America (USA) has two towering deficits: the trade imbalance and government debt.

The first thing we should observe is that this situation is constantly being trivialised but, if we ignore the spin and hype, we can see that these deficits are increasingly driving American policy both at home and abroad…

First let’s look at the trade imbalance.

America’s ability to export is contracting, the net result being that capital flows are mainly heading east.

On the supply side “cheap oil” has been central to America’s competitive edge, but the Middle East “divide and conquer type policy” of the last half century has been met with more and more determined resistance in the form of OPEC, terrorism and more recently the disruption to the economic occupation of Iraq.

Unfortunately, a Middle East type policy is now being stepped up on the African & South American continents!

The other policy of note is the “Free Trade” push, but naturally any country advocating this agenda does so because it is of the belief it is going to be of net benefit to them.

On government debt you could argue that it is the role of government to invest in the future even if it means borrowing to do so.

This American administration has certainly done that. Mainly by prosecuting the unjust war in Iraq.

At the same time there have been tax cuts to stimulate the domestic economy. The trouble is there has been scant return to date, on the billions in gov. debt already spent and committed.

The US Federal Reserve has quietly summed up the situation like this: “To repay foreign creditors, as it must some day, the US will need large and healthy export industries. The relative shrinkage of those industries in the presence of current account deficits – a shrinkage that may well have to be reversed in the future – imposes real costs of adjustment on firms and workers in those industries“.