Yes, Virginia, that trade deficit DOES matter

Robert Kuttner recently addressed the current problems of the falling dollar and the US trade deficit:  "Bush's Worrisome Weak-Dollar Policy" by Robert Kuttner Business Week 03/14/05 print edition.  (It's available online but it's behind subscription.)  He writes:

The gap between the Bush Administration's expansive geopolitical goals and its relinquishing of financial stewardship is becoming unsustainable. On Feb. 22 one line in a report by the Bank of Korea referring to diversification of its currency holdings away from the dollar created a brief panic in financial markets. While the markets have recovered -- for now -- it was a chilling reminder of the vulnerability of the dollar and the precarious position of the U.S.

The dollar is, of course, weak because the U.S. runs such huge trade and budget deficits. The federal government borrows nearly $2 billion a day abroad. Private foreign investors are unwilling to lend us that much money at current interest rates, so central banks make up the difference. In the first three quarters of 2004, fully 49% of the U.S. current account deficit was financed by foreign central banks, with Japan and China the lead lenders.

This heavy financial dependency on China is one of the more problematic aspects of Bush's risky emerging policy toward China.

Kuttner again:

The Bush Administration is failing on three counts: First, mounting budget deficits increase the need for foreign borrowing and add to pressure on the dollar. Second, not having a serious energy policy intensifies U.S. dependence on imported oil and widens the trade deficit. And third, the Administration isn't even attempting to manage the dollar's decline, relying instead on the whims of money markets. ...

The worst-case scenario is a dollar crash, followed by a steep recession. The shame is that sensible policies, which the Administration won't pursue, could still head off a disaster.

The following article adds additional context to the problems: Michael Steinberger, "Neo-Economics", The American Prospect Online, Feb 21, 2005.  Steinberger writes:

In late January, after weeks of waiting for a sign that the Bush administration would lead a coordinated effort to try to prevent the dollar’s recent slide from turning into a full-fledged crash, the world finally seemed to get the message. “There’s nobody home on economic policy in America right now,” a frustrated Morgan Stanley chief global economist Stephen Roach told an audience at the annual Davos, Switzerland, schmoozefest, where the fast-sinking dollar dominated the discussion. On any number of critical global economic issues, from Argentina’s financial meltdown to deadlocked world-trade talks to the staggering dollar, George W. Bush has effectively hung a “gone fishing” sign on the White House door.

This inattention -- an abdication of the global economic stewardship the country has held with vigor and aplomb since the end of the Second World War -- has been variously attributed to the war on terrorism, Bush’s fidelity to free-market principles, his disdain for multilateralism, or some combination thereof. But the inattention predates September 11, and given that Bush has been one of the most protectionist presidents of the postwar period, the free-market explanation rings equally untrue. And while Bush’s unilateralist instincts have surely played a part in Washington’s retreat from the global bazaar, there’s likely a broader -- and more overlooked -- ideology on which he is basing his economic policies: neoconservatism.

I'm not sure if we can really differentiate between unilateralism and neoconservatism; unlateralism seems to be an essential part of the latter.  But Steinberger's article explains how the neglect of the country's economic strength is one of the weaknesses of the neoconservative strategy for America to dominate the world indefinitely.