2007 February 13 Tuesday
US Trade Deficit Hits New Record

The US trade deficit continues to grow rapidly.

The gap between what the U.S. sells abroad and what it imports rose to a record $763.6 billion last year, up 6.5 percent from the previous record of $716.7 billion in 2005, the Commerce Department reported Tuesday.

For December, the deficit jumped a bigger-than-expected 5.3 percent to $61.2 billion.

How long will this continue? Can the Chinese and Japanese continue to prop up the value of the dollar against their currencies? I do not see how they can continue this indefinitely. But how long till the correction?

The previous article reports Democratic Party claims that of 3 million manufacturing jobs lost in the US since Bush took office a third of them went due to the trade deficit.

Curiously, House Democrats find rising inequality as a reason to oppose a massive trade deficit. But by that logic if rising inequality is bad these very same people should oppose low IQ immigration.

In a letter to President Bush, top Democrats, including House Speaker Nancy Pelosi (D-Calif.) and Rep. Charles B. Rangel (D-N.Y.), chairman of the Ways and Means Committee, called the trade deficit "unsustainable," listing among its consequences "failed businesses, displaced workers, lower real wages and rising inequality."

The House leaders called on the president to submit an action plan within 90 days aimed at shrinking the deficit by removing barriers to U.S. exports and eradicating trading practices they regard as unfair.

Exports surged but imports grew even faster.

"It was a banner year for U.S. exports," said Joseph Quinlan, chief investment strategist at Bank of America Corp., noting that manufactured exports surged by 14.7 percent, aerospace exports skyrocketed by 30 percent, exports to oil-producing countries jumped by 26.7 percent and exports of advanced technology products to India soared by 60 percent. The United States posted double-digit export gains to 30 out of 41 trading partners in 2006.

But the gains were overwhelmed by America's unrelenting thirst for oil, with the cost of imported energy jumping 20 percent to $291.3 billion during the year. That barely eclipsed the $232.5 billion trade deficit with China, the largest ever recorded with any nation, and a resurgence in imports of fuel-efficient cars that raised the deficit with Japan to a new record of $88.4 billion.

The United States also crossed an ominous threshold for the first time last year, with U.S. income payments to the rest of the world exceeding foreign payments to the United States by $11 billion -- a shift that could escalate pressure on the deficit in the future, Mr. Quinlan said.

We live in what Warren Buffett calls Squanderville. I think we'd be better off in his Thriftville.

Share |      By Randall Parker at 2007 February 13 11:17 PM  Economics Trade

Irish Savant said at February 14, 2007 3:03 PM:

There Asians are in a bind here. Their holdings of dollar-denominated assets are so vast that even a small dollar decline would hit them badly. Equally, they need a strong dollar to keep up their export sales. At the same time, as Randall says, the deficit cannot continue indefinitely. So it's a question of who blinks first. Let's hope that when it does happen it isnt too painful

Wolf-Dog said at February 14, 2007 6:02 PM:

As of last week, the money supply measure M2 was approximately $7.1 billion, which is only 10 times larger than our current annual trade deficit, whereas M1 was only about $1.4 billion last week. And the GDP of the U.S. is approximately $12 trillion.

One reason China and Japan need the U.S. currency is because they need to import raw materials, and so far the international transmission mechanism for the exchange of goods, is the dollar. But within 5-10 years, as computerized transactions become more advanced, China and Japan will gradually become more capable of directly exchanging manufactured goods to import raw materials, without the intermediate step of using the U.S. currency. If this happens, it would be the end of the U.S. as a superpower.

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