Over The Ears in Debt

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The hoped-for turnaround cannot come too soon, since the trade deficit can be financed only by incurring more and more obligations to foreigners. Last year the U.S. became the world's biggest debtor -- it now owes about $200 billion. That total adds more strains and complexity to the ongoing international debt problem, which went through several new contortions last week. In Washington, officials from the world's No. 2 debtor, Brazil, met with Federal Reserve Chairman Paul Volcker to explain their country's decision two weeks ago to suspend interest payments on about $65 billion worth of its roughly $108 billion foreign obligations. And in Argentina (international debt: about $52 billion), the government imposed a wage and price freeze after threatening to suspend its interest payments unless the country received $2.1 billion in fresh loans. A day later the Reagan Administration agreed to provide roughly half of a $500 million injection of funds.

Even if the trade deficit declines, America's cumulative foreign debt will continue to increase "on an explosive path," said Harvard Professor Martin Feldstein. While predicting that the annual trade deficit would slim down to $90 billion within two or three years, he forecast that the debt total could reach a staggering $1 trillion as early as 1992. Keeping up with interest payments, he observed, would be increasingly painful. Says Feldstein: "We're talking about a major slowdown in the rate of growth of our standard of living."

The fastest way to cut back on the projected $1 trillion debt figure would be to push down the value of the U.S. dollar even further, and thus close the trade deficit more quickly than expected. But that strategy has significant costs. Japan and West Germany, in particular, have been feeling the economic pinch and complaining about it as the shrinking value of the dollar has cut into their exports. At a meeting in Paris on Feb. 21 and 22, finance ministers < from the U.S., West Germany, Japan, Britain, France and Canada took note of the concern by declaring they would "cooperate closely" to stabilize the dollar's value.

Another cost of using the dollar's further fall to prune the anticipated foreign debt would be increased inflation as higher import prices are passed along to American consumers. Said Rimmer de Vries, chief international economist for Morgan Guaranty Trust: "The irony is, we need some higher inflation. Otherwise, there won't be improvement in the trade deficit." The Commerce Department reported last week that the Consumer Price Index, paced by a large increase in gasoline prices, shot up at an 8.3% annual rate in January. That was almost surely a temporary spurt, but TIME's economists agreed that inflation is on an upward trend. For 1987 as a whole, they predicted price increases of 4.5%, in contrast to last year's 1.1%, the lowest since the 1960s.