5.1% AND CLIMBING

The US current account deficit hit $144.9 billion in the 2004Q1 (seasonally adjusted)--or $579.6 bn at an annual rate. The latest figure is the worst the current account has ever been.

Research from the Federal Reserve Board of Governors found that industrialized countries with large current account imbalances typically saw the onset of adjustment triggered at a current account "adjustment" (a nicer word for punctuated financial crisis), entailing a spike downward in the dollar, a spike upward in interest rates, and declining investment and slowing of GDP growth. Ouch.

Today's numbers show that the US is well on this path. But fortunately for us in the US (not to mention the rest of the world, which is inextricably linked to the US import and financial machine) we have Asian guardian angels. In the first quarter of 2004 Japan and China bought up close to $190 billion in dollar assets, giving us the precious capital to finance our perennial indebtedness. Together, the two hold dollar reserves of more than $1 trillion!

Looking at it as thus, the whole global economy is a giant, tenuous pyramid scheme that we are all locked into. Growth is fueled by the United States' ability to consume ever more imports from the rest of the world, while US consumption is fueled by Asia's ability to keep feeding us this line of credit. So long as they do, the system works. (At least it will work at the level of maintaining the stability of the global trade and financial system--there are lots of individuals for whom this ain't working one bit).

Aside from the looming current account crisis, this system is turning the US into a wholly owned subsidiary of the rest of the world. Financing the current account and trade deficits requires us to sell off our stocks, bonds, factories, etc.--and their promises of future income and interest payments--which adds up to a sizeable chunk of our overall economy (25% in 2002). Many analysts on Wall Street and elsewhere see this number heading up to 40%, 50% and more in the very near future. We will know more about this on June 30 when the BEA releases these new numbers on the net international investment position.