U.S. Current Account Gap Hits $856.7 Billion In 2006

March 14, 2007
U.S. borrows to finance huge trade deficit.

The broadest measure of trade and investment flows, the current account, hit a new record high of $856.7 billion last year, the Commerce Department reported March 14.

Overall in 2006, the deficit came to 6.5% of gross domestic product (GDP), up from 6.4% in 2005.

"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," University of Maryland business professor Peter Morici said. "This reduces labor productivity, research and development spending, and important investments in human capital."

Helping the current account, the U.S. registered a bigger surplus in services of $70.7 billion last year, compared to $66 billion in 2005.

But the balance of total income lapsed into the red to the tune of $7.3 billion , from a 2005 surplus of $11.3 billion, as payments to foreigners on their U.S. investments mushroomed. "Those net payments turned negative for the first time in many decades, and confirm that borrowing to finance huge trade deficits have reduced the world's largest economy to the status of a debtor nation," Morici said.

Net financial inflows came to a surplus of $719.1 billion, down from $785.4 billion. The surplus is explained by massive foreign purchases of securities such as Treasury bonds.The Japanese and Chinese governments remain the leading foreign buyers of U.S .securities -- proof, according to U.S. critics of their trade policies, that they are deliberately holding down the value of their currencies.

But Americans also remained big buyers on overseas financial markets. Net U.S. purchases of foreign securities were a record $277.7 billion in 2006, up from $180.1 billion the year before.

Foreign direct investment in the U.S. increased $183.6 billion last year. U.S.-owned assets abroad increased $1.046 trillion.

Copyright Agence France-Presse, 2007

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