From Bloomberg

The U.S. trade deficit widened more than forecast in July to a record $68 billion as imports reached an all-time high and exports declined for the first time in five months.

The gap in goods and services trade follows June's $64.8 billion shortfall, the Commerce Department said today in Washington. The increase in imports reflected record crude oil prices and more shipments of equipment, raw materials and consumer goods from overseas.

Improvement in the trade deficit may prove difficult as U.S. growth, while slowing, is still outpacing the economies of most of its trading partners. Americans' appetites for Japanese electronics and cheaper clothing made in China may keep the shortfall close to a record in coming months even as energy prices wane and overseas shipments accelerate.

Economists and analysts don't see this problem going away anytime soon:

``We're going to see a fairly wide trade gap for a while,'' Jay Bryson, global economist at Wachovia Corp. in Charlotte, North Carolina, said before the report. ``Consumer spending in the U.S. is holding up well enough that, while imports will slow, they won't collapse.''

The IMF recently expressed its concern over global imbalances, especially the US trade deficit:

If global imbalances in the world economy are not resolved properly a worldwide recession could result, International Monetary Fund chief Rodrigo Rato was quoted as saying on Monday by a German paper.

The United States' current account deficit is an imbalance of particular concern and the country needs to work on boosting private saving and fiscal consolidation, Rato wrote in a guest contribution for business newspaper Boersen-Zeitung.

"The debate on these imbalances should be taken very seriously because a disorderly resolution of the problem could spark a global recession which we don't want," he wrote in an article to be published in the paper's Tuesday edition.

"However, adapting to global demand in an orderly fashion is difficult and can't be achieved in a rush," he added.

Rato said that the flipside of the U.S. deficit was the high current account surpluses being run by oil exporting countries, Japan, China and developing economies in Asia.

He said economies with current account deficits needed to reduce their dependence on global savings and countries with surpluses needed to lower their reliance on foreign demand.

While the trade deficit seems to be an ephemeral economic construct divorced from everyday life, it is in fact a very real problem.  Essentially, a trade deficit means the US is consuming more than it produces.  To make up the difference between what a country produces and what it consumes, the country first draws down its savings.  However, the US doesn't have much savings anymore.  The US consumer's savings rate has been negative for the last year and the federal government is issuing over $550 billion in bonds every year.  Corporations are the only sector that is saving money in the current economy.

With no savings, the US is now relying on foreign capital inflows to finance the trade deficit.  At the levels announced yesterday, the US must attract 2.2 billion dollars a day in foreign inflows to finance its trade deficit.  Although the US appears to be able to continually attract foreign funds for investment in the US, don't expect that to continue ad infinitum.  As the International Monetary Fund recently noted the US is in fact the beneficiary of a convergence of economic events that started with the Asian financial crisis of the last 1990s.  This event made emerging markets less attractive for direct investment, therefore making more stable countries like the US more attractive for international investment.  In addition, contrary to Bernanke's "global savings glut" theory, the primary reason for the excess savings in the world is a drop in Asian internal investment.  Money the Asian economies would traditionally invest in their own productive capacity was freed to move offshore.  Finally, the US economy has grown faster than Asia and Europe over the last 5 years, making the US the de facto most attractive place for the excess savings to flow.  However, the general consensus is for the US economy to slow in the coming year.  This slowdown is not conducive to investment.  In addition, there are plenty of economies around the globe that are growing at faster rates than the US - China, India, Russia, several Eastern European countries, Brazil and Mexico.  As US growth slows, these faster growing economies may receive a boost in foreign direct investment at the expense of the US.

The Republicans have advanced two arguments regarding the trade deficit is "nothing bad has happened yet."  This is similar to a cancer patient not taking chemotherapy because he hasn't dies from cancer yet.  In addition, several rightwing blogs have advanced the theory the US will always be a great place to invest.  While the US does have advanced capital markets (a point advanced by the Federal Reserve and the IMF), the overall macroeconomic environment is also vitally important in attracting foreign funds.  With US growth slowing, massive levels of consumer debt, a federal government that can't control it's finances and a housing sector showing extreme problems, the macro environment is not looking good.