Global Economic Crisis

The United States is already projected to have a Federal budgetary deficit of $1.8 trillion in 2009, a figure that I believe will ultimately exceed $2 trillion, or approximately 15% of America’s GDP. As is well recognized, the U.S. will have to borrow much of that deficit from overseas, resulting in ballooning payments to foreign holders of U.S. government debt instruments. Similarly, when the U.S. imports far more than it exports, the nation must pay for the resulting trade deficit with dollars. So here we have a perfect fiscal storm; quantitative easing by the Federal Reserve, massive overseas borrowing by the Federal government to pay its basic operating expenses, and massive borrowing or printing of dollars to pay for imports not covered by the net value of America’s exports.

It appears that the trade deficit for 2009 will likely exceed $300 billion. When added to a multi-trillion dollar U.S. government deficit, a figure not even inclusive of state, county and municipal deficits, the result is a fiscal imbalance that is unsustainable. In short, the current account deficit is exploding, when one aggregates the quantum leap in interest payments the U.S. taxpayers will be compelled to make to overseas creditors in addition to financing the widening trade imbalance.

Typically, a nation that is experiencing a major gap in exports versus imports that is beyond fiscal prudence will have no recourse but to facilitate the devaluation of its currency. The rationale is quite simple; a cheaper currency means your consumers will buy fewer imported goods, while the nation’s exports become cheaper. In normal fiscal times, that might be a prudent course to follow. However, as strong market forces are already weakening the U.S. dollar, any policy response designed to further depreciate the value of America’s currency will destroy much of the value of U.S. Treasuries held by sovereign creditors, in particular China. Yet, the U.S. trade imbalance combined with other economic and financial forces will inevitably devalue the dollar, which in turn will lead to heightened tensions between the United States and its primary foreign creditors.

It just may be that April’s trade figures are a leading indicator of a pending catastrophic collapse in the value of the U.S. dollar, a fiscal calamity that will add immeasurably to the financial and economic woes of the United States and the global economy. Green shoots? More like black clouds, at least to this observer.

The global economic crisis accelerated the US trade deficit, which rose in October by 1.1 percent to 57.2 billion dollars. The October results also showed that America’s trade gap with China had widened, according to U.S. government official figures.

The trade numbers caught economists and experts off guard, as they had forecasted a drop to $53.5 billion. Results show that the American trade deficit with China grew slightly to $27.9 billion in October from 27.8 billion dollars the previous month. The U.S. Commerce Department released the trade figures.

The trade results also show that total trade volume had fallen by 1.7 percent. Declines were registered in imports and exports, a manifestation of the growing impact of the global economic crisis in both the United States and throughout the world. October imports declined by 1.4 percent from September to 208.9 billion dollars. Exports also showed a decline, dropping 2.4 percent to 151.7 billion dollars.

The dismal trade figures highlighted the third straight month of a drop in both imports and exports. The Commerce Department numbers reflect a weakening in the performance of the U.S. economy simultaneously with a reduction of international trade. In the first ten months of 2008 the cumulative American trade deficit was a staggering $590.9 billion.