Today, the US Commerce Department reported the second quarter current account deficit was $183.1 billion. This was caused largely by a $216.3 billion deficit on trade in goods.

The current account is the broadest measure of the US trade balance. In addition to trade in goods and services, it includes income received from US investments abroad less payments to foreigners on their investments in the United States.

At about five percent of GDP, the huge current account deficit indicates Americans continue to consume much more than they produce, and borrow too much from the rest of the world

The current account deficit is nearly entirely caused by the huge deficit on trade in goods. In turn, the goods deficit is caused by a combination of an overvalued dollar against the Chinese yuan, a dysfunctional national energy policy that increases US  dependence on foreign oil, and the competitive woes of the three domestic automakers. Together, the trade deficit with China and on petroleum and automotive products account for about deficit 90 percent of the deficit on trade in goods.

To finance the current account deficit, Americans are borrowing and selling assets at a pace of $600 billion a year. US  foreign debt exceeds $6.5 trillion, and the debt service comes to about $2,000 a year for every working American.

US Bureau of Economic Analysis - Commerce Department

The current account deficit imposes a significant tax on GDP growth by moving workers from export and import-competing industries to other sectors of the economy. This reduces labor productivity, research and development (R&D) spending, and important investments in human capital. In 2007 the trade deficit is slicing off $300 to 500 billion off GDP, and longer term, it reduces potential annual GDP growth to 3 percent from 4 percent.

Peter Morici,

Professor,Robert H. Smith School of Business, University of Maryland,

College Park, MD 20742-1815,

7035494338 Phone

703 618 4338 Cell Phone

pmorici@rhsmith.umd.edu

http://www.smith.umd.edu/lbpp/faculty/morici.html

http://www.smith.umd.edu/faculty/pmorici/cv_pmorici.htm