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 Richmans' Trade and Taxes Blog

Deficit Commission should address both deficits
Howard Richman, 4/27/2010

The bipartisan U.S. Deficit Commission meets for the first time today (April 27). In December it will report its recommendations to Congress. The commission is expected to recommend some combination of tax increases and spending cuts to rein in our huge government budget deficits.

But there is another deficit problem that should be addressed at the same time. Our foreign debt has been skyrocketing. On July 13, 2009, we wrote a commentary (America Sliding Into a Pit of Foreign Debt) for the American Thinker about it. We wrote:

The graph below shows the United States net foreign debt. It hit an unprecedented $3.5 trillion, 24.3% of our GDP, at the end of 2008, according to a report issued on June 26 by the Bureau of Economic Analysis. When foreign debt rises as a percentage of GDP, a country becomes less and less able to pay off debt from its income stream.

Eventually, when payments to foreigners get too high, a currency crash becomes inevitable. We also wrote about this back in July:

At the same time that our foreign debt is skyrocketing, we are losing manufacturing jobs, and thus the ability to export goods in the future to pay back this foreign debt. This policy is not sustainable. We are heading toward a dollar crash, high inflation, high interest rates, or a combination of all three, all because we won't require that the mercantilist countries buy our goods instead of taking our IOUs!

Addressing one deficit without addressing the other, causes problems:

• Reducing the trade deficits without also moving government budgets toward balance would produce overly-high interest rates.
• Reducing the budget deficits without also moving the trade deficits toward balance would result in reduced demand for American products.

The obvious solution is to move our budget toward balance while at the same time moving trade toward balance.