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The Daily Reckoning PRESENTS
There has been much debate over the U.S trade deficit – some see it as
a sign of the “decline of America,” while others insist that it
reflects the strength of our country. Bill Bonner shows us why seeing
this deficit as an asset is America’s downfall...
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
© 2005 Bill Bonner
The
Daily Reckoning Archives
 www.dailyreckoning.com
Bill Bonner is the founder and president of Agora
Publishing, one of the world's most successful consumer newsletter
publishing companies, and the author of the free daily e-mail The
Daily Reckoning. He
is also the author, with Addison Wiggin, of “Financial
Reckoning Day: Surviving The Soft Depression of The 21st
Century” (John Wiley & Sons).
You
can sign up for a free subscription to the Daily Reckoning here: http://www.dailyreckoning.com.
This
essay was originally published in The Daily Reckoning.
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