IN THE DAYS when the United States was a creditor, it drew a steady stream of investment income from abroad to raise the American standard of living. But now that the country is a debtor, the stream has reversed and -- for the first time since 1914 -- the net flow is going abroad. That's another signal of an approaching crisis.
This country's international deficit was running, in the summer quarter, at a rate of $173.5 billion a year. That's the amount the rest of the world has to put into this country, in dollars, to keep its economy in balance. But the rest of the world is getting tired of it. The appeal of putting billions more into the dollar, a declining currency that its own government refuses to defend, is very limited. Not only the United States but all the trading nations together are headed toward a disaster unless they can change course rapidly and forcefully.
The necessary moves are pretty clear. Last month the Institute for International Economics here convened a gathering of 33 economists from most of the major trading countries. They quickly sketched out a strategy that belongs to neither the ideological right nor the left, but represents a wide international consensus among specialists who are not in government and can speak freely.
Devaluing the dollar has gone just about far enough, they warned. Continuing drops in the exchange rate won't balance American trade. They will just generate inflation.
Any serious remedy has to begin with an attack on the U.S. budget deficit. That's central. It's straining and distorting monetary relationships worldwide. If the United States started to bring that deficit down by $40 billion a year, that would buy enough time and good will to do other necessary things -- like bringing down its trade deficit equally fast. It's got to swing toward surplus by a massive $150 billion to $200 billion over the next four or five years to bring it to a size that this country can finance.
At the same time, other countries are going to have to take drastic action in the opposite direction. Japan, running the world's biggest trade surplus, is going to have to get it down fast -- perhaps to zero. West Germany is going to have to do much the same, investing its surplus capital at home, where unemployment is high, rather than lending it to the United States to support Americans' overconsumption. Taiwan and Korea need to get their trade surpluses down and internal spending up. There are no losers in this strategy. Each country benefits.
But what if, for the usual reasons of politics and inertia, they don't take this good advice from the IIE's savants? Interest rates will soar in this country as the rest of the world refuses to finance its deficits further. That will mean a recession here that spreads rapidly, like flu, to Japan and Europe as their export sales here fall. With the industrial economies in decline, the Latin countries will follow with massive defaults on their debts. Then the world will slide into something considerably worse than any recent recession.
Choices have to be made. Nobody wants to think about these unpleasant things during the holidays, but there isn't much time. The IIE's economists were too tactful to put it so bluntly, but Americans can't say that they haven't been warned.