Sizing up the deficit

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"A billion here, a billion there," legend has the late Republican Sen. Everett Dirksen saying, "and pretty soon you're talking real money." Dirksen's widely quoted quip pertained to the debt and the budget during the 1960s. In that regard, it is equally apropos today.

America's unsustainable fiscal policy represents a huge red flag to the nation's long-term economic health. And, unlike the 1960s, Mr. Dirksen's quote would be quite applicable today to the nation's foreign-debt position as well. Thus, in the midst of soaring national and foreign debts being piled up by the world's only superpower and its largest economy, understandably concerned central bankers and finance ministers congregate in Washington this weekend for the annual spring meetings of the International Monetary Fund (IMF) and the World Bank.

A billion here. A billion there. Well, that's 2 billion. And $2 billion is how much money the United States effectively borrows from the rest of the world each and every single day to finance the amount Americans consume above and beyond what we produce. The frightening calculation is based on the annualized rate of America's current-account deficit for the fourth quarter. Even for a $12-trillion-a-year economy, $2 billion a day is real money.

The U.S. current-account deficit, which totaled $666 billion last year, measures the combined balances on (a) trade in goods, for which the nation recorded a deficit of $665 billion in 2004; (b) trade in services, which generated a relatively paltry surplus of $48 billion last year; (c) investment income, which produced a minuscule surplus of $24 billion; and (d) unilateral transfers, which recorded a net outflow of $73 billion. (Unilateral transfers comprise government grants and pensions, as well as private remittances, such as payments from foreign workers in the United States to their families abroad.)

For the year, the nation's $666 billion external deficit represented 5.7 percent of U.S. gross domestic product (GDP). The fourth-quarter current-account deficit reflected an annual rate of 6.3 percent of GDP, which represents more than $750 billion per year, or more than $2 billion per day.

Nothing seems to be able to stop America's current-account deficit from soaring. Theoretically, a depreciating currency should eventually reduce a nation's current-account deficit. At the least, a falling dollar ought to keep the U.S. current-account deficit from skyrocketing. But that hasn't happened.

Various measures of exchange-rate data compiled by the Federal Reserve reveal that the value of the dollar has been falling for more than three years. The Fed's price-adjusted (i.e., real) broad dollar index, which is a weighted average that includes our major trading partners, shows the dollar depreciated by more than 15 percent between February 2002 and last month. A subset index representing currencies that circulate widely shows a real dollar depreciation of more than 25 percent over the same period. Nevertheless, the annual U.S. current-account deficit has jumped by nearly $300 billion, rising from $386 billion in 2001 (3.8 percent of GDP) to $666 billion last year.

As recently as 1991, the U.S. current account registered a surplus. Since then, however, deficits have been the rule. They averaged $120 billion per year from 1994 through 1997, or about 1.6 percent of GDP. Then, they began to soar, totaling more than $200 billion in 1998, nearly $300 billion in 1999, more than $400 billion in 2000 (4.2 percent of GDP), more than $500 billion by 2003, more than $650 billion last year, and now, measured at an annual rate, more than $750 billion during last year's fourth quarter.

No nation can continue forever consuming 6 percent more than it produces, not even the world's only superpower. As America's current-account deficit has inexorably risen since the early 1990s, its net international investment position has been commensurately affected. As recently as the late 1980s, the U.S. net international investment position, measured at market value, was positive. However, the $3.6 trillion cumulative U.S. current-account deficit (1992-2004) has transformed what was once the world's largest creditor country into its largest debtor. Indeed, when the final numbers for 2004 are crunched, the net international investment position of the United States will likely be a negative $3.3 trillion.

Meanwhile, the national debt, which represents a compilation of previous budget deficits and monies borrowed (and spent) from trust funds and federal pension programs, is headed past $8 trillion this year. Like the nation's deteriorating net international investment position, the national debt is on a growth path well above half a trillion dollars a year.

To paraphrase Dirksen: A billion here. And pretty soon the number reaches $5 trillion, which, according to back-of-the-envelope calculations based on IMF projections, will likely be America's foreign-debt position within three years. A billion there. And pretty soon the number reaches $10 trillion, which will be the level of the national debt before President Bush leaves office.