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WSWS : News & Analysis : North America

US balance of payments deficit hits another record

By Nick Beams

16 March 2006

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The extent of the imbalances in the global economy and the fact that normal growth patterns will not correct them has been underlined by the latest US balance of payments deficit. The current account deficit reached $225 billion in the fourth quarter of 2005, up from $185.4 billion in the third. For the year 2005 the deficit was $805 billion, equivalent to 6.4 percent of gross domestic product.

The latest figures show that rather than being closed, the payments gap is widening. This was the seventh year out of the last eight in which the deficit hit a new record.

"The bottom line is that a current account deficit of this unparalleled magnitude is unsustainable and there is no hope of it being painlessly resolved through higher exports alone," Paul Ashworth, an analyst at Capital Economic told the Financial Times.

Total US exports would need to increase by 70 percent to eliminate the payments gap. "This is clearly not going to happen," Ashworth continued. "Instead it will require a big dollar depreciation alongside much weaker domestic demand for imports."

In other words, the only way the deficit would start to fall is through a major recession in the US. On the one hand, "a big dollar depreciation" would almost certainly lead to a sharp interest rate rise, as international banks and financial institutions demanded bigger compensation for placing their funds in dollar assets. And a significant interest rate rise would bring a downturn in the economy.

On the other hand, "weaker domestic demand for imports" could be achieved only by a severe contraction of the US economy.

This is because the very structure of the US economy, in which imports of goods and services are some 59 percent higher than exports, means that normal economic growth automatically increases the deficit.

As Morgan Stanley chief economist Stephen Roach noted in a recent report: "Given the high import content of domestic demand, a given increment of consumption growth ... produces a much larger