The coming private pension plan crisis: the unavoidable consequences of dollar manipulations and widening U.S. trade deficits.

• Author: Kubarych, Roger M.

The United States has a current-account deficit of close to 6 percent of GDP. Many forecasters expect this to swell to 8 percent of GDP during the next few years.

There are several reasons why the United States has such a mammoth deficit. But it really boils down to three factors: oil, growth differentials, and the dollar.

First, higher oil imports accounted for 30 percent of last year's $95 billion increase in imports and 36 percent of this year's annualized $172 billion increase in imports. Nothing else comes close in explaining the deterioration of the trade position lately.

Second, relative growth rates of demand in the United States versus the rest of the world have diverged. Demand for goods and services has risen much faster in the United States than in other important countries.

Third, market forces that would ordinarily have brought about a decline in the value of the dollar against foreign currencies--and compelled foreign exporters to raise the prices of the products in U.S. markets--have been thwarted. That is because of the actions of governments and central banks in several regions of the world, particularly in Asia. They have conducted persistent, large-scale foreign exchange market intervention to keep their currencies from appreciating against the dollar. Even when they weren't intervening directly in the markets, many of those same governments have encouraged or arm-twisted a number of domestic financial institutions that are ostensibly in the private sector, but often defer to official policy views, to buy dollar assets, too.

These actions have been performed with the sole purpose of preserving the profitability of exports to the United States. The U.S. government has done little or nothing about it up until now--or even acknowledged the market-distorting behavior as a problem. It is particularly ironic because this has been an administration that prided itself on never submitting to international constraints on the ability of the United States to pursue an independent national security policy. But in the area of international finance, it has totally submitted to foreign powers, who have achieved a virtual veto power over the U.S. trade position in the world.

Note that the European governments and central banks have not been intervening. So the euro has been allowed to go up against the dollar--by a cumulative 56 percent from the low point of $0.82 in early 2002 to just under $1.28 as of the end of October, 2004. Correspondingly, import prices of European products have gone up by 12 percent during that time.

In sharp contrast, import prices of Japanese products have stayed virtually unchanged while prices of products from other Asian countries have actually fallen by 3 percent during that two-year period. Hence there is no market incentive for U.S. customers to cut back on their purchases, and the U.S. trade deficit...