Trade Deficit Threatens Double-Dip Recession

Friday, the Commerce Department will report September international trade in goods and services. The trade deficit—the amount imports exceed exports—is expected to rise to $32.5 billion from $30.7 billion in August.

The trade deficit was a principal cause of the Great Recession. Now, it threatens to torpedo the economic recovery and keep unemployment above 10 percent for the foreseeable future.

More than anything else, U.S. businesses need customers—more sales of U.S.-made goods and services—to get the economy rolling and hire more Americans.

The deficits on oil and trade with China account for nearly the entire U.S. trade imbalance, and money spent on imported gasoline and Chinese coffeemakers can’t be spent on American-made products, unless offset by exports.

At 2.7 percent of GDP, the trade deficit subtracts more from the demand for U.S.-made goods and services than President Obama’s stimulus package adds.

Obama’s stimulus is temporary, whereas the trade deficit is permanent. Moreover, the trade deficit will increase, because oil prices will rise and imports of Chinese consumer goods will climb as the global and U.S. economies expand in 2010.

When imports substantially exceed exports, Americans must consume much more than the incomes they earn producing goods and services, or the demand for what they make is inadequate, inventories pile up, layoffs result, and the economy goes into recession.

From 2004 to 2008, the trade deficit exceeded five percent of GDP, and Americans borrowed from abroad to consume more than they produced and keep the economy going. They posted as collateral overvalued homes financed on shaky mortgages. When mortgages failed, banks stumbled, home prices tumbled, and retail sales tanked. The economy was thrust into the worst recession in 70 years.

Now huge federal stimulus spending is required to resuscitate business activity. Once the stimulus money is spent, the demand for U.S.-made goods and services will fall, and the rising trade deficit will further tax demand and threaten a new round of layoffs and a second economic contraction. The much feared double dip recession could result and unemployment could rocket past 15 percent, igniting a second Great Depression.

President Obama ignores the fundamental causes of a rising trade deficit—China’s subsidies for domestic oil consumption, which drive up global prices and the cost of U.S. oil imports, and China’s purposeful manipulation of currency markets, which keeps the yuan undervalued against the dollar and subsidizes Chinese sales in U.S. markets.

President Obama’s policies to fight the recession will deliver an inadequate, temporary lift to the U.S. economy, and he has not offered meaningful policies to reduce the trade deficit. He fails to challenge China’s subsidies for domestic petroleum consumption and to even acknowledge the threat to American prosperity posed by China’s currency mercantilism.

Industrial policies to promote exotic alternatives to conventional oil, conservation and battery powered cars will hardly dent oil imports for many years, and will create jobs numbering in the thousands, not the millions lost in the recession.

Left to fester much longer, the trade deficit could cause an economic Armageddon reminiscent of the Great Depression.

Comments

[bluesky123:]

Transition US commercial transportation to nat gas:
1) reduce CO2 by 40%, reduce volatile organic compounds by 10%, reduce particulate matter by 80%
2) reduce our energy imports & trade deficit
3) jobs for Americans in the US nat gas industry (higher tax revenues at state & federal level)
4) reduce foreign energy dependence

A no brainer. I'll take a siesta and wait for the rest of sleepy Washington to come to its senses.

Nov 12 04:43 AM

[User 504692:]

I am guessing that what you say WILL happen, because everything is geared for it to happen. Without intervention, Murphy's law will set in.

I don't see intervention happening in the right way, or soon enough. And it is looking like soon enough needs to be next year.

Nov 12 05:03 AM

[Davewmart:]

'President Obama ignores the fundamental causes of a rising trade deficit—China’s subsidies for domestic oil consumption, which drive up global prices and the cost of U.S. oil imports, and China’s purposeful manipulation of currency markets, which keeps the yuan undervalued against the dollar and subsidizes Chinese sales in U.S. markets.'

That's a pretty one-eyed assessment of the causes of the US's present predicament.
Had the US not gone on an unfinanced spending spree for the last 20 years, and hollowed out it's own industry under the banner of internationalism, then China's actions could not have resulted in the present imbalances.
As for the oil component, the refusal to recognise that oil supplies are limited and the willingness to engage in war instead of making appropriate efforts to move to other resources has led to the present problems.
France generates almost all it's electricity using nuclear power and so has much greater security of supply than the US - fossil fuels can be conserved for purposes for which it is harder to replace, and electricity can be gradually phased in for purposes such as transport with improved battery technology.
What are in my view unrealistic assessments of the potential for renewables to soon replace fossil fuel power generation have not helped.
The desertec proposals, for instance, to generate power for Europe from the Sahara is hoped by it's proponents to be able to generate around 15% of Europe's power by 2050 at a cost of half a trillion dollars! - too late and too expensive.

Why China should be expected to operate in other than what it feels to be it's own best interests I can't imagine, and nor is it immediately apparent how the biggest creditor of the US can be forced to change.
It seems more likely that they will give up on the dollar, and so have less incentive to hold their currency down.
Obama indeed has done just about everything possible to hold the dollar down, as the readiness to spend, spend, spend money that does not exist is liekly to reduce the value of the dollar.

The fault then lies not in the stars but in ourselves, and nor should the blame be placed exclusively on China, who are the other side of the Siamese twin produced by the US overspending.

Nov 12 07:00 AM

[Mad Hedge F...:]

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Nov 12 08:04 AM

[Gregman2:]

It makes one ask, "Who is the U.S. Stimulus designed to stimulate?"

Nov 12 11:38 PM