Is the U.S. Trade Deficit a Train Wreck Waiting to Happen?

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Three years after the recession started, the nation is mired in debt. Historically high consumer debt levels, near record high budget deficits, and record trade and current account deficits are burdening households, tax payers, and the nation’s economic future.

How much longer will the U.S. be able to borrow from the rest of the world to finance its trade deficits? Already, the U.S. external imbalances are beyond levels that many economists consider sustainable and well above levels that other countries saw immediately before they faced a financial crisis. For instance, Sweden and Finland had current account deficits that were close to or less than the current U.S. levels before they experienced severe financial crises in 1992. Also, Korea had a current account deficit slightly less than the U.S. currently does before going into a tailspin in 1997.

Projections for the future do not bode well either. Even if one assumes that trade deficits will shrink to more moderate levels from their current highs, current account deficits, which include interest payments on the nation’s external debt in addition to the trade deficit, will likely rise to unsustainable levels again. The reason for this divergence is the growing international indebtedness that will require a growing debt service.

For the complete report, download: Is the U.S. Trade Deficit a Train Wreck Waiting to Happen?

For more information, see A Personal Perspective on the Dollar.