How Deep A Trouble Is The US Economy In?

2006 current account deficit has soared from $791.5 billion in 2005 to $856.7 billion. What does that mean to the commoner on the street? In an over-simplistic explanation, a trade deficit happens when a country imports more than it exports. This results in more money flowing out of the importing country into the exporting country. With less money in the economy but more products, everything cost more per product resulting in inflation. Inflation is a natural occurance in the growth of every economy but an uncontrolled inflation leads to hyper inflation and eventually depression as we have witnessed both in early China and some parts of Africa.

Trade deficit in the US is now a little like a drug addiction. Knowing that purchasing cheap, imported products and services hurts the economy but no one can resist the temptation of living on cheaper and cheaper products and services in a credit society. This forms a vicious cycle.

This problem is further compounded by the fact that on 10.4% of all investments to the USA in 2006 from abroad was in productive assets. The rest of the money has gone into US treasury, bonds and other such paper assets which in effect, makes the USA pay an interest to foreign countries for the corresponding amount of production resulting from these new debt.

The result of all these will be lower productivity and a shift of labour from high productivity industries to low productivity industries like the service and R&D sector. Consequently, wages might stagnant or even start to drop in order to cut costs and remain competitive. It has been estimated that the US economy is $1.5trillion smaller than 10 years ago and that worked out to be about $10,000 per worker.

There is no simple solution to this issue unless hard fist policies are made against many principles of free trade. Already the administration has started to increase import tax on China imports which will help flow some money back into the economy for every product imported and also help to reduce overall imports. I see the administration already taking small, diplomatic moves to repair the damage that has been accumulated over the decade and we will see how well these highly paid individuals do in these critical times.

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