American economy threatened by historic deficit

The US deficit in the broadest measure of international trade surged to an all-time high last year, increasing a potential threat to the American economy as the country sank deeper into debt to Japan, China and other nations.

The Commerce Department reported Wednesday that the deficit in the US current account increased by 25.5% last year to a record $666bn (€497bn). Forecasters said the 2005 deficit could be $100bn (€74.6bn) higher than that as the US continues to buy record levels of foreign consumer goods and oil.

Analysts worry the deficits are now so high that foreigners could at some point lose their appetite for dollar-denominated investments. That could lead to a rush for the exits, plunging the value of the dollar and stock prices while causing interest rates to soar.

Under that scenario, the higher interest rates would act as a severe drag on the US economy. They would forced up borrowing costs, for example, for home mortgages, auto loans and the investment spending businesses need to expand.

Analysts noted that the current account deficit is a record in dollar terms and in relationship to the total economy: 5.7% of the gross domestic product last year, compared with 4.8% in 2003.

“We can’t keep running current account deficits at these levels. It means we are borrowing nearly 6% of our GDP from the rest of the world and the gap is growing,” said David Wyss, chief economist at Standard & Poor’s in New York.

A Treasury report this week showed that foreigners now hold $1.96 trillion (€1.5 trillion) in Treasury securities, 45% of the total that is publicly traded. Japan has the largest holdings at $701.6bn (€523.8bn), followed by China at 194.5bn (€145.2bn).

Democrats blame the Bush administration for the record trade deficits. The lawmakers say the country has not done enough to crack down on unfair trade practices that, the Democrats contend, have meant the loss of millions of US manufacturing jobs.

The dollar has fallen significantly over the past three years against the 12-nation euro, the British pound and the Canadian dollar, but that improvement has not shown up in an improving trade deficit because of the currency manipulation in China and several other Asian countries, analysts said.

Economists worry that the current account deficit could at some point trigger a dollar crisis.