Trade deficit: On borrowed time?

WASHINGTON — Every other night or so, the calls start pouring in from Asia to the homes of Peter Leonard and several traders he supervises at Nomura Securities in New York, jolting them awake sometimes as often as five times a night.

The calls come from places such as Tokyo, Shanghai, Hong Kong and Singapore, where investors want to buy U.S. mortgage-backed securities, which are essentially giant packages of mortgages on thousands of American homes. Such sleep disturbances have roughly doubled in the past year, according to Leonard, reflecting the sizzling demand among Asian money managers for a piece of the U.S. mortgage market.

The interrupted slumber of Nomura's New York mortgage traders is one small facet of the rapidly rising flow of foreign money into U.S. financial markets. This torrent of capital from overseas has become indispensable fuel for the U.S. economic engine, helping to keep interest rates — particularly those for mortgages — low.

But the influx of capital has an ominous flip side — the ballooning U.S. trade deficit, which soared 24 percent in 2004, to $617.7 billion. The dollars spent by Americans on Japanese cars, Chinese televisions and other imported goods end up in the hands of foreigners, who plow them into U.S. Treasury bonds and other securities.

The trade deficit (or current account deficit, as its broadest measure is called) is approaching 6 percent of gross domestic product as measured by the current account, the highest percentage of any major industrial country in modern times.

Therein lies a serious worry for many economists: As the deficit mounts, so does America's overall indebtedness to foreigners, which now totals about $3 trillion. That would be less troubling if the money streaming in from overseas were helping to finance a boom in productive assets such as factories and machinery.

But to the contrary, economic data show historic highs in the proportion of U.S. spending on consumption and housing. Not only is the United States piling up debt, it is doing so while consuming at record levels.

"It's like, 'I'm going to Bermuda with the credit I'm racking up on my credit card,' rather than, 'I'm going to school and putting my school books on my credit card,' " said Catherine Mann, a scholar at the Institute for International Economics.

That dark perspective is at odds with the position often taken by Bush administration officials, among others, about the trade deficit. The gap, according to the administration, should be viewed in a more positive than negative light, given the eagerness with which foreigners supply funds to the United States.

"There's always the question when you look at a current account deficit — is it a sign of strength, because capital is pouring into your country, or is it a sign of concern?" Lawrence Summers, Treasury secretary during the Clinton administration, told a panel at the World Economic Forum in Davos, Switzerland, last month. "If you look behind the 6 percent of GDP deficit, there's a lot to make you worry," because foreign money "is financing consumption, not investment" in plants and equipment.

Furthermore, he added, much of the investment by businesses in the United States is going into real estate, which does not generate the production of goods for export that are needed to help shrink the trade gap. At some point, he warned, sentiment among foreign investors could turn against America's deteriorating fundamentals, triggering a sharp sell-off in U.S. stocks and bonds that would threaten to throw the economy's expansion into reverse.

"Will those risks ever come home to roost? One can't predict with great confidence," said Summers, who is now president of Harvard University. "Will they come home very soon? Probably not. If you keep taking them, will they eventually catch up with us? I worry that they will."

An analysis by economists at Goldman Sachs provides data to bolster Summers' point: Consumption and spending on residential buildings are a much larger share of the U.S. economy "than has historically been the case," the firm noted in a report to clients last month. Taken together, spending on consumer goods and housing has totaled nearly 76 percent of GDP in the past couple of years, compared with an average of about 69 percent of GDP over the past half-century. Given that the trade deficit is also at an all-time high, "these imbalances place the economy on a path that is ultimately unsustainable," the report said.

Among the factors helping to spur spending on housing is the same factor causing sleep deprivation among the Nomura traders — the surge in demand from Asia for U.S. mortgage-backed securities, which has been led by China's central bank. As Asians buy these packages of mortgages from U.S. financial institutions, they add to the pool of capital available for Americans to finance their homes.

"If you think about it, there are a lot of homeowners who are having money lent to them by Beijing," said Steven Abrahams, a senior managing director at Bear, Stearns & Co. who specializes in the mortgage market.