OF ALL the symptoms of rising instability in the American economy, none is less noticed in this country than the deficits in foreign transactions. None is more dangerous.
There is also none that this country is less well equipped, by its own experience, to manage. The debates over domestic deficits and employment are on familiar ground, and proceed with sophistication. But most of the people who matter in American politics and business learned their economics at a time when the rest of the world hardly mattered to this country's prosperity. The possibility of a disruptive and damaging crisis of foreign payments is as remote from most Americans' minds today -- including those Americans in the Reagan administration -- as the possibility of an oil crisis was in 1973.
A few days ago the Commerce Department announced the latest figures on the merchandise trade balance. This year it will run to a deficit of about $130 billion -- nearly twice last year's, which in turn was nearly twice the previous year's or any other year's. But the figure on which to keep your eye most carefully is the trade balance's cousin, the current account balance. It's a broader measure, taking into account investment income from abroad and so forth. It is also more important, because that's the figure that foreigners must finance by lending to Americans and investing in dollars. In 1984 the current account deficit will be over $100 billion, a magnitude that has no precedent in this country's history.
If foreigners should stop sending their money here, or even slow down, the United States will be forced to adjust through slower growth and higher inflation. The closer you get to the financial markets, the more clearly you hear anxiety.
John Paulus of Morgan Stanley and Co., the investment banking firm, has published a brief essay that deserves more attention here in Washington than it is likely to get. The present current account deficit, he says, is "quite threatening." Most of Washington expects a renewed surge of growth next year to cure whatever ails the American economy. Mr. Paulus observes that this surge of growth will raise resource utilization rates very high. The United States will begin to strain the limits of its productive ability, and the prospects for profits here will drop compared to those in other countries -- even those that are at present growing more slowly. A swing away from the dollar could develop very quickly.
Other countries also have a stake in getting the American foreign deficit down, Mr. Paulus adds. Trouble here is also trouble abroad. The rational response is tighter policy in this country and more expansive policy in Europe and Japan. How much time do governments have to act? No one can say. But since it's utterly unpredictable, wisdom suggests an early start -- improbable though that, in reality, may now appear.