The Commerce Department announced Tuesday that the U.S. current account deficit in the second quarter of 2004 widened again to a colossal $166.18 billion, vastly above the projected $159.35 billion shortfall. The $163.58 billion shortfall in goods was only slightly offset by the $13.29 billion surplus in services.
Currency traders reacted to this news by betting against the dollar, albeit on an as-yet small scale.
These figures point out a grim dynamic that no administration senior official or economic adviser has yet been ready to acknowledge: The economic strategy of the Bush administration may not be sustainable in the long term.
Ultimately, U.S. financial stability and overall prosperity remain dependent on the willingness of foreigners, especially the State Banks of Japan and China to continue to hold U.S. Treasury bonds and to invest on a gigantic scale in the United States, despite its soaring federal budget deficit and current account trade deficits. Yet these two crucial figures continue to soar every year. How long can they continue to rise and remain sustainable?
Classic Adam Smith purists continue to sleep easy in their beds and exude confidence when they get out of them. For classic economic theory says that devaluing the currency makes imports more expensive and exports far cheaper. Therefore further significant falls in the dollar should revive U.S. industry by making it more competitive on the level global playing field. Then, orders will rush into U.S. companies from overseas, the trade gap will magically close, all those worrying jobs the economy has started to hemorrhage will come flooding back in, and the nation can look forward to a tidal wave of peace, security and prosperity -- or, at least, prosperity -- in the president's second term.
Bush's re-election indeed looks likely ever more likely on current political trends. The Bush-Cheney campaign's skill in keeping the election focused on terrorism and strength issues has been coupled with Democratic presidential candidate John Kerry's ineptness on taking advantage of an at-best anemic economic record. Therefore even data such as these disturbing figures look unlikely to dent Bush's poll leads or surging confidence.
But once the president gets back into the Oval Office, he may not be able to ignore these trends for much longer. For recent experience suggests that the tumbling dollar will not automatically cause the smooth and prosperity-generating readjustment that he still anticipates.
That is because, first of all, the fundamental reason for the enormous annual trade deficits wracked up by the U.S. economy over the past 20 years -- and getting bigger all the time -- are largely structural in nature and making U.S. exports cheaper will not increase them remotely enough.
The United States has ceded its role as the largest industrial and high-tech producing nation on Earth to China, Japan and the other rising tiger nations of East Asia. The demand for consumer durable goods such as washing machines, television sets, DVD players and a lot more automobiles than Detroit can produce anymore by itself is not going to go away. Also, nations such as Japan and the European Union nations are not going to stop doing what they need to protect their domestic steel and other heavy industries.
High-tech information and service industries have never been able to fill that gap before, and they certainly are not going to do so now. They remain very much in the doldrums since the collapse of the great Internet speculative bubble began in March 2000 and there is no sign of a new boom on the horizon there.
This administration, and this president, priding themselves on being the heirs of Ronald Reagan, have indeed followed some of the same policies he implemented with such success 20 years ago. Like Reagan, they have slashed taxes and allowed the annual federal budget and international trade balance of payments deficit to rocket into the stratosphere.
When Reagan did that, the economy recovered from a serious recession and roared ahead with the longest, greatest, most successful and most widely and fairly distributed recovery in American history.
But there was another reason for that not being followed by the Bush economic team. For Reagan kept the dollar strong and allowed interest rates to soar sky high in the short term. As a result, foreign investment flooded into the United States in the hundreds of billions of dollars. Japanese banks and Saudi Arabian oil billionaires alike knew they had good cause to be confident that Reagan and his Federal Reserve Chairman Paul Volcker were determined to lick inflation and retain fiscal stability come what may.
But Bush, his Council of Economic Advisers and his Fed Chairman Alan Greenspan have been sending a very different message to global investors. They are keeping interest rates in the bargain basement. And the combination of flat-lining interest rates with a tumbling dollar, coming on top of the enormous structural trade deficit and Bush's blasé unconcern about the federal government's ever-widening one, gives international investors a very worrying picture.
Also, 20 years ago, the United States was an obvious haven for a booming Japan and an Arab world still fearful of the Soviet communist threat to invest in. But over the past year, Saudi Arabian investors have quietly withdrawn hundreds of billions of dollars of investment from the domestic United States, and Japan remains mired in its recession woes with its banks desperate to survive in Tokyo, let alone dreaming of plunging anew into U.S. investments.
With the tumbling dollar sending messages of fear, not reassurance into international markets, the euro of the European Union for all its own structural weaknesses has stepped into the breach for want of anything better. The euro has remorselessly risen against the dollar.
More than three years ago, we issued the following warning these columns: "The Bush team have undermined international investor confidence in the strong dollar that Bill Clinton and his Democrats, seen since the days of William Jennings Bryan as the party of cheap money and fiscal imprudence, maintained so long and so well through two presidential terms.
"If the yen or even the long-despised euro should generate more investor confidence than the dollar, then the enormous flow of global investment that has kept American prosperity and growth thundering ahead for two decades could vanish. Then the economic downturn would rapidly reach crisis proportions and the hardship would reverberate from coast to coast across the American continent.
"No one around Bush seems to take this danger seriously for a second. But then, none of them seems to be worried for a second that they have abandoned the most important fiscal principles that so served Ronald Reagan so well for so long 20 years ago."
Bush's "spend today to get reelected tomorrow" policy still looks set to carry him through the November election, aided by Kerry's woeful political ineptness. Will it carry him through the next four years as well? That looks a lot less likely.