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While You Were Shopping…
August 16, 2001

Let's talk trade deficits. No one else is. True, knowing about interest rates and dollar devaluations won't make you charming at cocktail parties or irresistible to the opposite sex, but if you're one of those types who likes to know what hit you, take note.

The sky isn't falling yet, but the dollar is. Yesterday, the greenback took a drubbing on the international currency markets, reaching a five-month low after reports from the Federal Reserve and International Monetary Fund raised doubts that the U.S. can sustain our massive trade deficit and avoid recession.

Simply put, when a nation's imports outstrip exports, it incurs a trade deficit - a state the U.S. has lived in since 1981 when our string of surpluses soured. Last year, we tipped the scale at $435 billion - a 40% increase from the previous year and an unprecedented 4.5% of total national output. (For purposes of comparison, when panic over our economic well-being prompted President Nixon to break the dollar's link to gold in 1971, the trade deficit was just 0.1%.)

Think of it like your own family's bills. If you habitually spend more than you take in, at some point the creditors come calling. You have two options: sell off assets or take out new loans at higher rates. Our country's doing both. Many of the old pillars of American industry now belong to overseas moguls - sold to build the bubble. As for the new class of creditors, look no further than the foreign investors who now own 38% of outstanding t-bills and 20% of our corporate bonds. Offices in London, Hong Kong, Paris, and Zurich hold our purse strings, but they won't indefinitely finance spendthrift tendencies to the tune of $1.1 billion a day. When their confidence falters, so too does the once-almighty dollar.

Back at the Fed, if the bottom drops out of the dollar, the automatic reaction would be to raise interest rates. Not so fast. If the economy is staring down a recession, the opposite prescription - a rate cut - would be just the thing. You cannot serve two masters. Either America's fiscal future depends on the comeback power of our domestic economy or the goodwill of our foreign creditors. The latter bear us no allegiance; the former looks increasingly improbable because you can only hawk the family jewels once.

Back in the day of robust surpluses, America's manufacturing base provided good-paying jobs for workers who chose a life between waiting tables and starting dot-coms. But as our taste for cheap imports has grown, so too has the industrial sector's inability to compete with overseas sweatshops. As a result, last year American manufacturing hemorrhaged 837,000 jobs; last month production capacity logged its tenth straight drop. We toasted the advent of the Information Age by consuming when we used to create, and now find ourselves without the resources to stage a rally.

Thus, the blueprint of our demise, drawn to our own specifications. As long as the dollar stays strong, exports remain expensive and production capacity falters. However, if our wastrel ways persist, our foreign keepers will tire of trading their goods for American IOUs. Lacking the ability to produce alternatives, we'll face a far greater threat than higher prices at the mall: No power in history has lost its economic independence and maintained political might.

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