The US dollar has not dropped far enough yet to close the US trade deficit.
The dollar has declined during the past two years against not only the euro but also against most other currencies, including the Japanese yen and the renminbi. On a real trade-weighted basis, the dollar is down about 13% relative to its value in March 2006.
This improved competitiveness of American goods and services is needed to shrink the massive US trade deficit. Even with the dollar’s decline and the resulting 25% rise in US exports over the past two years, the US still had an annualized trade deficit at the end of fourth quarter of 2007 of about $700 billion (5% of GDP). Because US imports are nearly twice as large as US exports, it takes a 20% increase in exports to balance a 10% increase in imports. That means that the dollar must fall substantially further to shrink the trade deficit to a sustainable level.
The dollar has to fall much further because of the rising price of a barrel of oil. Peak Oil will send the cost of oil far higher and the United States and other countries will have to export far more in goods and services in exchange for the oil. In other words, we do not just need to export another 5% of our GDP to close our current trade deficit of 5% of GDP. We also will need to export several percentage points more of our GDP to pay for future oil price increases.
Another doubling in the price of oil will not double our oil import bill because a lot of demand destruction will occur as oil prices go up. But we are going to have to give up a lot more stuff to the rest of the world in order to balance our trade. More for them means less for us.
Given this trend a job in an industry which sells most of its goods and services abroad might be the ticket for job security.
For a few years now I've held the view that foreign buying of US bonds was causing a weak US currency, cheap imported consumer goods prices, the large US trade deficit, and inflation of housing and capital prices. But the conditions that caused this state of affairs are coming to an end. Prices are rising in China and causing higher prices in the US.
Soaring energy and raw material costs, a falling dollar and new business rules here are forcing Chinese factories to increase the prices of their exports, according to analysts and Western companies doing business here.
The rise was a modest 2.4 percent over the last year. But even that small amount, combined with higher energy and food costs that also reflect China’s growing demands on global resources, contributed to a rise in inflation in the United States. Inflation in the United States was 4.1 percent in 2007, up from 2.5 percent in 2006.
Because of new cost pressures here, American consumers could see prices increase by as much as 10 percent this year on specific products — including toys, clothing, footwear and other consumer goods — just as the United States faces a possible recession.
Welcome to the 1970s flashback era of stagflation.
Place this in context. For a few years Alan Greenspan has been saying he sees an eventual resurgence of US inflation on the horizon. I've never heard him say why. But put this in context. We've had a huge run-up in oil prices for a few years without a recession (at least until now). We underwent too much monetary expansion. But the monetary expansion didn't cause consumer price inflation because we were getting flooded with cheap Chinese goods and the Chinese were using their trade surplus to buy US bonds to keep their currency weak and the prices of their goods low in the US. The monetary expansion did cause an inflation in housing prices and other more durable asset prices.
Well, all that was not sustainable. Hence the recession. Economist Martin Feldstein at Harvard says the housing asset price inflation enabled American consumers to borrow against their equity to keep their buying power up even as energy prices rose.
MF: In the post-World War II period, recessions have been preceded by a combination of increased oil prices and high interest rates. And we certainly got a dose of both of those this time. The Fed raised the federal funds rate from 1 percent to 6 percent, and oil prices tripled. So yes, I would have been worried that that combination alone, driven by the high oil prices, could have turned us down. In fact, I wrote a piece in the Wall Street Journal a couple of years ago, asking: Why did the jump in oil prices (that we had then observed—from roughly $20 to $60 a barrel) not push the economy into recession? And I answered that by saying: because there was this surge in home-equity borrowing that allowed individuals to increase their consumption faster than their incomes. I concluded by saying that if energy prices continue to increase, we cannot count on that kind of offset from higher consumer spending financed by mortgage borrowing.
Feldstein says that the US recession probably isn't going to cut into China's or India's economies. This means that total world oil demand probably won't go down as much as US demand if world demand even goes down at all.
MF: I don’t think that India and China are going to be adversely affected by a slowdown in the United States, if it occurs. Now, that’s different from having them pick up the slack, to use your phrase, and provide aggregate demand for the rest of the world. I think those two ideas get confused sometimes when people talk about decoupling. India does not depend on exports to the United States. Similarly, I think the direct impact on [U.S.] imports from China would not be that large. China exports a lot, but its net exports (when you net through how much it imports in order to reexport) are not so much a driving force in their economy, and they have other ways of picking up the slack domestically. In fact, they’ve been worried about the fact that their economy has been growing too fast, and they’ve been looking for ways to dampen it. If their exports slow down, they will shift toward more domestic spending. That’s a very good thing for the Chinese economy and may make for a structural change that will reduce the future trade imbalance between China and the United States. So, I don’t think the Chinese should be that worried about a U.S. recession.
Since oil prices probably won't slacken and prices of goods from China are on the rise a recession in the US will not eliminate 1 source of inflation in the United States while inflation of goods prices from China will add another source. Plus, the US dollar will decline against the Chinese currency adding to that price inflation.
The US has been living beyond its means. This inflation of consumer prices is part of the process of lowering living standards that is needed to bring us back within our means.
The dollar hit a record low against the Euro.
FRANKFURT, Sept. 20 — Investors around the world dumped the dollar today, pushing it to an all-time low of $1.40 against the euro and to parity with the Canadian dollar for the first time in three decades as currency traders digested the full implications of the Federal Reserve’s new course for interest rates.
In a nutshell: The US trade deficit has forced the dollar down against unmanipulated currents to compensate for the inability of the dollar to drop against East Asian currencies. Oil hit a new high too. That makes sense. As the dollar declines the price of oil drops in other currencies and that pushes up demand for oil from other countries. Hence the price of oil rises in dollar terms.
At some point the US dollar has to go down against the Chinese and Japanese currencies. The tie of the East Asian currencies to the dollar has driven their value down against the Euro even as they run up huge trade surpluses.
European Central Bank President Jean-Claude Trichet and French Finance Minister Christine Lagarde urged Asian governments to let their currencies appreciate more to close disparities in global trade.
``The yen and the yuan in particular are currencies whose level and spread pose a problem to global trade,'' Lagarde told reporters today after a meeting of euro-area finance chiefs in Oporto, Portugal. Trichet singled out China in saying it is ``desirable'' that Asian nations without floating exchange rates allow more movement in their currencies.
The Europeans are looking at a deluge of cheap goods from America and East Asia. They do not want the US trade deficit to become a European trade deficit. They aren't going to be as complaisant as American policy makers have been about the US trade deficit.
The Canadians are on a roll in large part due to Alberta oil sands production.
Consider what has happened since: the unemployment rate has slid to a 30-year low of 6.0%, wage gains are rolling along at a 4.0% clip, the Toronto stock market is near record highs, house prices have soared, government coffers are overflowing, the strong dollar has helped turn us into champion consumers and we are on the cusp of becoming a creditor nation -- joining the elite ranks of countries like Germany that own more abroad than they owe.
And oh yeah, the world has finally figured out that Canada holds the world's second-largest oil reserves after Saudi Arabia.
Crude oil prices jumped above $84 a barrel late on Thursday after production platforms in the Gulf of Mexico were shut down ahead of a threatened tropical storm.
Nymex October West Texas Intermediate hit a record $84.10 a barrel, up $2.17, but settled at $83.32, up $1.39 on the day. The October contract expired at the end of trading. The most active November WTI contract was up $1.05 at $80.75.
This is a good time to bring innovative energy technologies to market.
The declining dollar is good news for US manufacturers. But more expensive imports and higher oil prices could combine with the housing bust to push the United States into a recession.
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.
Political economist David Ricardo famously argued for the benefits of trade due to comparative advantages where each participant in trade comes out ahead. Steve Randy Waldman argues that Ricardo is dead.
First, the current incarnation of free trade is coming under pressure not because people are stupid, but because people are smart. The publics in countries like the United States and Britain have been remarkably tolerant of free trade over the last two decades, because the policy-relevant public "gets it", has been persuaded by economists from Ricardo on down that free trade is a positive-sum good thing.
Free trade is a positive sum thing if it is truly free trade and not the result of political distortions of markets. But that's not the world we live in.
Ricardo argued that free trade is mutually beneficial because it leads to specialization. But what happens when trade does not lead to greater specialization?
Free trade is positive sum because of specialization. The idea is that if someone else makes cars better or more cheaply than the UK can, Brits will do some other thing in which they have a comparative advantage, maximizing both overall productivity and the wealth of both nations. But there's a catch to this ancient Ricardian reasoning, a hidden assumption: The other thing that Brits do has to be tradable. If the UK stops building cars, and instead concentrates on home-building and retail sales, then there are no certain gains to trade.
In a nutshell: America is exporting debt rather than exporting products. So we aren't exchanging Chinese towels and shoes for US goods in industries where we specialize. Instead we are just exporting debt in growing piles while a succession of industries cuts back on production. In an amazingly long list of industries the US runs a trade deficit with China. This is madness.
Free trade is failing for a couple or reasons. First off, currency manipulation. The East Asians are buying large amounts of US debt in order to keep their currencies cheap. As a result the US trade deficit keeps growing and growing. Second, intellectual property theft is a problem. A US company that has to buy legal software and pay for the creation and use of intellectual property is at a competitive disadvantage to a Chinese manufacturer who can operate with all illegal software and use intellectual property of others without compensation.
The intellectual property theft problem reduces the amount of new intellectual property generated. If companies can not earn back the costs of developing intellectual property then they'll make less of it.
During recent talks with US Treasury Secretary Henry Paulson Chinese Vice Premier Wu Yi argued that China has to run a huge trade surplus with the United States and manipulate currencies in order to compensate for China's past abuse by colonial powers.
Wu's opening statement Thursday included a lengthy account of China's widespread poverty and history of colonial domination.
"It is our hope that by making an introduction on China's development road and economic strategy for our American friends (we can show) why we have chosen this development road and where it will lead us in the future," she said.
"We have had the genuine feeling that some American friends are not only having limited knowledge of, but harboring much misunderstanding about, the reality in China," she said, according to a text of her speech released by the government.
Why should our understanding of China - or lack thereof - have anything to do with the desire to avoid America becoming what Warren Buffett calls Squanderville?
"The way I've articulated the situation to the Chinese is to look beyond Congress," Paulson said. "Congress is a reflection of the American public, and the American public has a perception that the benefits of trade between our two countries aren't being shared equally or fairly."
Following the talks, officials on both sides avoided any suggestion of concrete progress on the principal American demand that China should stop undervaluing its currency as a way to promote exports.
So sorry Chinese leaders. We'd be happy to go along with the Squanderville status quo. But our public forces us to go through the motions of complaining to you in hopes you'll stop pegging your currency. Not to worry though. We are just going to complain and then go home and do nothing. We are on your side on this and trying to ignore our own masses to the extent possible.
I do not think we should be bargaining with the Chinese over their currency manipulations and over our mounting debts to the world. We should just enact tariffs and gradually raise them till the trade deficit declines to a balance. But that course of action is anathema to the "free trade" zealots.
The American people should not be so blase about the size of the trade deficit. We are living far beyond our means.
The U.S. trade deficit rose to a record $69.9 billion in August, driven by high oil prices, a growing trade gap with China and rising consumer demand for imported goods from antiques to appliances, the government said yesterday.
The trade deficit was 2.8 percent bigger than in July, despite strong growth in exports, led by sales of agricultural products and aircraft, the Commerce Department reported. American companies sold $122.4 billion worth of goods and services overseas in August, an increase of $2.7 billion over the previous month.
Even if we could somehow magically replace oil with another energy source that would eliminate only $20.8 billion of the $69.9 billion August 2006 deficit.
The total value of imports rose by 2.4% to $192.3bn in August, while exports rose by 2.3% to $122.4bn.
During August, the politically charged trade deficit with China rose by 12.2% to a monthly high of $22bn. The is on course to top last year's record figure of $202bn.
The $22 billion deficit with China represents over 31% of the total trade deficit. Take it away and the US would still have a trade deficit that is far too large. But part of that is due to other East Asian countries trying to keep their currencies just as weak as the Chinese Renminbi currency so that they are not overwhelmed by Chinese imports. But they also keep their currencies weaker so that they can export to the US.
Exports to China actually dropped.
The politically sensitive deficit with China widened to $22 billion, exceeding the previous record of $20.5 billion reached in October 2005. Thursday's report showed that imports from China increased to an all-time high of $26.7 billion in August. U.S. exports to the Asian nation fell to $4.8 billion.
Remember when all of America's business leaders converged on Congress en masse in May 2000 to argue for granting China status as a Permanent Normal Trade Relations (PNTR) trade partner? This was supposed to open up a massive market for US goods. All it did was allow capitalists (e.g. Wal-Mart's bosses) to automate and speed up the indebting of America to the world.
Why are people living so far beyond their means? Does the influx of foreign money drive down the cost of borrowed money so much that people run up more debt? Or has the development of mechanisms to aggressively market credit cards and other debt instruments worked on human weaknesses to buy now and worry later to lure an increasing percentage of the populace to live beyond their means? Has capitalism become the enemy of prudent living and sound personal economics?
Democrats claim they could do a better job of closing the US trade deficit.
Democrats, hoping to take control of the House and Senate from Republicans, contended the August deficit figure underscored the need for a change in trade policies being pursued by President Bush and the Republican Party.
They said the administration has failed to crack down on unfair trade practices of other nations including China's currency manipulation and its widespread piracy of U.S. goods.
Just a reminder to the Democrats: Democrat Bill Clinton was instrumental in opening the US market to Chinese goods.
The Dow Jones index of major US shares swept above the 12,000 level for the first time on Wednesday but eased back to close short of the landmark level.
The index rose as high as 12,049.51, boosted by falling US inflation, oil and petrol prices and ongoing optimism about corporate earnings.
A slowing of job growth is also not seen as a threat to the profitability of large cap stocks.
The US economy added 51,000 jobs last month, far below analyst expectations, in another signal of slowing growth.
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Last month's figures contrast with job additions of 188,000 in August and 123,000 in July.
One reason the capitalists can be optimistic about how things are going even as many workers are doing worse is that an increasing portion of all economic output is going to corporate profits.
One way to comprehend what is happening is to look at the split between how much of the economy is won by profits and how much by wages.
The share allotted to corporate profits increased sharply, from 17.7% in 2000 to 20.9% in 2005, while the share going to wages has reached a record low.
If the shift of revenue from wages to profits is due to higher productivity of smart holders of capital then this trend is not so bad. But I wonder if it is due in part to flooding the US labor market with imported labor and I wonder if the higher profits are coming via shifting of external costs onto the rest of us. How much of those profits are paid for by the middle class with taxes that fund for the health care, crime handling, and other costs of the cheap imported labor?
Why did Japan do better than the United States in exporting to China?
Japan’s auto sector now accounts for one-third of U.S. auto market sales. But Japan still depends on exports and, since 2001, has been much more exposed to the Chinese market. Japanese exports to China, which were very small before 2000, make up almost 15% of total Japanese exports, while the U.S. share has declined by nearly the same amount.
Japan’s export base increased at a 20% annual rate between 2002 and 2004, with almost a quarter of this growth coming from China. During this period, Chinese imports were growing at about a 50% annual rate, while Japan’s exports to China were rising at almost a 60% annual rate.
“China’s explosion onto the world economic stage was a huge boon for Japan, which not only benefited in terms of export stimulus, but from a direct source of domestic stimulus to an economy that had struggled to find the momentum to lift itself out of its long-term recession,” says Fosler.
But Fosler says much of the optimism about Japanese economic growth may be a delayed reaction to the better than expected performance of 2004-2005 rather than a hard-nosed appraisal of the future. Recently, Japan’s machinery export orders and industrial activity have been flat, and its profit growth is slowing rapidly and its productivity growth is stagnating. And China’s exports, which have been important to all of Asia, are now rising at only about a 15% annual rate.
My guess: Japanese businesses are less eager than American businesses to move factories from the home country to China. So what would have been US export growth to China instead became US companies making their goods in China for the China market. Mind you, that's just a guess.
Anyone have a source for what percentage of manufacturing of US and Japanese companies takes place in the home countries versus various other countries?
One reason why the US trade deficit is 5.8% of GDP:
The numbers leave little doubt as to the extraordinary contrast between the two economies. Last year China saved about half of its gross domestic product, or some $1.1 trillion. At the same time, the US saved only 13% of its national income, or $1.6 trillion. That's right, the US, whose economy is six times the size of China's, can't manage to save twice as much money.
And that's just looking at national averages that include saving by consumers, businesses, and governments. The contrast is even starker at the household level — a personal saving rate in China of about 30% of household income, compared with a US rate that dipped into negative territory last year (-0.4% of after-tax household income).
These are extreme readings by any standard. The US hasn't pushed its personal saving rate this far into negative territory since 1933, in the depths of the Depression. And the Chinese rate is higher than it has been at any point in the past 28 years, since its modern reforms began. Similar extremes show up in the consumption shares of the two economies — the mirror image of trends in personal saving rates. US consumption has held at a record 71% of GDP since early 2002, while Chinese consumption appears to have slipped to a record low of about 50% of GDP in 2005.
China's lopsided economy and their manipulation of their currency (the awkwardly named renminbi) are setting the US up for a severe fall should the Chinese go into a depression. Chinese money is keeping US interest rates unnaturally low and is feeding the US housing boom. All that could change very rapidly should the Chinese economy go unstable.
The focus of many economics and free marketeers on tariff trade barriers and their complaints when Bush restricted steel imports strike me as a case of fighting the last war. That the US has incredibly low barriers to foreign goods is demonstrated by America's ridiculously high trade deficit. This is a dangerous situation.
Some say the Chinese have a huge trade surplus because they are rapidly developing. Then by that argument the US should have run a huge trade surplus in the 19th century. Did it? I don't think so. My impression is we were net receivers of foreign investment and that while we had high trade barriers we didn't run a large trade surplus.
The $725.8 billion deficit, announced Friday by the Commerce Department, was a 17.5 percent leap from 2004's then-record deficit of $617.6 billion. The 2005 trade deficit equaled 5.8 percent of this country's gross domestic product, up from 5.3 percent of GDP in 2004 and 4.5 percent in 2003.
When I hear some argue for lower trade barriers my reaction is they are arguing for the freedom to send the whole nation deeply into debt.
The US runs large trade deficits with most (all?) of its major trading partners.
The $201.6 billion trade deficit with China in 2005 was a sharp 24.5 percent jump from 2004's $161.9 billion gap, prompting critics of free trade to concentrate their ire on that country. (Japan was second at $82.7 billion, up 9.4 percent. Canada was third at $76.5 billion, up 15.1 percent.)
If foreign banks were not buying US debt to push up the US dollar I'd be more sympathetic to arguments for letting the market work it all out. But foreign trade isn't free trade when currency valuations are manipulated by governments.
China sells the US 6 times as much as the US sells China.
America set a record for the value of goods exported to China - $42 billion - but that was dwarfed by the almost $250 billion travelling in the opposite direction.
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Also contributing to the record figure was the $176 billion of crude oil imports, with America paying an average price of $47 a barrel.
By the way, if the US dollar declines in value that will lower the real cost of oil to the rest of the world since holders of their currencies will be able to buy US dollars more cheaply. That will increase demand for oil in the rest of the world and hence eventually lead to higher oil prices in US dollars. A sharp decline in the US dollar could cause a bout of inflation in the United States.
Organized labor says the trade deficit is doing real economic damage.
"Such a huge trade gap undercuts domestic manufacturing and destroys good U.S. jobs," said Richard Trumka, secretary-treasurer of labor's AFL-CIO. "America's gargantuan trade deficit is a weight around American workers' necks that is pulling them into a cycle of debt, bankruptcy and low-wage service jobs."
Sen. Byron Dorgan (D-N.D)., said the new deficit figure showed that "our trade policy is an unbelievable failure that is selling out American jobs and weakening our economy."
Amazingly, the dollar's value rose even as the US trade deficit broke new records.
The dollar recovered from an initial decline against the euro yesterday. It appreciated 14.4 percent against the 12-nation currency in 2005 and climbed 14.7 percent versus the yen.
I can remember a college economics professor explaining to us how we didn't have to worry about trade deficits since currency values would adjust to cause exports and imports to approximately balance.
Back in 1991 the trade deficit was only 30 billion dollars.
The trade deficit, which has risen more or less steadily since 1991 when it was $30.7 billion, widened 17.5 percent in 2005 to set a record for the fourth year in a row.
The increase in the US trade deficit in 2005 was over 4 times bigger the total US trade deficit in 1991.
Such a huge deficit seems crazy to me and I'm not persuaded by arguments that this is not a problem. I agree with Warren Buffett. Americans are living in Squanderville. The question in my mind: Why is this happening? Wider availability of consumer debt? Some demographic trend in the US population? Foreign governments manipulations of the US dollar? US capitalists shifting their capital abroad to get cheaper labor? Other?
Robert Musil argues that we should see the trade deficits as a massive purchase of political risk insurance by people in other countries. But does that explain our trade deficit with Canada for example? Still, an interesting idea.
What if anything should be done at the level of US government policy about the US trade deficit?