Who will pay for mounting federal and trade deficits?

Our children and grandchildren, yes. But the running trade deficit gets a little trickier.

By , Columnist

Here's a critical slant on the Obama administration's projected record $1.7 trillion deficit this year: "Debt Day."

That's the day each year when total government spending exceeds anticipated total federal revenues. Republican House Leader John Boehner recently calculated that Debt Day in 2009 occurred April 26, just six months and 26 days after the fiscal year started Oct. 1, 2008. Washington already has run out of money only halfway through the year, he noted.

The federal budget deficit – $4.7 billion a day if you spread it over the entire year – is one of two major flows of red ink for the United States. The other is the deficit in international trade, which currently is running about $1.5 billion a day, down from the more than $2 billion a day during recent boom years.

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Both deficits threaten the nation's living standard and raise the question: Who's going to pay for these massive piles of debt?

Looking at the domestic debt, Mr. Boehner says it will be "our children and grandchildren," which is probably mostly right. Who'll pay for America's running trade deficits gets a little trickier.

In the long run, the twin debts were unsustainable before the recession. The stimulus spending has merely speeded up the day of reckoning.

But on the domestic front, what was the alternative? Charles McMillion, a Washington consulting economist, sees the deficit as the lesser of two evils. Without costly stimulus, the number of unemployed Americans, bankrupt businesses, and home foreclosures would swell even more, he says. Federal revenues would shrink.

The assumption is that a revived economy would make it easier for future presidents – and our offspring – to service the enlarged debt.

The current long-term debt path is unsustainable, says Washington's Committee for a Responsible Federal Budget. Debt held by the public probably will amount this year to more than 50 percent of the nation's gross domestic product, its total output of goods and services. That's the highest rate in more than 50 years, and it's headed higher still. Budget deficits of about $1 trillion are expected for 2010 and 2011. This would create "an enormous burden on future generations and will ultimately lead to a lower standard of living," the committee says.

In recent years, foreign nations – China, Japan, Saudi Arabia, etc. – have helped finance both debt streams. But the problem is now so severe that the China Daily ran an article in April asking where the US would get the capital to cover its deficits.

On the international side, the extended trade deficit has allowed foreigners to buy between $6.5 trillion and $7 trillion of US stocks, bonds, bank accounts, and other securities (not including direct investment in plant and equipment), calculates Peter Morici, an economist at the University of Maryland business school. That sum would have been enough to purchase all the publicly traded stock in the US at the time of the worst recent stock market slump, he says. Further, paying interest on that debt amounts to nearly $2,000 a year for every working American.

To a large extent, foreigners want to hold American assets. The US remains a safe, relatively prosperous place to invest.

But the Obama administration must tackle the trade deficit "before it comes down on our head," says Mr. Morici. That includes dealing with China's undervalued currency and other export subsidies.

At some point, foreigners may decide they have enough dollars or fear that their present stashes will tumble in value. The result could be rapid devaluation of the dollar and higher interest rates, leaving Americans holding the bag with a currency worth far less than it is today.

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