- Local economists are getting gloomier about bulging U.S.
trade and budget deficits that they say affect the long-term value of everything
from homes to cars to retirement funds.
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- They said this week's announcement that the nation's
trade deficit in October hit a record $55.46 billion is yet another sign
of major long-term problems facing the economy and American consumers.
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- "The pain will hit at some point," said David
Moss, a professor at Harvard Business School. "A financial crisis
is unlikely, but I would say it's a delicate time."
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- Yesterday, the Treasury Department reported that foreigners'
purchase of U.S. assets - including bonds, stocks and real estate - slowed
to its lowest pace in a year in October, the result of growing unease about
the heavy borrowing the United States is doing to shore up its financial
accounts.
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- Foreign investment in the United States is key to offsetting
the tens of billions of dollars flowing out each month as Americans snap
up such imports as Chinese electronic gadgets, Japanese cars and Middle
Eastern oil.
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- Without that foreign government reinvestment, the U.S.
economy would become a virtual one-way funnel - with money streaming out
of the country, reducing the overall net wealth of the nation, economists
say.
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- A big trade deficit may further weaken the U.S. dollar,
making American products cheaper to buy and boosting exports.
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- But the price of foreign imports will increase with a
falling dollar, causing inflationary pressures and probable interest rate
hikes.
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- Under that increasingly accepted scenario, the ultimate
cost of homes and cars will go up. Interest rates and consumer and business
credit costs will soar. Stock markets will get rattled and people's retirement
portfolios won't perform as well.
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- "The downside risks are much greater than the average
person realizes," said Robert Murphy, an economist at Boston College.
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- The federal budget deficit, now at $413 billion, merely
compounds the problems, as the government issues bonds that effectively
compete with private-sector borrowers, Murphy said.
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- One particular problem area is trade with China. The
U.S. trade deficit with China was $16.7 billion in October and $131 billion
for the first 10 months of the year, according to the U.S. Commerce Department.
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- And because China pegs its yuan to the U.S. dollar, the
natural corrective forces are neutralized.
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- Nariman Behravesh, chief economist at Lexington's Global
Insight, an economic forecasting firm, said the United States would like
the Chinese yuan to rise in value, making American products cheaper and
more attractive in China.
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- He said the U.S. financial situation reminds him of the
late 1980s, just before a recession. He said he's not predicting a recession
right now. "But I do think (the trade deficit) is something we have
to start dealing with."
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