This is a mini-report about the increasing dependence on international trade, our poor performance and reliance on savings from other nations instead of our own, which causes accelerating debt to foreign interests. It's presented in an easy-to-understand format with pictures. This report is a chapter of the Grandfather Economic Reports series of certain negative economic conditions facing families and their children, compared to prior generations. The full report, Foreign Trade and International Debt Report is an eye-opener.

QUESTION:  Do our children and grandchildren deserve to be placed in a reduced international position than we inherited from our parents and grandparents? Would that make us proud?

FACTS:

• Since 1952 the international reserve position of the U.S. has fallen from 50% of the world's total to but 3% of the total — a 94% drop. The decline continues. Many other productive nations now have 4 to 7 times more foreign reserves backing up each of their children than we do for ours, and their lead is increasing as the U.S. continues with massive trade deficits.

• The U.S. is continually unable to adequately compete internationally to balance its trade with the rest of the world. Even the information technology sector is in deficit.

• The U.S. is less independent than prior generations since one quarter of the economy depends on international trade in goods, 3 times more than before - as foreign entities own more and more of our assets than we do of theirs - while our education quality suffers relative to others. With 5% of the world's population, America consumes 20% of world imports.

• Our annual international trade deficit is larger than Social Security spending, 50% larger than all defense spending, and 2 times larger than Medicare.

• And the U.S. has become more dependent on imported foreign oil and natural gas than ever before. The oil consumption-production gap is a whopping 60%, as consumption soars and production and reserves continually decline.

• The U.S. is the world's largest debtor, a long fall from being the world's largest creditor when I was a young worker. In recent years the population consumed $3 trillion (borrowed from foreigners) more than they produced, leaving their children owing $3 trillion of their future income to foreign interests. Not a nice bequest from one generation to another.

• This International Trade Report, together with the chapter called America's Total Debt Report, proves we are living beyond our means. For decades Americans have enjoyed the game of consuming more than we produce, borrowing from the future to make-up the shortfall with unprecedented ratios of domestic and foreign debt increasing much faster than national income. This cannot continue forever.

• These are dramatic numbers, with significant long-term implications for the currency, international economic power, relative standard of living, and possible national security of our nation's children into the future.

The signal to free-up our economy from debt addiction is clear.

INTERNATIONAL TRADE - NEGATIVE TRENDS EXPLODING!!

This chart measures the U.S. merchandise trade balance each year since 1959. It shows whereas the USA used to run a balance of trade, (meaning we were able to sell enough goods to other nations to pay for what we purchased from them) we are now running massive deficits. If a country runs a trade deficit, it is borrowing from the rest of the world so that it can spend in excess of its own production. This means the USA is less competitive than before. NOTE: The U.S. is setting record negative trade balances each year. Since 1992, deficits have exploded.

As a result, our manufacturing base declined from 30% of GDP in 1953 (when we had a trade surplus) to 16% in 1999—and much of the smaller balance is foreign-owned. The majority of our trade deficit was created by importing more than we exported in manufacturing goods—add zooming oil imports to that and you have the cause of our trade deficit.

This chart shows year 2002 trade performance in goods was a $484 billion trade deficit—the largest negative trade balance in history, despite a recession.

In the 12-months ending January 2003, the U.S. had a goods trade deficit of $496 billion; while Japan & Germany scored a cumulative trade surplus of $214 billion. That's a whopping $710 billion difference.

In 2001, for the first time, China surpassed Japan as the country with the largest trade gap with the United States. America's deficit with China surged 22% to a record $83.8 billion, followed closely by the deficit with Japan, which rose 10.8% to a record $81.3 billion. America's deficit with the 15-nation European Union rose 29% to $55.5 billion.

This vividly shows how America is living beyond its means—by consuming more goods made by others than it produces to meet the needs of foreigners—resulting in exploding debts in favor of foreigners, in addition to record high domestic debt ratios of household, business and the domestic financial sectors.

It can be seen that the pattern since the mid 1970s brings into focus the basic question above—America's lack of competitiveness world-wide—increasingly so each year. This indicates the U.S. has become less competitive, despite claims of recent improved productivity (mostly realized only by a narrow part of the economy and primarily by revising how they measure productivity and inflation).

USA CUMULATIVE TRADE DEFICITS—past 17 years

The chart above showed the USA merchandise trade deficit for each year—reaching the greatest deficit in 2002 of $484 billion.

The left chart shows the USA cumulative merchandise trade deficit—with all nations since 1985. (cumulative means adding all deficits)

The cumulative merchandise goods trade deficit was $3.8 Trillion during the last 17 years. That means each American man, woman and child effectively borrowed $13,000 from producers in other nations, because we Americans consumed more goods from other nations than we produced and sold abroad. As a result, foreigners now own $3.8 trillion more in US assets than before.

Not shown on the chart is the cumulative goods trade deficit since 1976—totaling $4.1 trillion. Prior to that period, America produced near continuing surpluses with the rest of the world allowing America to own more assets in foreign nations than they in ours. However, that net has eroded over recent years to a net negative.

Taking into account goods and services, and investment flows, which is called the current account—"foreign-owned assets in the US totaled US$9.4 trillion in 2001; while US claims on the rest of the world amounted to US$7.2 trillion," according to the White House Council of Economic Advisers. This shows America has a net $2.1 trillion deficit with other nations, which combines account surpluses prior to 1975 with the cumulative current account deficit of $2.9 trillion since 1976.

How can competitiveness rise as the result of higher so-called "productivity," if at the same time the trade deficit explodes? What competitiveness?

It is clear that the so-called 'economic boom' of the 1990s was a false boom, because the economy was fueled primarily by increasing internal and foreign debt—instead of by internal production and competitiveness.

The above chart shows our growing lack of competitiveness as we increase foreign debt at a faster pace. The long-term performance of our currency is our fault (negative trade balances driven by massive internal debts).

QUESTION:   What are foreigners doing with that which we borrowed from them?

ANSWER:     They own an increasing percentage of our businesses, stocks, bonds and government treasury bonds. Meaning >> Americans own less and less of their nation.

DOES IT MATTER—THESE DEFICITS??

• Federal Reserve Chairman Alan Greenspan said, "We cannot depend on imported capital, that is, a current account deficit, to offset low domestic savings indefinitely."

• In its August 2001 annual assessment of the world's largest economy, the International Monetary Fund (IMF) said "the yawning current account deficit raised the risk of a sharp depreciation in the U.S. currency."

• On 25 July 2001 former Federal Reserve Chairman Paul Volcker told the Senate Banking Committee hearing on risks of growing balance of payment deficit, "We are a debtor nation with nil personal savings and are absorbing a significant portion of other countries savings. These huge and growing external deficits are symptoms of imbalances in the national economy and the world economy that cannot be sustained."

• On 30 April 2001 White House Economic Advisor Dr. Lawrence Lindsey said, "We are in uncharted territory—it's unprecedented—it cannot go on—something has to give."

• MIT professor Dr. Lester Thurow said, "No country can run a large trade deficit forever."

• The U.S. Trade Deficit Commission, December 2000, said, "Not only is the trade deficit not sustainable, but it carries a great deal of danger to the nation and living standards."

• Foreigners now own more and more of America—about "$8 trillion of U.S. financial assets, including 13% of all stocks and 24% of corporate bonds", according to Bridgewater Associates. According to the Federal Government Debt Report, they also own 40% of Treasury bonds & bills. Additionally, they own real estate and factories.

We should not be mad at foreign interests. We are the ones consuming beyond our own production, creating unprecedented debts and trade deficits PLUS excessive federal spending.

WHAT TO DO?

It has been said that there are only three ways in which negative trade balances can be restored:

1. The deficit-incurring country (USA) must cease excessive credit (debt) expansion which sucks in imports faster than incomes warrant,

2. Other countries must inflate their economies to over-price their own production so as to suck up US exports, or

3. The deficit country (USA) must allow its currency to depreciate to drive up prices.

QUESTION:  What's happening on this front?

ANSWER:

1. USA increases debt even faster (see America's Total Debt Report),

2. Why should other countries inflate away their currency to help America, and

3. Allowing depreciation of the US dollar is what's happening (see Foreign Exchange Report), causing a loss of international buying power of every US wage earner and holder of dollars—to the tune of negative 30% against the Euro.

Those powers-that-be allowing this degradation of our currency should be sent to jail for 'treason.'

The trends shown in the above charts (and those in the full report below) are most dramatic—a threat to our economy, and potentially to national security—and a threat to our increasing dependence on foreign-produced energy.

© 2003 Michael W. Hodges
Financial Sense Archives for Mr. Hodges

 Web note: The above editorial is a recent summary of an updated chapter from Michael Hodges series, Grandfather Economic Report. Read the full article: "Foreign Trade and International Debt Report" on G.E.R.

Michael W. Hodges
Grandfather Economic Report
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