The U.S external deficit has an internal counterpart: the budgetdeficit. Higher budget deficits generally increase domestic demandfor foreign goods and foreign capital and thus promote largercurrent account deficits. But the two deficits are not "twin" inany mechanistic sense, and they have moved in opposite direction attimes, including at present. The latest projections by the Obamaadministration and the Congressional Budget Office (CBO) suggestthat both in the short run, as a result of the crisis, and over thenext decade or so, as baby boomers age, the U.S. budget deficitwill exceed all previous records by considerable margins. ThePeterson Institute for International Economics project that theinternational economic position of the United States is likely todeteriorate enormously as a result, with the current accountdeficit rising from a previous record of six percent of GDP to over15 percent (more than $ 5 trillion annually) by 2030 and net debtclimbing from $ 3.5 trillion today to $ 50 trillion (the equivalentof 140 percent of GDP and more than 700 percent of exports) by2030. The United States would then be transferring a full sevenpercent ( $ 2.5 trillion ) of its entire economic output, toforeigners every year in order to service its external debt.
This untenable scenario highlights a grave triple threat for theUnited States. If the rest of the world again finances the UnitedStates large external deficits, the conditions that brought on thecurrent crisis will be replicated and the risk of calamity renewed.At the same, increasing U.S. demands on foreign investors wouldprobably become unsustainable and produce a severe drop in thevalue of the dollar well before 2030, possibly bringing on a hardlanding. And even if the United States were lucky enough to avoidfuture crisis, the steadily rising transfer of U.S income to therest of the world to service foreign debt would seriously erodeAmericans' standards of living.
Hence, new record levels of trade and current account deficitswould likely levy very heavy costs on the United States whether ornot the rest of the world was willing to finance these deficits atprices compatible with U.S. prosperity. Washington should seek tosharply limit these external deficits in the future - and it isencouraging that the Obama administration has indicated itsintention to move in that direction, opting for future U.S. growththat is export-oriented, rather than consumption-oriented, andrejecting the role of the United States as the world's consumer ofthe last resort.
Balancing the budget is the only reliable policy instrument forpreventing such a buildup of foreign deficits and debt for theUnited States. As soon as the U.S. economy recovers from thecurrent crisis, it is imperative that U.S. policymakers restore abudget that is balanced over the economic cycle and, in fact, runssurpluses during boom years. Measures that could be adopted now andphased in as growth is restored include containing the cost ofmedical care, reforming Social Security, and enacting new taxes onconsumption.
The U.S. government's continued failure to responsibly address thefiscal future of the United States will imperil its global positionas well as its future prosperity. The country's fate is alreadylargely in the hands of its foreign creditors, starting with Chinabut also including Japan, Russia, and a number of oil-exportingcountries.
Unless the United States quickly achieves and maintains sustainableeconomic position, its ability to pursue autonomous economic andforeign policies will become increasingly compromised.
Without a doubt, the financial melt-down and its horrors began onWall-Street. Even though " Wall-Street" means the nation's bigfinancial and investing operations, not a geographical location, adisproportionate number of Street people live in Manhattan.
In the real world (outside New York City), a bonus is generally apayment for extraordinarily good performance. But on Wall-Street,what's called a bonus is generally part of base pay. That'sespecially true for worker bees, who far outnumber CEOs.
A fair number of Wall-Streetters got wiped out because their wealthwas tied to their firm's stock price. Dick Fuld, the former CEO ofLehman, had shares and options worth about $1 billion at theirpeak. He got less than $1 million when he sold them after the firmwent bankrupt.
The two biggest basket cases - AIG and CITY got into troublebecause they didn't know they were taking risks.
The two divisions at AIG that brought down the firm - financialproducts and stock-lending - didn't understand what they weredoing. Financial products wrote credit-default swaps that theythought were riskless but turned out to be ultra-risky.
The stock-loan department, AIG's other disaster, took the cash itgot for lending out stock owned by AIG and invested the money inesoteric securities rather than in risk-free Treasuries, thestandard practice. In the end, the problem isn't really pay: it'scompetence. The CEOs didn't understand the fine point. These firmscollapsed out of ignorance fueled by avarice - a particularly toxiccombination.
It is not essential for the United States to fully eliminate itsexternal imbalances. Theory and history suggest that a deficit ofaround three percent of GDP would be sustainable because U.S.foreign debt would then grow no faster than the domestic economy onwhich it rests - especially if foreign capital were used forproductive investment (as during the 1990s) rather than for privateconsumption and government spending (as during this decade).Maintenance of the deficit at this level would permit the U.S. netforeign debt to stabilize at about 50 percent of GDP -uncomfortably high but probably manageable.
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