entire world’s financially intertwined house of cards crashing down, triggering a debilitating global depression and cause insurmountable political turmoil worldwide. Of course, no one really knows for sure what would happen should America fall economically, but it definitely would impact the world economy dramatically.
So, how big is our trade deficit? In May, the Commerce Department reported the March trade shortfall was $63.9 billion and definitely expected to increase as the year progresses. If one breaks the amount down, around one third of it is mainly due to imported Chinese goods and imported oil. China has devalued their currency 40 percent (as of this writing), enabling them to unleash a plethora of cheap goods on American soil. On the other hand, the devaluation has made our shipped goods too expensive for the Chinese to buy. The main barrier to trade with China, thus, is not so much that they practice unfair trading practices, but it’s more the fact that they simply can’t afford to buy our goods. And that’s bad for America in terms of reducing our deficit.
How can our trade deficit be our Achilles’ heel? “Business Week” reported awhile back that the deficit is currently being financed by heavy borrowing from abroad, and that the U.S. is “attracting foreign investments into assets such as stocks, corporate bonds, and Treasury securities. But much of the rising flow of money from overseas is coming from foreign central banks, especially Japan’s and China’s.” As it stands, private investors likely are getting wary of making loans to the U.S. If someday America is forced to pay the international banks back, we’ll be in deep trouble. Thus, our unquenchable thirst for foreign capital has left us vulnerable to economic catastrophe.
What is the solution to reducing the trade deficit? We as a nation need to stop living beyond our means. We need to curb our spending and save more — much more. At present, gas prices are high. So, many people are not going to the stores and buying like they used to. Maybe being forced to curb our spending habits because of high gas prices isn’t such a bad thing after all, since it forces people into saving whether they like it or not.
In any event, if foreign nations can invest their surplus capital in America from savings, why can’t we invest more than we do now and aggressively try to eliminate the blight of our habitual trade deficits? Even though the U.S. receives slightly more on its foreign investments than foreigners do in investing in the U.S., it still won’t keep America’s head above turbulent waters forever.
The main problem is we’re simply not investing in projects that eventually produce wealth — not like we used to. Instead of investing in America, we’ve been on a buying spree fueled with foreign capital. Foreign entities can someday eventually pull the plug on us by demanding payment for their “investments.” Armies don’t need to invade to take over America, they merely have to demand repayment. And therein lies our Achilles’ heel.
David Briceno lives in Grass Valley
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