Global Policy Forum

Elizabeth Becker

The United States hit a record deficit of $166.2 billion last quarter in trade and capital flows with the rest of the world, the Commerce Department reported Tuesday, raising fresh concerns about the nation's overall indebtedness and prompting some analysts to warn of threats to the value of the American dollar. With goods continuing to flood into the United States from Asia and Europe, and indications that foreign governments still view the American market as the most attractive place to sell their products and invest their money, there was little indication in the latest report that the overall imbalance is likely to diminish soon. News of the current account deficit, which was significantly larger than expected by most analysts, slightly pushed down the value of the dollar on Tuesday against the euro. The report contributed to a greater decline against the Japanese yen.

Most economists attribute the ballooning deficit, which also is reaching high levels as a share of the nation's economic activity, to an overvaluation of the dollar in international currency markets, especially in relation to China and Japan. And some warn that the situation is rapidly spinning out of control. "I really believe we have a disaster scenario in the making," said C. Fred Bergsten, director of the Institute for International Economics, which has long been a center for those who worry about the nation's global economic stature. "As soon as the markets see these unsustainable levels of debt, the dollar could very well crack.

But others said the threat was exaggerated by experts whose previous warnings have not been borne out. Claude E. Barfield, resident scholar and trade expert at the American Enterprise Institute, said that he was not one of the analysts "who think the sky is falling" because of the increasing deficit. He said that the dollar had been weakening against the euro and some other currencies, which should have a positive effect on the trade balance by the end of the year. "I don't think there is any imminent problem,'' Mr. Barfield added, "but over time we are going to have to get our macroeconomic house in order.'' Besides the currency issue, Mr. Barfield said that the long-run answer was for Americans to save more aggressively and for the United States to stop consuming so much beyond its means.

The Bush administration interpreted the current account deficit as a sign that other countries were lagging behind the United States and needed to pump up their economies. Robert Nichols, assistant secretary of the treasury for public affairs, said that the deficit actually made the country more attractive to foreign investors. The imbalance "is largely a result of the global growth deficit," Mr. Nichols said. "It's important that the rest of the world grow more, which will expand our ability to export and aid our manufacturing industry."

But many outside analysts see a different problem as American consumers continue to buy low-priced imports, especially from Asia, while American manufacturers have failed to increase their share of the global market. That has pushed the size of the deficit relative to the overall output of the economy into dangerous territory, some economists contend. It now represents 5.7 percent of the country's gross domestic product, a level that many analysts consider unsustainable, up from 2 percent in 1998. "This is a far larger share of the G.D.P. than we've had in the past,'' said Robert E. Scott, of the liberal-leaning Economic Policy Institute. "This just can't go on."

With the presidential election looming, Democrats seized on the latest data as evidence of what they called further proof that President Bush's economic policies were failing the American public. "The current account rising to a new record is exceedingly troubling," said Jason Furman, economic policy director for the John Kerry campaign. "What's even more worrying is that the Bush administration appears entirely unconcerned about the current account deficit or trying to address it." Ian Shepherdson, the chief United States economist for High Frequency Economics, said that he was surprised by the big drop of $9.6 billion in the net income flows earned by American investors overseas.

To cover the debt, the United States has become more dependent on foreign governments. According to one study, private foreign investors have grown wary of financing the United States deficit over the last year; as a result, Asian governments have stepped in, especially Japan and China, and now provide 87 percent of the inflow of dollars to cover the gap in what Americans earn from selling and investing abroad. Exporters in both countries benefit from efforts made by their governments to keep their currencies at lower levels against the dollar. There is a broad consensus within the administration and at the International Monetary Fund that the Japanese yen and Chinese yuan need to be valued higher against the dollar. But despite increasing pressure, the Chinese have balked at any immediate change, saying they still need time to prepare fundamental structural and financial flaws in their economy before they can allow adjustments in the value of the yuan. Meanwhile, China registered a $4.49 billion trade surplus in August, its largest monthly trade surplus this year, according to the Xinhua news agency. While encouraging their consumers to spend more, both China and Japan continue to save far more than the United States, which has also lost the domestic savings advantages it gained as federal budget surpluses turned into huge deficits.

In response, Mr. Kerry, the Democratic candidate, is campaigning in part on a policy calling for more stringent fiscal policy and a return to budget surpluses enjoyed under Mr. Clinton. He has also pushed for more aggressive enforcement of the nation's trade laws. President Bush argues that Mr. Kerry, playing to a labor union constituency, has begun flirting with protectionism as an answer to the nation's trade gap; he contrasts that with what he says is a strong White House effort to negotiate more trade agreements with individual nations, regional groups and at the World Trade Organization.