Record Trade Deficit Reported

The U.S. trade deficit for October rose 8.9% from the September deficit to hit a record level of $55.5 billion, and the cumulative trade deficit for the first 10 months of 2004 reached a record $550.5 billion, exceeding the trade deficit for all of 2003. Although historically high petroleum prices were in part responsible for the October results, the rising tide of red ink is consistent with trends set over the past several years.

As U.S. dollars flow out of the United States in the so-called "current account," those greenbacks will be returned through the "capital account" by foreign, long-term investment in the U.S. A significant portion of this investment will be to finance record U.S. budget deficits.

The continuing and increasing dependence of the United States on both commodity assets like petroleum and financial investment from overseas is of concern to many private economists and goes a long way toward explaining the U.S. government's reluctance to stop the free-fall of the dollar against other currencies. Theoretically, as the dollar weakens, foreign imports will become more expensive, while U.S. exports will become cheaper in other countries. Eventually, this should have the effect of narrowing the trade deficit while at the same time stimulating business activity in domestic export industries.

However, the dollar's recent, precipitous decline has significantly reduced the marked-to-market value of dollar reserve holdings by foreigners—particularly foreign central banks—which erodes global confidence in the U.S. dollar as the reserve currency of choice for the 21st Century.

Whether or not this loss of confidence is permanent will depend crucially upon policy and actions in Washington over the coming months, especially with respect to reigning in federal spending.