United States is in deep decline

The error of rampage“Meanwhile, the White House, the center of power in this superpower, seemed oddly abandoned, as if no one were at home.

“As if 1600 Pennsylvania Avenue, Washington, D.C., were temporarily closed for renovations.”

“We never had such a large number of people, at least if you believe public opinion polls, saying that the country is on the wrong track. The reason is a combination of the war in Iraq, but even more the feeling of economic insecurity. Globalization, de-industrialization, declining real wages, even for people who have jobs, life is getting more difficult. Then I think a complete loss of confidence in government. Whoever becomes president, they are going to have to convince voters that they can actually make a difference.”

For all the crimes and mistakes of the Bush Administration, I think one of its greatest failings was just utter incompetence.

But to know where this crisis is headed over the next year or so, you need to watch a different number: the size of the US trade deficit.

folded dollar grenadeIn the third quarter, the U.S. had a trade deficit of $707 billion (€550 billion) — equal to 5 percent of GDP at an annual rate. That’s smaller than the peak deficit of nearly $800 billion in the third quarter of 2006, but it’s still an astonishing sum, especially since every dollar of the trade deficit is another dollar that the rest of the world has to lend the US.

Homeowners are staggering, Wall Street is flat on its back, and the country is in the greatest credit crunch since the Great Depression — yet America keeps borrowing by the truckload. If this crisis was caused by too much debt, how long can the trade deficit stay so high?

There are three possible scenarios for the trade deficit:

Business as usual
One possibility is that the trade deficit remains high. The rest of the world keeps shipping goods and services to the US while it continues to lend the US the money to pay for the imports.

Global restructuring
Alternatively, the trade deficit shrinks because US consumers cut back on imports and the rest of the world has to adjust to a global economy that lacks the US’s customary demand and borrowing.

Innovative growth
The final possibility is that the trade deficit shrinks because the US exports more innovative goods and services to the rest of the world.