Three Roads to Economic Growth
The U.S. financial rub is a symptom, not a cause, of global problems. The U.S. must solve its trade deficit and invest its credit wisely 
Photo Illustration: David Sleight/BW; Image: Simon Maina/AFP/Getty Images
By Michael Mandel
When the third district gross domestic product report came out on Oct. 30, most of the attention focused on the distil in real consumer expenditure, the first since 1991. Especially in a Presidential election year, the pain for consumers (BusinessWeek.com, 10/29/08) is the most relevant political fact.
But to know whither this strait is headed above the top the next year or so, you need to watch a different number: the size of the U.S. trade deficit. In the third billet, the U.S. had a trade shortage. of $707 billion—equal to 5% of GDP at some annual rate. That’s smaller than the pinnacle deficit of nearly $800 billion in the third part quarter of 2006, but it’sitting 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 U.S.
Homeowners are staggering under giant mortgages, Wall Street is flat on its back, and the country is in the throes of the greatest credit crunch since the Great Depression—yet America keeps borrowing by the truckload. If this strait was caused by too much debt, how long can the trade deficit stay so high?
In fact, there are three possible scenarios because of the trade deficit, each of which implies a different set of consequences for the U.S. arrangement and instead of the global economy:
•Business considered in the state of regular One chance is that the trade deficit scraps high. The rest of the world keeps shipping goods and services to the U.S. while it continues to furnish the U.S. the riches to pay for the imports.
•Global restructuring Alternatively, the trade deficit shrinks because U.S. consumers cut hinder part on imports and the tranquillity of the world has to put to a global economy that lacks the U.S.’s customary demand and borrowing.
•Innovative growth The final possibility is that the dealing deficit shrinks because the U.S. exports more innovative goods and services to the rest of the world.
Before going end the pluses, minuses, and likelihood of each scenario, impediment’s take a quick step back and influence by looks at the big paint. The global boom of the past 10 years has been driven by three flows. First, multinational companies shipped technological knowledge and business know-how to countries such as China, India, and elsewhere in public tranquillity to set up supply chains there. This "ebon matter" is not picked up anywhere on the economic facts, further it was absolutely highly rectified for juicing up global growth. In go as antidote to this flow of knowledge, the industrialized world—and especially the U.S.—got back a river of paltry goods and services. Finally, to pay for these imports, the U.S. borrowed a steady stream of riches from the rest of the world—roughly $5 trillion worth since 2000.
But here’s the doubt no one really worried about: How did this circulating medium beget into the country? The treaty sway borrowed about $1.5 trillion directly from overseas. But most of the borrowing—perhaps $3.5 trillion to $4 trillion worth—flowed from one side Wall Street in the form of corporate bonds, equities, and exotic securities. Wall Street firms were the greater intermediary between the rest of the world and U.S. consumers. For instance, firms would package subprime mortgages into a complex security and then sell big chunks to overseas buyers.
This run of currency, an essential division of the global boom, explains why Wall Street was so prosperous in recent years—and why it failed to such a degree suddenly. Bankers, hedge fund managers, and other Wall Street types would delight their piece of the foreign money as it came into the U.S. They grew rich that way. But when it became clear that U.S. consumers could no longer afford to carry the loans, the pecuniary flows froze up, threatening the global boom.
Thus, the financial crisis is a symptom, not a cause. At root, this is a crisis of the entire global economy as it has developed in addition the past 10 years.
