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(DV) Sandronsky: Financial Fragility and the US Economy







Trade Deficit Rises
Financial Fragility and the US Economy

by Seth Sandronsky
February 13, 2006

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According to the conventional wisdom, the federal government’s budget deficit harms the private sector of the U.S. economy. In an AP article on the nation’s record trade deficit (excess of imports over exports) in 2005, there was no mention that it is double the size of the federal budget deficit.

Size matters. But there is more to this story.

Imports of foreign oil due to the domestic disruption of production from Hurricane Katrina accounted for about a third of last year’s trade deficit. It grew in 2005 at a slower rate than in 2004.

To help their exporters maintain market share in the U.S., Asian central bankers continue to bankroll the U.S. trade deficit. The U.S. political class knows this.

So do their paymasters. But blaming China for the U.S. trade deficit is the preferred game for some lawmakers in Washington.

How was business for U.S. exporters last year? Well, the growth rate of their exports was slower in 2005 versus 2004.

Crucially, Uncle Sam won’t go out of business as the nation enters into its next recession (when the economy’s production of goods and services shrinks for six straight months). Can we say the same for hapless U.S. businesses and consumers?

They are far more at-risk than Uncle Sam to changes in the flow of foreign funds. If this is not news, I suggest that we need a new definition of the term.

At some point, nobody can honestly predict when, several socio-economic processes are likely to unfold as the twin deficits shrink. It is doubtful that Main St. will escape pain-free.

Businesses, households and the federal government will have to borrow less/pay more for doing so from abroad. This process will reduce domestic spending, thereby acting as a drag on the economy stateside.

Meanwhile in the U.S., growth slows and borrowing grows, with no small future consequences signaled by the expanding trade deficit. The AP looked away from this side of the story.

Rest assured that investors on Wall St. have their eyes on it. So should the U.S. populace away from that center of finance capital.

Seth Sandronsky is a member of Sacramento Area Peace Action and a co-editor of Because People Matter, Sacramento's progressive paper. He can be reached at ssandron@hotmail.com.

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