There
Is No Such Thing As A Trade Deficit
The argument goes like this. If you exchange money for something, you can't be worth less than you were, because you have merely traded money for something else of equivalent value. On one level that makes sense, and it's very easy to grasp. In fact, it's so easy to appreciate, it's a trap that may help explain why so many Americans are so heavily in debt. The idea, you see, breaks down when one understands that money can be exchanged for depreciating assets, or services that, once used, have no lasting value what-so-ever. Let's look at a family for an analogy, instead of international trade issues. Assume that while one adult member of the family works, the other spends that income on the things needed to sustain and enjoy life. The children contribute nothing but dependency. Though love and affection do count for something, they are not "trade" issues for this example, but may substitute for social programs. Now, let us also assume that the worker makes "X" dollars per month, but the spender spends "X-plus" dollars per month (on food, shelter, transportation, entertainment, household goods, clothing, services, etc.), making up the difference with debt. According to the "no deficit" theory, they are not in danger of spending their way into financial oblivion, because they have received equivalent value for earnings spent AND money borrowed for spending. Eventually, however, debts have to be paid, and this family will find that what they have spent on vacations, house cleaning services, and electronic devices can not again be spent on food, or rent, or medical services. They can not take their DVD player to Safeway and trade it for the roast beef they used to enjoy. Instead, they will eventually have to lower their standard of living to meet their obligations, or face bankruptcy and try to start over. It's the same with countries. By spending money unproductively, and to excess, people and whole countries get hurt. History shows that running a trade deficit the size of the one we are now sustaining is one of the surest ways of meeting financial ruin. Complicating our understanding of this issue is the smoke of something called the Trade Weighted Current Account Deficit, or Surplus as the case may be. This attempts to find meaning in the amount of money that is returned to this country as foreign investment. It is the other side of running a trade deficit as it is our own cash coming back in to the country to be "parked" until needed. O.k., that makes sense, too. We can say we are offsetting the trade deficit with cash that comes back for investments here. But, that would only have meaning were all, or most all of these funds going into investments that might actually produce a benefit to the country, like the railroads did in the 19th Century. In our current situation, however, much of the foreign trade surpluses earned abroad are coming back to this country to buy US government debt issues. The Current Account Balance, therefore, tries to offset the significance of the trade deficit by citing what is tantamount to an increase in the public debt load. There is no offset when the money is spent to keep the government running. The very simple fact is, we do have a trade deficit, and we are bleeding. At last estimate our Gross Domestic Product was running on the order of 11 trillion dollars, while our trade deficit has reached over 600 billion dollars, or 5.5 percent of GDP. No country in history has been able to long sustain a trade deficit in excess of 5 percent of GDP WITHOUT EXPERIENCING A SEVERE ECONOMIC ADJUSTMENT. In my opinion, we were due for that "adjustment" early in the Clinton administration, but they well understood how to delay the pain. I think Bush knows as well. In fact, most recessions happen in the first term of a Republican administration following one of a Democrat. He seems to have past that test with only months left in the first term. How long the "adjustment" can be put off remains to be seen, but it's not going to matter who gets elected in November. The next four years look bad - continuing trade deficit, or not. Given the world's escalating commodity prices, look for an inflationary downturn in the U.S.. That is, rising prices and rising unemployment. In another matter, strange things are going on regarding the Pension Benefit Guarantee Corporation (PBGC), a government sponsored entity (or enterprise). PBGC is taking on the roll of formerly private pension plans at our nation's largest employers, and transferring the insurance and obligations to the American taxpayer. According to a recent editorial by Steve Forbes of Forbes Magazine, the PBGC had a 10 billion surplus in 2000, but that became an 11 billion deficit last year. He estimates that the figure could balloon to 50 billion should most of the likely-to-fail plans actually do so. Overall, the general under funding of the plan reaches 300 billion dollars as things stand now. What if the economy turns mildly to the down side? What about strongly to the down side? Hey, what's another 1, or 2, or 3 trillion dollars anyway - all things considered? It's only paper money. If we have to, we can always buy more printing presses from China. Better yet, we can save money by asking them to print our money for us using their labor costs. Then, we can import it. By the way, the PBGC does not insure the size of a retiree's check, only some part of it after negotiations with worker representatives. Many settlements have been from 25-33% of former retirement checks. Now, for the interesting part. I'm learning of a related matter involving the repeal of the federal requirement that commercial airline pilots retire at age 60. This was long stressed to be a safety issue, despite the objections of the pilots themselves (and they have been defeated repeatedly in trying to change the age limit). Now, with increasing pressures on the PBCG from financially troubled airlines, there is a sudden (and I mean that as in "with a sense of urgency") push to change the law, and return retired pilots to the air at the expense of younger ones. So, the age 60 rule is no longer a safety issue, if it ever was, but it is "more importantly?" a money issue. Is this not a sign of deep seated troubles? In my opinion, the PBGC is a public money disaster-in-the-making on an order of magnitude equivalent to the S&L Crisis of the late 1980s. In taking a look at the precious metals market, the Federal Reserve announced another round or rate increases, so it's time to revisit the theory that higher rates are bad for bullion prices. Many continue to argue that higher rates put downward pressure on the price of gold in that funds invested in bullion pay no returns, and that as interest rates increase, it become more attractive to switch to interest bearing issues from investments in bullion. While some may feel that way, it is not how things work. In fact, it is the narrowing of the spread between real interest rates and nominal interest rates (i.e, the rate of inflation) which gives the greatest upward pressure on gold as seen in historical charts. That is the condition today as interest rates ratchet higher trying to catch up with changes in the nominal rate. This time, however, we are also in the early stages of a commodities melt-up. Therefore, the nominal rate can advance, while bringing about higher real interest rates AND higher bullion prices. Higher real rates, then, become a symptom of inflation, rather than a response to it. Here is part of the reason why bullion prices are higher since interest started heading up, and this will likely continue for some time to come, perhaps for many years. Some thoughts:
"In
the long run, we are all dead."
"The
study of money, above all other fields in economics, © 2004 Larry S. Levy Larry S. Levy is editor of Arts 'n Mines, a private email newsletter writer for special friends, guests and his own amusement on metals and mining shares, and occasionally contributes economic and historical commentary on these subjects to international publications. He is retired from his former practice as a property valuations expert. During that time he held leadership roles in the premiere trade associations, lectured, and published articles on valuation topics. Email |
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