Did 2008's $677 Billion Trade Deficit Cause the Recession? 9 comments
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On Wednesday, the Commerce Department reported that the 2008 deficit on international trade in goods and services was $677.1 billion. This is down from $700.3 billion in 2007 but still is 4.7 percent of GDP. The trade deficit was smaller in 2008, because economic growth and consumer spending began to decline during the second half 2008.
Trade deficits and shoddy banking practices pushed the economy into recession, and until both trade and the banks are fixed, sustained economic growth cannot be accomplished. The trade deficit will rise again as the effects of the stimulus package are felt, but if its underlying causes are not addressed, the trade deficit will drag the economy back down into a double dip recession.
Pushed up by the surge in oil prices and the ballooning trade gap with China, the trade deficit is reducing U.S. GDP by $400 billion, annually, and significantly adding to the pain imposed by the unfolding recession. The negative effects of the trade deficit on GDP and employment overwhelm the potential positive effects of President Obama's proposed stimulus spending.
To finance the deficit of recent years, Americans have borrowed more than $6.5 trillion from foreign sources, including foreign governments, and the debt service comes to more than $1500 for each working American. In addition, foreign investors have at least $3.6 billion acquiring equities in U.S. businesses.
The flood of dollars into foreign government hands has bloated sovereign wealth funds that are now buying significant shares of U.S. businesses and other property, and threaten to compromise the loyalties of U.S. businesses.
The Chinese government alone holds about $2 trillion in U.S. and other securities, and these could be used to purchase about 20 percent of the value of publicly-traded U.S. companies. Add to that the holding of Middle East sovereigns and royal families, the potential purchases of U.S. businesses by foreign governments with interests unfriendly to the United States is alarming.
This should give Americans real pause for concern about Chinese and other foreign government intentions to diversify their foreign exchange holdings into U.S. stocks and other real assets.
Anatomy of the Hemorrhaging Current Account
In 2008, the United States had a $144.1 billion surplus on trade in services. This was hardly enough to offset the massive $821.2 billion deficit on trade in goods.
The deficit on petroleum products was $386.3 billion, up from $293.2 billion in 2007. The average price for imported crude oil rose to $95.23 from $64.28 percent from 2007, while the volume of petroleum imports fell 4.0 percent.
The American appetite for inexpensive imported consumer goods and cars is also a huge factor driving up the trade deficit. The trade deficit with China was $266.3 billion, and is a new record, up from $256.2 billion in 2007.
The deficit on motor vehicle products was $107.1 billion. Ford (F) and GM (GM) continue to push their procurement offshore and cede market share to Japanese and Korean companies. However, the automotive trade deficit was down from $120.9, as Asian automakers continued to expand production in North America and demand for autos fell with the recession.
Lower oil prices and a recession bearing down on consumer spending, should ease the trade deficit in 2009. However, despite its trade surplus, China is not permitting its currency to rise in value and has beefed up subsidies on its exports in an effort to export its unemployment to the United States and other industrialized countries. China's beggar-thy-neighbor protectionism threatens to ignite a global trade war of devastating proportions.
In 2010, as stimulus spending in the United States and elsewhere lifts economic activity the trade deficit will increase again, oil prices will surge and China's exports will rise above 2008 levels, thanks to an undervalued currency and larger export subsidies. The U.S. trade deficit will rise beyond its peak of 5.1 percent of GDP, and this may well pull the U.S. economy back into recession.
Dollars spent on imported oil and cars and consumer goods from China cannot be spent on U.S. goods and services, and every dollar that U.S. imports exceed exports negates at least one dollar of federal stimulus spending. Overall, the trade deficit overwhelms the positive effects of the Obama stimulus package on demand for U.S. goods and services, GDP and employment. Along with the banking crisis, the trade deficit is a primary cause of the U.S. recession.
The dollar remains at least 40 to 50 percent overvalued against the Chinese yuan and other Asian currencies. Although China adjusted the yuan from 8.28 per dollar to 8.11 in July 2005 and permitted it to rise gradually to 6.84 by July 2008, the value of the yuan has not changed since.
In order to sustain an undervalued currency in 2008, China purchased approximately $600 billion in U.S. and other foreign securities, creating a 40 percent subsidy on its exports of goods and services. Other Asian governments align their currency policies with China to avoid losing competitiveness to Chinese products in lucrative U.S. and EU markets.
Consequences for Economic Growth
High and rising trade deficits, tax economic growth. Specifically, each dollar spent on imports that is not matched by a dollar of exports reduces domestic demand and employment, and shifts workers into activities where productivity is lower.
Productivity is at least 50 percent higher in industries that export and compete with imports, and reducing the trade deficit and moving workers into trade-competing industries would increase GDP.
Were the trade deficit cut in half, GDP would increase by at least $400 billion, or about $2750 for every working American. Workers' wages would not be lagging inflation, and ordinary working Americans would more easily find jobs paying higher wages and offering decent benefits.
Manufacturers are particularly hard hit by this subsidized competition. Through the recent economic expansion and recession, the manufacturing sector has lost 4.6 million jobs since 2000. Following the patterns of past economic expansions, the manufacturing sector should have kept at least two million of those jobs, especially given the very strong productivity growth accomplished in durable goods and throughout manufacturing.
Longer-term, persistent U.S. trade deficits are a substantial drag on growth. U.S. import-competing and export industries spend three-times the national average on industrial R&D, and encourage more investments in skills and education than other sectors of the economy. By shifting employment away from trade-competing industries, the trade deficit reduces U.S. investments in new methods and products, and skilled labor.
Cutting the trade deficit in half would boost U.S. GDP growth by one percentage point a year. The trade deficits of the last two decades have reduced U.S. growth by one percentage point a year. Lost growth is cumulative. The U.S. economy is about $3 trillion smaller, thanks to the record trade deficits accumulated over the last 20 years. This comes to about $20,000 per worker.
Had the Administration and the Congress acted responsibly to reduce the deficit, American workers would be much better off, tax revenues would be much larger, and the federal deficit would be much smaller. The recession would be much less severe if the Obama Administration relies on stimulus and bank reform alone, as the economy will fall back into recession once the spending has run its course. A pattern of false recoveries, much as occurred during the Great Depression, will likely emerge. Conditions will not be as bad, and unemployment will stay at unacceptable levels.
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This article has 9 comments:
see Oil.
There were systematic failures in the checks and balances in the system, by Boards of Directors, by credit rating agencies, and by government regulators.
The financial system operated with large gaps in meaningful oversight and without sufficient constraints to limit risk. Even institutions that were overseen by complicated, overlapping system of multiple regulators put themselves in a position of extreme vulnerability.
However, the most important thing is not being discussed, in my opinion. It seems to me that we are "seeing the trees but missing the forest". Take off your capitalist centric "blinders" for a minute, and consider that our economy was about 70% consumer driven. As such, the quote below from Economist Robert Reich makes alot of sense as to how we got to the present recession/depression:
robertreich.blogspot.c...
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What's going on? Let me explain as clearly as I can.
American consumers are coming to the end of their ropes and don't have the buying power they need to absorb the goods and services the U.S. economy is capable of producing. This is likely to mean fewer jobs, which will force Americans to pull in their belts even tighter, leading to still fewer jobs – the classic recipe for recession. That recession may turn into a full-fledged Depression if fiscal and monetary policies can't make up for consumers' lack of buying power. And there's reason to worry they cannot because consumers are in a permanent bind. They're deep in debt, their homes are losing value, and their paychecks are shrinking.
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Under these circumstances, the usual remedies won't work. Wall Street bailouts have no effect because housing prices continue to fall, and the Street is sitting on a giant pile of bad debt. Tax breaks for business won't generate more investment in factories or equipment because demand for their products what emerges from the factories is dropping. Temporary fixes like a stimulus package that give households a one-time cash infusion won't get consumers back to the malls because they know the assistance is temporary and their problems are permanent. They're likely to pocket the extra money instead of spending it. Additional Fed rate cuts might give consumers access to somewhat cheaper loans, but there's no going back to the easy money of a few years ago. Lenders and borrowers have been badly burned. The values of houses and other major assets are dropping even faster than interest rates can be lowered. Growing numbers of homeowners owe more on their mortgages than their homes are now worth on the market.
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We're reaping the whirlwind of many years during which Americans have spent beyond their means and most of the benefits of an expanding economy have gone to a relatively small group at the very top. Adjusted for inflation, the median wage is below where it was in 1999. The nation's median hourly wage is barely higher than it was 35 thirty-five years ago. The income of a man in his 30s is now 12 percent below that of a man his age three decades ago. The rich, meanwhile, can't keep the economy going on their own because they devote a smaller percentage of their earnings to buying things than the rest of us: After all, they're rich, and they already have most of what they want. Instead of buying, they're more likely to invest their earnings wherever around the world they can get the highest return.
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The debate over widening economic inequality of income and wealth in America usually pits fairness against growth. Conservative supply-siders contend that the people at the top not only deserve to be richly rewarded because such rewards encourage them to invest and innovate, and thereby benefit everyone else. Liberals concede that some inequality may be necessary to encourage growth but that we have long passed the point where it is either necessary or fair. But the reality we're now facing poses a different question: Can we have any growth at all when income and wealth are so unequal that most Americans can no longer buy what they produce?
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The answer is likely to be no. Go back to the years just before the Great Depression and you see the same pattern. As I've noted before, Marriner S. Eccles, who served as Franklin D. Roosevelt's Chairman of the Federal Reserve from 1934 to 1948, noted this in his memoir "Beckoning Frontiers":
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"As mass production has to be accompanied by mass consumption, mass consumption, in turn, implies a distribution of wealth -- not of existing wealth, but of wealth as it is currently produced -- to provide men with buying power equal to the amount of goods and services offered by the nation's economic machinery. Instead of achieving that kind of distribution, a giant suction pump had by 1929-30 drawn into a few hands an increasing portion of currently produced wealth. This served them as capital accumulations. But by taking purchasing power out of the hands of mass consumers, the savers denied to themselves the kind of effective demand for their products that would justify a reinvestment of their capital accumulations in new plants. In consequence, as in a poker game where the chips were concentrated in fewer and fewer hands, the other fellows could stay in the game only by borrowing. When their credit ran out, the game stopped."
Is the game about to stop again?
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And there you have it. I don't know about you, but it sure does seem like the game is on the verge of sputtering out, and yes, the trade deficit is part of it, but try to see the forest for the trees.
The key here is OIL IMPORT addiction. As the Author said, accounted for 389 Billion last year----blown out the tailpipe....one time use-gone-poof.
There is an alternative and damn if Obama DID NOT bring it up in TARP TWO, the sequel.
Until the USA has a plan to stop imported oil we're toast,cuz the last thing we need right now is to piss off the largest holders of our debt
with talk of protectionism.
So use oil imports as source for TAX -AND concurrently begin immediate transfer to homebased resource energy we have in abundance, Coal Gasification, Wind, & Natural Gas !!!!!
Americans haven’t borrowed to fund the trade deficit. No debt was created. You can wonder, though, if we’d have as large of a trade deficit if we didn’t require such a large capital surplus to fund our budget deficit. The federal government has borrowed to fund its deficit. And with all the government is about to borrow to fund future deficits, including the stimulus, the capital surplus is about to get a whole lot bigger.
“The Chinese government alone holds about $2 trillion in U.S. and other securities, and these could be used to purchase about 20 percent of the value of publicly-traded U.S. companies.”
I don’t see why this is a concern. What would happen if they decided they wanted to diversify (ie sell what they own and buy something else)? They would significantly impair the assets they’re selling, realizing massive losses, and bid up the assets they’re buying. They would create huge gains for whoever buys the assets they sell and whoever sells the assets they buy. And now your concern is that they will now do something nefarious after they buy up our assets. If they do anything but run them profitably, they will lose on their investment. If SWF’s really wanted to hurt us, they could just shut off the oil or stop buying debt. But why don’t they? Because Americans are their customers and they realize the W in their SWF is inextricably connected with the US.
“The American appetite for inexpensive imported consumer goods and cars is also a huge factor driving up the trade deficit.”
We only buy as much as we do from non-US sources is because it’s cheaper. Why do we buy so much oil? It’s cheaper than alternatives. Not because we’re “addicted”. All consumers have an appetite for relatively inexpensive goods. They make judgments based on quality, price, convenience, and any number of other reasons. Are you arguing they should buy without regard for the value per dollar? You might be able to convince politicians that paying too much for something is a good way to stimulate the economy, but I think you’ll find it much harder to convince anyone who actually spends their own money.
“Dollars spent on imported oil and cars and consumer goods from China cannot be spent on U.S. goods and services, and every dollar that U.S. imports exceed exports negates at least one dollar of federal stimulus spending.”
This isn’t true (if you’re on board with the idea that even if the federal dollar is stimulative in the first place). First, this assumes that every dollar spent on an imported good goes straight to China or the Saudis. In fact, Wal-Mart makes a profit when you buy. They paid the trucking companies to get it there. Often, Wal-Mart bought it from someone else, who makes a profit. There are a lot of people who get a piece of that dollar. Second, again, that dollar we send over there doesn’t do them a bit of good. For them to benefit from that dollar, they need to buy dollar-denominated assets. That might be a dollar-denominated tractor or a dollar denominated treasury note or a dollar-denominated whatever.
here is the crux of the problem.
no more wars.
no more enrons.
> jack