DEFICIT DISORDERS
by Bill Bonner
As we mentioned yesterday, the noise on the issue of national accounts is deafening. Every politician, economist, and goofball analyst with access to an editorial page seems to have an opinion. Here we offer an anti-opinion. Our purpose is neither to explain the current account more clearly nor to guess about what will happen to the dollar. No, we set a much lower goal for ourselves; we only want to show that almost all the commentators and policymakers are numbskulls.
We begin by reminding readers that the U.S. trade deficit hit a new record in January, at $58.3 billion, an amount that "exceeded everyone's worst expectations," said The New York Times. The deficit reached over $650 billion last year, requiring 80% of the entire world's savings to finance it. The world has never seen such a huge red number in international trade and doesn't know what to make of it. It is a sign of the "decline of the American empire,' say some of the commentators. Others take as an emblem of America's strength.
Whence cometh this trade deficit?
It ariseth when Americans buy more from non-Americans than they sell to them. Each day that passes, Americans buy (net) about $2 billion more in foreign imports than they make in overseas sales. That U.S. businesses are more profitable than their Asian counterparts makes no difference. That the American economy is the most dynamic, flexible and delicious confection ever put up on God's green earth is as irrelevant as tree rings. That foreigners want a piece of America is flattering, but it is also as much a non sequitur as hemorrhoids.
Nor does it especially matter why Americans overspend. They have their reasons. But even if they didn't, the result would be the same. Each day, including weekends, more goes out than comes in. Ships, plying their routes from East to West - that is, leaving North American ports headed for China, Japan and the rest of the Far East - glide across the water. They are lightly charged with lumber, raw materials, tools, and food. Some are empty. As they make their way across the broad Pacific, they cross other ships headed in the opposite direction. These ships leaving the Orient on their way to Seattle or Long Beach ride lower in the water, for they are full up to the gunnels. There are cell phones, TVs, toys, gadgets, trinkets, clothes, and appliances - all the flotsam and jetsam upon which America's standard of living now rests.
If the nation were a corporation, the difference between what came in and what went out - in dollar terms - would be the measure of its "loss from current operations." If it were a family, it would be the rate at which it impoverished itself. If it were a business, running such an imbalance for so many years - it would have gone bankrupt long ago. Even a lesser nation would have run into trouble a long time ago. Only a nation with the world's reserve currency could have gotten away with it.
It is not particularly important that the U.S. economy is "growing faster than its competitors," as Mr. David Malpass claims (in the Wall Street Journal), even if it were true. Besides, the U.S. economy is growing at less than half the rate of China. Nor does it matter that Asians have "no choice" but to buy U.S. dollar assets, as other commentators maintain. Nor is it pertinent that the foreign investments represent a kind of "tribute" paid to the imperial power.
The grim and unyielding fact is that each day, Americans are about $2 billion dollars "richer" in SUVs, flat screen TVs, and other consumer gee-gaws that come mostly from Asia (where the trade deficit is concentrated), while the Asians are $2 billion richer in U.S. financial assets, notably Treasury bonds.
Since 1990, foreigners have acquired $3.6 trillion worth of U.S. assets as a direct consequence of the trade deficits.
Individually, of course, this makes no great difference. We only bring it up to mock others who brought it up before us. A man decides for himself if he'd rather have a big TV or a Treasury bond. It is not for us to say he's made a good choice or a bad one. But Americans are not merely trading a financial asset for a consumer asset. They have few financial assets to trade. Since the Reagan administration, savings rates have dropped. People do not dip into capital in order to spend it at Wal-Mart. They dip into debt. With no savings to spend, they cannot trade a financial asset for consumer gee-gaws. So, they must trade a financial liability.
This is just another consumer preference, of course. It is no concern of ours if a man decides he wants a big-screen TV so badly he's willing to go into debt to get it. He would rather have the additional debt than forego the TV. This preference has become so wildly popular that it takes our breath away. Each day, collectively, people buy $2 billion worth of stuff they can't pay for. They will pay for it in the future. Or someone will.
Again, we have no problem with that.
But every public spectacle begins with a lie. Later it develops into mass illusion, self-congratulation, hallucination, farce and...finally...disaster. Until the disaster comes, you never know quite where you are. Because for every imbecility that comes along, there are dozens of hallucinators who are eager to put it over on people...and at least half the population is ready to believe it.
So, almost everyday we see a piece in the Wall Street Journal explaining that trade deficits are no trouble. And at a certain macro-economic level, they are no trouble at all. At least, as long as someone keeps lending money, they are no trouble. But even while the money flows...Americans get poorer every day.
Some kibitzers point out that the United States ran trade deficits for much of its early history...and that fast-growing countries always have current account deficits. After all, they are building something for the future...factories, plants, machines... all of which take capital. Then, when the factories are built, they produce earnings and profits, which are used to pay back the debt. In this instance, the debtor comes out ahead.
Oh, the flattering reverie of it...but when did you last see a factory...or refinery...or mine... under construction in America, dear reader? The last one we recall was a shiny new brewery outside Baltimore - and that must have been 40 years ago. Since then, it has gone out of business!
The distinguished economic journal, Bank Credit Analyst, based in Montreal, looks ahead and sees nothing but good news. BCA believes the information revolution has many more good things to give us. We're not aware of any benefits, yet, from the information revolution...but we're prepared to believe there might eventually be some. But information is notoriously light on its feet.
We read that more and more U.S. tax forms - which are nothing more than information - are being processed in India. And now comes word from Business Week that American companies are actually outsourcing more and more of the "information" component of modern products. They no longer go to Taiwan and ask the locals to "make this." Now, they go to Taiwan to see what the locals are making that they can sell back home. More and more, U.S. companies don't even participate at the design stage. "Many just take our products," said one Taiwanese manufacturer.
What we are seeing, says Paul Craig Roberts, is the "rapid transformation of America into a Third World economy." American firms are increasing left with only brands to market. But even those won't last forever, after customers realize that the real innovation, design and manufacture genius is overseas. Just as car buyers took up new brands as quality increased in Japan, they will take up new brands in other industries. Soon, Americans will not only want to spend on foreign-made good, they will have to.
Meanwhile, the Newman brothers, Dan and Frank, point out that the outflow of dollars is no cause for concern, because the dollars just come back to us. As we conceded yesterday, they do...or, they will. But they don't come back the same good-natured working stiffs they were when they left. Instead they come back in finer clothes, with finer manners, and with a better accent. They come back as renters. Instead of helping the average man earn a living, in other words, they make it harder for him. For now, they must be supported too. After all, interest must be paid on debt...or compounded into more debt. Either way, day by day, the burden just grows heavier.
Regards,
Bill Bonner
The Daily Reckoning |
