U.S. Must Restore Equilibrium to Balance of Payments

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NEW YORK - The flow of foreign capital into the United States, financing its trade deficit, has thus far helped sustain the American standard of living by enabling Americans to consume more than they produce.

But the cost of amortizing and servicing the growing foreign debt, which could reach $1 trillion by the end of this decade, is rising.

And if the United States is to restore equilibrium to its balance of payments, it must reduce its consumption of foreign goods and services by more than $200 billion a year plus about $30 billion for servicing the foreign debt. That would require cutting imports or stepping up exports that much.

How much of a blow to the American standard of living that would mean depends on whether the trade deficit is shrunk within a pattern of economic growth or stagnation. Eliminating the U.S. trade deficit chiefly by expanding exports would mean higher employment and output. That would offset some or all of the costs of consuming less than the nation produces.

One way or another, shrinking the trade deficit will mean cutting the inflow of foreign capital. As Jeffrey R. Leeds, managing director of the capital markets group of the Chemical Bank, observes:

""Rules of double-entry accounting, rather than economics, assure that a country's current-account balance is financed by equal and opposite movements of capital.'' But, he adds, ""rules of economics determine the prices - exchange rates and interest rates - which get the job done.''

As Leeds sees it, at current interest-rate differentials, foreign investment in the United States is going to slacken and will cause the dollar to fall further. He thinks that process has already begun, pointing to evidence of a sharp decline in net private capital flows to the United States in the second quarter of this year, a weakening that he maintains has continued.

The second-quarter drop in net foreign private investment in the United States, according to his reading of the numbers, amounted to $37 billion at an annual rate. That was offset by an increase inforeign central banks' official purchases of dollars, to keep the dollar from sinking and their own currencies from rising.

With the threat of reduced foreign investment hanging over the United States, Leeds contends that long-term interest rates in this country are not likely to fall unless rates of return on competitive investments abroad also decline - or unless the U.S. budget deficit contracts, relieving some of the federal government's claims on domestic savings. As American debts pile up, long-term American interest rates may have to rise to attract the needed financing from abroad. …