THE UNITED STATES ran a merchandise trade deficit of $11.5 billion last month, the Commerce Department says. That's less than the tremendous $15.5 billion reported in September -- which is nice but unfortunately is also irrelevant. The variations from month to month are being caused by irregularities in processing the Customs data on which these statistics are based, rather than by any fundamental changes in the trend. The trade deficit is now running about $140 billion a year and will probably continue at that level through next year.
These continuing trade deficits are a signal that American are consuming more than they produce. The deficits are being financed by foreigners and, like any lenders, they are collecting interest. The weight of those interest payments is beginning to make a difference in the way this economy behaves.
Analogies with family finances have their limitations, but in this case the analogy works pretty well. Suppose a family saved its money diligently, invested it and, as the years went by, began to enjoy a steady stream of dividends and interest. That would enable it to spend more than it earned in its weekly paychecks. And that is roughly the situation that the United States had achieved by 1981, when its investment income from abroad came to $34 billion. Although it ran a trade deficit that year of $28 billion, the deficit was harmless because the investment income covered it with $6 billion to spare -- which was reinvested abroad. But 1981 was a pivotal year -- the year that the Reagan administration set a tone of national optimism and good cheer that was based, in economic terms, on the chronic and increasing overconsumption that has now continued for four years.
To return to the family: it stopped saving and started spending more money, which was good for everybody's morale. When it ran beyond its income, it borrowed. Eventually its interest payments equalled its investment income. Then, as it continued to borrow and interest obligations continued to rise, the family found itself with actually less money to spend than it was currently earning.
That is the position in which the United States is now beginning to find itself. That $34 billion-a-year cushion of foreign investment income in 1981 had shrunk to zero by the middle of last year. By now it has probably reversed to a net outflow, and the outflow will increase as long as the trade deficits continue.
When the foreign lenders decide to cut down additional lending, as all lenders eventually do, Americans will feel the weight of those accumulated interest payments. Like the family in the example, the country will have less to spend than it is currently earning. If overconsumption helped generate the national mood of good feelings of the past four years, it is troubling to speculate on the political effects of the enforced underconsumption that must follow.