Tag Archives: Trade deficits

America Hasn’t Always Run Huge Deficits, by Bill Bonner

Once upon a time the US was not a profligate nation. In fact, its citizens saved and invested and didn’t borrow money. From Bill Bonner at bonnerandpartners.com:

BALTIMORE, MARYLAND – Round us swirls a blinding dust of accusations… slurs… mad dogs… lost thoughts… and screwball ideas…

“You dog-faced pony soldier,” says a rattled Joe Biden to a student protester.

Senator Romney is a “pompous ass,” says the President of the United States.

The Trump Team’s budget for 2021 came out yesterday. The press said it planned to “slash the safety net.” The Democrats said it was “dead on arrival.” The Wall Street Journal had this comment:

The $4.8 trillion budget for fiscal 2021, released Monday, assumes that economic growth will be stronger than most forecasters project. To hit its targets, the budget excludes tax cuts the administration may propose later and includes spending cuts that are vague, unlikely to advance in Congress, or both.

“A lot of specific policies are meaningful, but the overall numbers are largely phony,” said Marc Goldwein, senior vice president at the Committee for a Responsible Federal Budget, a group that favors deficit reduction.

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Nixon Shock, the Reserve Currency Curse, and a Pending Dollar Crisis, by Mish Shedlock

When Nixon closed the gold window in 1971, he opened a Pandora’s box of economic evils. From Mish Shedlock at moneymaven.io:

Many problems today including deficit spending, trade deficits, and income inequality have their roots in 1971.

Nixon Shock

A reader asks “What Forced Nixon to Close the Gold Window in 1971?”

The answer is called “Nixon Shock“.

Nixon wanted to fight the war in Vietnam, not raise taxes, and not hike interest rates to finance it.

Arthur Burns, not Volcker was at the Fed.

American economist Barry Eichengreen summarized: “It costs only a few cents for the Bureau of Engraving and Printing to produce a $100 bill, but other countries had to pony up $100 of actual goods in order to obtain one”.

Vietnam War and the Dollar Exodus Beginning

The dollar exodus had its beginnings way back in February 1965 when President Charles de Gaulle announced his intention to exchange its U.S. dollar reserves for gold at the official exchange rate of $35 per ounce.

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Opinion: America is in denial about the trade deficit — it’s not China, it’s us, by Stephen S. Roach

If you consume more than you produce, you have to either draw down savings or borrow money from those who produce more than they consume. The former is the US, the latter is China. From Stephen S. Roach at marketwatch.com:

U.S. trade deficit is made at home with appalling low savings rate

MARK SCHIEFELBEIN/AFP/Getty Images
Clueless U.S. Trade Representative Robert Lighthizer and Chinese Vice Premier Liu meet in Beijing in February.

NEW HAVEN, Conn. (Project Syndicate) — “When governments permit counterfeiting or copying of American products, it is stealing our future, and it is no longer free trade.” So said President Ronald Reagan, commenting on Japan after the Plaza Accord was concluded in September 1985.

Today resembles, in many respects, a remake of this 1980s movie, but with a reality-television star replacing a Hollywood film star in the presidential leading role — and with a new villain in place of Japan.

Back in the 1980s, Japan was portrayed as America’s greatest economic threat — not only because of allegations of intellectual-property theft, but also because of concerns about currency manipulation, state-sponsored industrial policy, a hollowing out of U.S. manufacturing, and an outsize bilateral trade deficit.

In its standoff with the U.S., Japan ultimately blinked, but it paid a steep price for doing so — nearly three “lost” decades of economic stagnation and deflation. Today, the same plot features China.

Notwithstanding both countries’ objectionable mercantilism, Japan and China had something else in common: They became victims of America’s unfortunate habit of making others the scapegoat for its own economic problems.

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The US Government Debt Crisis, by Alasdair Macleod

There’s no way out if the debt hole the US government has dug itself. From Alasdair Macleod at goldmoney.com:

This article explains why the US Government is ensnared in a debt trap from which there is no escape. Its finances are spiralling out of control. In the context of a rapidly slowing global economy, the budget deficit can only be financed by QE and bank credit expansion. Do not draw comfort from trade protectionism: it will not prevent the trade deficit increasing at the expense of domestic production, unless you believe there will be an unlikely resurgence in personal saving rates. We can now begin to see how the debt crisis will evolve, leading to the destruction of the dollar.

Introduction

At the time of writing (Thursday April 24) bond yields are crashing, the euro has broken down against the dollar and equities are hitting new highs. Obviously, equities are taking their queue from bonds. But bond yields are crashing because the global economy is sending some very worrying signals. Equity investors will be hoping monetary easing (which they now fully expect) will kick the can down the road once again and economies will continue to bubble along. They are ignoring some very basic economic facts…

Regular readers of my Insight articles will be aware of strong indications that the expansionary phase of the credit cycle is now over, and that we at grave risk of falling headlong into a global credit and systemic crisis. The underlying condition is that economic actors and their bankers accustomed to credit expansion are beginning to realise the assumptions behind their borrowing commitments earlier in the credit cycle were incorrect.

That’s why it is a credit cycle. It is driven by prior credit expansion which corrals all producers into acting in an expansionary manner at the same time. Random activity, the condition of a true laissez-faire economy, ceases. Instead, credit conditions act on profit-seeking businesses in a state-managed context. Entrepreneurs take the availability of subsidised credit to be a profit-making opportunity. The same cannot be said of governments because they do not seek profits, only revenue.

If a government acts responsibly it should never have to borrow, except perhaps in an emergency, such as to defend the country against invasion. The evolution into unbacked fiat currencies has changed all that by permitting governments to finance themselves through the printing press.

There is only one way a government funds the excess of spending over tax revenue without it being inflationary, and that is to borrow money from savers. There is a downside to this. The government bids for existing savings, including those held in pension and insurance funds, diverting them from other borrowers. In the 1980s this was described as “crowding out” other borrowers and had the effect of increasing interest rates to the point where these other borrowers stop borrowing. In the post-war years, this has been the consequence of spendthrift socialism.

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Record Deficits, Stronger Dollar Equals Record China Trade Deficit, by Tom Luongo

If you pump money into an economy, which the tax cut has done, people are going to spend some of the loot on imports. From Tom Luongo at tomluongo.me:

Sometimes math is a real bitch.   Donald Trump is a smart guy.  I know he knows math.

Too bad he’s ignoring it.

Here’s the gig.  The title says it all.  Government spending is rising rapidly.  More actual money is flowing into the US economy.  Where is that spending going?  To buy cell phones, computers, cars, office supplies and all the rest.

It doesn’t matter if the purchase is made at Best Buy through a Purchase Order, the money still goes to stuff built and imported from China.  The second order effect is that even if it goes to subsidize a farmer in Iowa or a defense contractor in California, that money winds up in the hands of a consumer who does what?

Goes to Best Buy and buys a new TV.  This isn’t rocket science folks, it is simple cause and effect.

More money chases those goods.  Despite the naysayers, Apple is selling a crap-ton of $1200 phones…. built where?  China.

So, the budget deficit thanks to record spending is fueling the very trade deficit with China that Trump is complaining about daily.

Here’s the math.

Big Badda Boom

First up is the budget deficit numbers through nine months of fiscal year 2018, courtesy of Zerohedge.

This resulted in a June budget deficit of $75 billion, better than the consensus estimate of $98BN, and an improvement from the $147 billion deficit in May and as well as slightly less than the deficit of $90.2 billion recorded in June of 2017.This was the second biggest June budget deficit since the financial crisis…

…The June deficit brought the cumulative 2018F budget deficit to over $607BN during the first nine month of the fiscal year, up 16% over the past year; as a reminder the deficit is expect to increase further amid the tax and spending measures, and rise above $1 trillion.

The post has a ton of charts to illustrate the point, but it’s mostly unnecessary.  The US Treasury is issuing debt at an astounding rate to cover this budget.  Spending goes up as tax receipts do thanks to lower tax rates and increasing growth.

To continue reading: Record Deficits, Stronger Dollar Equals Record China Trade Deficit

Deutsche: Is The US Headed For An Imminent Debt Crisis? Here Are The Signs, by Tyler Durden

The US is certainly headed for a debt crisis, whether it’s imminent or not depends on how you define imminent. From Tyler Durden at zerohedge.com:

The thesis is simple and familiar: the United States is running a fiscal deficit and a current account deficit (i.e. “twin deficits”) and relies on domestic and foreign investors to buy US Treasuries.

The  bigger the fiscal deficit is the more Treasuries investors – including the Federal Reserve – need to buy. At the same time, the more Treasuries that have to be sold, the highest the interest rate all else equal… until something snaps (or unless an stock market crisis forces the Fed and investors to monetize/park cash in Treasurys).

This was, in a nutshell the grim message from the IMF’s latest Fiscal Monitor Report, which warned that the US would be the only country with growing debt levels over the next 5 years.

What the IMF did not elaborate on, however, is that in many countries, such twin deficits have resulted in a debt crisis. So, picking up where the IMF left off, Deutsche Bank conducted an analysis which found that “the deteriorating fiscal and external situation for the United States have increased the probability of a US debt
crisis by 7 percentage points, from a historical average below 9% to a level around 16%.”
More details:

As shown in Figures 10 and 11 below, the model-implied odds of a crisis are set to tick higher over the next several years as government debt levels increase and the current account deficit grows. Indeed, the probability tends to rise to an abnormally high level outside of recessions. The pre-crisis average was around 9%; the next four years will average a bit more than 15%. This is mostly due to wider fiscal deficits, which we expect to widen to around 5.0% of GDP in each year through 2022. Fiscal expansion will boost growth this year, partially reducing the odds a crisis in the very near-term, but this effect will fade over the forecast horizon as growth slows down to its long-term trend and fiscal deficits remain large.

To continue reading: Deutsche: Is The US Headed For An Imminent Debt Crisis? Here Are The Signs

It’s Not Bad Trade Deals–It’s Bad Money, Part 2, by David Stockman

What changed in the 1970s that turned the US’s trade surpluses into trade deficits? The money. From David Stockman at davidstockmanscontracorner.com:

In Part 1 we made it clear that the Donald is right about the horrific results of US trade since the 1970s, and that the Keynesian “free traders” of both the saltwater (Harvard) and freshwater (Chicago) schools of monetary central planning have their heads buried far deeper in the sand than does even the orange comb-over with his bombastic affection for 17th century mercantilism.

The fact is, you do not get an $810 billion trade deficit and a 66% ratio of exports ($1.55 trillion) to imports ($2.36 trillion), as the US did in 2017, on a level playing field. And most especially, an honest free market would never generate an unbroken and deepening string of trade deficits over the last 43 years running, which cumulate to the staggering sum of $15 trillion.

Better than anything else, those baleful trade numbers explain why industrial America has been hollowed-out and off-shored, and why vast stretches of Flyover America have been left to flounder in economic malaise and decline.

But two things are absolutely clear about the “why” of this $15 trillion calamity. To wit, it was not caused by some mysterious loss of capitalist enterprise and energy on America’s main street economy since 1975. Nor was it caused—c0ntrary to the Donald’s simple-minded blather—by bad trade deals and stupid people at the USTR and Commerce Department.

After all, American capitalism produced modest trade surpluses every year between 1895 and 1975. Yet it has not lost its mojo during the 43 years of massive trade deficits since then. In fact, the explosion of technological advance in Silicon Valley and on-line business enterprise from coast-to-coast suggests more nearly the opposite.

Likewise, the basic framework of global commerce and trade deals under the WTO and other multi-lateral arrangements was established in the immediate post-war years and was well embedded when the US ran trade surpluses in the 1950s and 1960s.

Those healthy post-war US trade surpluses, in fact, were consistent with the historical scheme of things during the golden era of industrial growth between 1870 and 1914. During that era of gold standard-based global commerce, Great Britain, France and the US (after the mid-1890s) tended to run trade surpluses owing to their advanced technology, industry and productivity, while exporting capital to less developed economies around the world. That’s also what the US did during the halcyon economic times of the 1950s and 1960s.

What changed dramatically after 1975, however, is the monetary regime, and with it the regulator of both central bank policy and the resulting expansion rate of global credit.

To continue reading: It’s Not Bad Trade Deals–It’s Bad Money, Part 2

Why Is the GOP Terrified of Tariffs? by Patrick J. Buchanan

We send foreign countries pieces of paper, they send us stuff. Sounds like a good scam, but Patrick Buchanan disagrees. The US is manufacturing as much as it ever has, but with a lot fewer people. The US is also growing as much food as it ever has, but with a lot fewer people. Rising manufacturing productivity and agricultural productive explain both phenomena. Neither trend is going to reverse no matter how many tariffs we slap on foreign manufactured and agricultural goods. In the next article, Bill Bonner pinpoints the number one factor responsible for the US slide from net exporter to net importer. Patrick Buchanan was part of the administration that made it happen. From Buchanan at buchanan.org:

From Lincoln to William McKinley to Theodore Roosevelt, and from Warren Harding through Calvin Coolidge, the Republican Party erected the most awesome manufacturing machine the world had ever seen.

And, as the party of high tariffs through those seven decades, the GOP was rewarded by becoming America’s Party.

Thirteen Republican presidents served from 1860 to 1930, and only two Democrats. And Grover Cleveland and Woodrow Wilson were elected only because the Republicans had split.

Why, then, this terror of tariffs that grips the GOP?

Consider. On hearing that President Trump might impose tariffs on aluminum and steel, Sen. Lindsey Graham was beside himself: “Please reconsider,” he implored the president, “you’re making a huge mistake.”

Twenty-four hours earlier, Graham had confidently assured us that war with a nuclear-armed North Korea is “worth it.”

“All the damage that would come from a war would be worth it in terms of long-term stability and national security,” said Graham.

A steel tariff terrifies Graham. A new Korean war does not?

“Trade wars are not won, only lost,” warns Sen. Jeff Flake.

But this is ahistorical nonsense.

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The U.S. relied on tariffs to convert from an agricultural economy in 1800 to the mightiest manufacturing power on earth by 1900.

Bismarck’s Germany, born in 1871, followed the U.S. example, and swept past free trade Britain before World War I.

Does Senator Flake think Japan rose to post-war preeminence through free trade, as Tokyo kept U.S. products out, while dumping cars, radios, TVs and motorcycles here to kill the industries of the nation that was defending them. Both Nixon and Reagan had to devalue the dollar to counter the predatory trade policies of Japan.

Since Bush I, we have run $12 trillion in trade deficits, and, in the first decade in this century, we lost 55,000 factories and 6,000,000 manufacturing jobs.

Does Flake see no correlation between America’s decline, China’s rise, and the $4 trillion in trade surpluses Beijing has run up at the expense of his own country?

The hysteria that greeted Trump’s idea of a 25 percent tariff on steel and 10 percent tariff on aluminum suggest that restoring this nation’s economic independence is going to be a rocky road.

In 2017, the U.S. ran a trade deficit in goods of almost $800 billion, $375 billion of that with China, a trade surplus that easily covered Xi Jinping’s entire defense budget.

To continue reading: Why Is the GOP Terrified of Tariffs?