Unbalanced trade

Imports: The only flaw in the smooth-running U.S. economy is the burgeoning trade deficit.

June 23, 2000

YEARS AGO, a monthly trade deficit of $30.4 billion would have caused major economic turmoil. Not today. Markets ignored the fact that the United States recorded its second-highest trade deficit in April.

Maybe low unemployment and moderate inflation have blinded many Americans to the fact that the nation is addicted to imports. But eventually, we'll have to face this trend's effects.

The problem is not that this country is exporting jobs. (With nearly full employment, we don't have the capacity to produce these goods ourselves without creating inflationary pressures.) The problem is how we're increasing the gigantic pool of dollars that is circulating outside the United States.

Right now, the foreigners holding these dollars are reinvesting them in our country, keeping our currency strong. But what if they decide to redeem those dollars for yen, pounds or marks? The dollar will get weaker, meaning foreign goods will cost more.

Interest rates will have to climb to keep foreigners from investing their dollars outside the United States. Higher interest rates mean slower growth, higher unemployment and possibly the end of this unprecedented economic recovery.

There are no immediate signs of crisis, but trouble is lurking in the future.

As the late economist Herbert Stein said: "If something can't go on forever, it will stop."

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