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Guest Commentary: August 1, 2001
The Risks of a Growing Balance of Payments Deficit
The Honorable Charles Schumer
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The U.S. balance of payments deficit is burgeoning. Over the last two and a half years, it has risen from $320 billion in 1999 to approximately $500 billion this year.
Already a number of economists have expressed concerns about the sustainability of our dependence on foreign investment. With the national savings rate dropping to around 4% in the last few years and the personal savings rate in the red, the U.S. was forced to fund its investment boom with foreign investment, which has generated the massive imbalance we have today.
But like the Egypt of 1875, which through its profligate spending became so indebted that it was forced to sell its ownership in the Suez Canal to the British, we are living beyond our means. And we cannot continue to do so.
What holds for individuals apparently holds true for the economy at large. Living beyond one's means is not sustainable, and the problem is not self-correcting.
Some economists thought that the problem would, in fact, self-correct: Over-borrowing would become a drag on the economy, as more of domestic GDP were allocated to foreign debt servicing. The slower economy would weaken the dollar, and as a result, the U.S. would become less attractive to foreign investors.
But that hasn't happened. In fact, the reverse has.
The dollar has never been stronger, and now more than ever, foreign investment is flooding into the United States.
Recent gains in the euro have been marginal and arguably speculative. Today foreign ownership of U.S. Treasuries is 37%, U.S. corporate bonds is 46% and equities is 11%.
This is a dangerous paradox.
Note: The above commentary has been adapted from comments Sen. Schumer made at a hearing of the Senate Banking Subcommittee on Economic Policy, July 25, 2001.
 How to contact Senator Charles Schumer (D-NY)
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