ANOTHER WARNING signal was posted this week, advising travelers of an uncertain and perhaps rough passage ahead for the American economy. The government published the figures on the country's international commerce in the third quarter, July through September. There are a lot of ways to measure the foreign trade deficit, but the most important is the current account balance. That's the figure that has to be financed by foreigners buying dollars.
The current account balance in the summer quarter was running a deficit three times as large as in the previous summer, and that one had been a record by a wide margin. What should you make of this trend? There are several implications, none good. The first and most obvious is the increasing dependence of this country on the willingness of foreigners to hold dollars. The longer it goes on, the more vulnerable the country will become to severe economic disruptions caused by changes in foreign investors' attitudes and intentions.
Next: You should be aware that the current account deficit is not stable. It will keep expanding -- for a while. This year it will be over $100 billion. But continuous expansion is impossible. It's a good bet that something will crack -- the growth rate, the exchange rate, or both -- in the next several years. The forces producing this massive imbalance are eventually self-destructive.
Next: The foreign deficit is a brake on American economic expansion. You are familiar with the Keynesian idea that a federal budget deficit stimulates the economy by giving consumers money to spend. There's a less familiar corollary. The current account deficit tells you how much of that money Americans are spending on foreign production, which does nothing for American growth. In Keynesian terms, the rapidly rising current account deficit is an offset against the federal government's budget deficit. As one deficit increasingly offsets the other, the stimulation to the national economy has been declining. Perhaps that helps explain why the economic growth rate has been falling recently.
Next: You should also note that the country is financing these foreign deficits by squandering, in effect, the huge and profitable foreign investments that it has built up over the past two generations. As recently as 1981 those investments poured $33 billion in earnings into this country, a substantial contribution to its prosperity. Investment income is now running less than half that amount and will be zero by next summer. Although they work as hard and produce as much, Americans will find themselves living less well because they no longer have the accustomed stream of income from foreign investment. These foreign-transactions numbers are doubtless abstruse and obscure. But they are tracing forces the impact of which will soon be visible here at home, in unemployment rates and American standards of living.