Updated from Monday, July 12, with trade deficit figuresNEW YORK ( TheStreet) -- The Commerce Department said the deficit on international trade in goods and services increased to $42.3 billion in May, up from $40.3 billion in April because of a $3 billion increase in the trade deficit with China. Imports are rising much faster than exports, and the overall trade deficit will increase even more sharply when oil prices rebound, threatening the economic recovery. President Obama has cautioned Americans about the dangers of another boom financed by excessive borrowing, but unless the administration implements policies to reverse the huge trade deficits on oil and with China, the nation risks economic stagnation or depression. The trade deficit rose dramatically during the Bush expansion and was $66.4 billion in July 2008. This depressed demand for U.S.-made goods and services, causing layoffs in manufacturing and supporting service industries, even as finance, housing, retailing, and other industries grew more important. Financing a trade deficit exceeding 5% of GDP required massive capital inflows from China and other nations, and those investments suppressed long-term interest rates and instigated excessive risk taking in the bond market. Reckless banking practices and shoddy bond ratings permitted the indiscriminate securitization of mortgages and other consumer and business loans, bubbles in residential and commercial real estate values, and overleveraging by consumers and businesses. When the bubble burst and consumers and businesses cut back spending, layoffs spread from manufacturing through the entire economy and cascaded into the Great Recession. The trade deficit bottomed at $24.9 billion in May 2009, just before the current economic recovery began. Now, a rising trade deficit and continued weakness among regional banks threatens to derail the recovery. If the economy goes down a second time, it will not likely recover easily or quickly. The unemployment rate will rise into the teens, and conditions reminiscent of the Great Depression will prevail through much of the nation. Oil and consumer goods from China account for nearly the entire trade deficit, and without a seismic change in energy and trade policies, the U.S. economy faces grave peril.