Thursday, February 03, 2005

Economics - Trade deficit

Follow-up to my February 1 post. Although I have not combined the trade deficit with the budget deficit into some total number, I have stated that I believed they are both indicators of economic structural weaknesses that this nation will be forced to face. Back on November 6, I started writing about excessive spending as part of my post-election focuses and said:

Perhaps it is unfair to lump the national debt and trade deficits together as "borrowing", but the trade deficit does one thing that leaves me just a little paranoid... especially at 1/2 trillion dollars per year... and that is the issue of control. Somewhere in the equation of getting goods for cash is the part that says Cash = Control. Cash becomes the power to influence, the power to compete, and the power to control.
Don Beaudroux at Cafe Hayek (named after Friedrich Hayek) wrote:
In his book Exporting America, Lou Dobbs writes

Our trade deficits and budget deficits are soaring, together amounting to a trillion dollars a year [p. 30].

The ‘trade deficit’ is a deficit in the current-account. When America has a trade deficit, nothing more ominous is happening than the fact that Americans are importing more goods and services (in value terms) than Americans are exporting. Foreigners earning dollars by selling goods and services to Americans are investing some of their dollars in dollar-denominated assets – mostly stocks, bonds, real-estate, and cash.

So why does Dobbs think that this sum is meaningful? Answer: he mistakenly equates the current-account deficit with debt. It’s not debt.
All well and good... the definition is clarified. The question is not in the definition, but the significance of the trade deficit. Of that, there is much dispute... as Yoda might say.

The Cato Institute agreed with Dr. Boudreaux... or at least did in 1998. By 2004, others were not so sure, as reported in the New York Times.

Not only are many U.S. economists concerned about the trade deficit, there are a growing number of voices elsewhere in the world expressing concern. For example, John Quiggin, a Federation Fellow in Economics and Political Science at the University of Queensland, wrote in The Economists' Voice
Currently the United States imports about half as much again as it exports. Without radical changes in the U.S. economy, or specific policy initiatives on energy, a large deficit on oil imports can be taken as a given. There are important classes of consumer goods for which domestic production has ceased. If balance is to be reached in a decade, there has to be a major turnaround in the pattern of trade in some other sector. But what? At the moment, there is no sector in which the United States is currently running a significant surplus (there is a small surplus on services, but even here, the trend is flat or negative). Even with the recent depreciation of the U.S. dollar, and widely-noted productivity growth, there are no signs that U.S. producers are gaining market share in any part of the traded goods sector.

Any significant reduction in the imbalance on goods and services therefore appears likely to require very large changes in market prices or U.S. income levels, such as:
• A (further) larger devaluation of the U.S. dollar.
• Large reductions in U.S. wages relative to those overseas.
• Large increases in U.S. productivity relative to foreign productivity (the relevant concept here is multi-factor productivity, taking account of both capital and labor inputs).
• Large reductions in U.S. consumption relative to foreign consumption.

Unfortunately, no one of these alone would be enough to get the trade deficit in balance or surplus without a crisis.

It is inevitable that the U.S. trade account will return to balance, and likely that most of this adjustment will take place within the next ten years. The only question for policy is whether the adjustment will be relatively smooth, like the process which resolved the first U.S. trade deficit blowout in the 1980s, or sharp and costly, as in the case of the many countries that experienced financial crises in the 1990s.
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“The Divine Afflatus,” A Mencken Chrestomathy, chapter 25, p. 443 (1949)
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Tracking Interest Rates

Tracking Interest Rates


SEARCH BLOG: FEDERAL RESERVE for full versions... or use the Blog Archive pulldown menu.

February 3, 2006
Go back to 1999-2000 and see what the Fed did. They are following the same pattern for 2005-06. If it ain't broke, the Fed will fix it... and good!
August 29, 2006 The Federal Reserve always acts on old information... and is the only cause of U.S. recessions.
December 5, 2006 Last spring I wrote about what I saw to be a sharp downturn in the economy in the "rustbelt" states, particularly Michigan.
March 28, 2007
The Federal Reserve sees no need to cut interest rates in the light of adverse recent economic data, Ben Bernanke said on Wednesday.
The Fed chairman said ”to date, the incoming data have supported the view that the current stance of policy is likely to foster sustainable economic growth and a gradual ebbing in core inflation”.

July 21, 2007 My guess is that if there is an interest rate change, a cut is more likely than an increase. The key variables to be watching at this point are real estate prices and the inventory of unsold homes.
August 11, 2007 I suspect that within 6 months the Federal Reserve will be forced to lower interest rates before housing becomes a black hole.
September 11, 2007 It only means that the overall process has flaws guaranteeing it will be slow in responding to changes in the economy... and tend to over-react as a result.
September 18, 2007 I think a 4% rate is really what is needed to turn the economy back on the right course. The rate may not get there, but more cuts will be needed with employment rates down and foreclosure rates up.
October 25, 2007 How long will it be before I will be able to write: "The Federal Reserve lowered its lending rate to 4% in response to the collapse of the U.S. housing market and massive numbers of foreclosures that threaten the banking and mortgage sectors."
"Should the elevated turbulence persist, it would increase the possibility of further tightening in financial conditions for households and businesses," he said.

"Uncertainties about the economic outlook are unusually high right now," he said. "These uncertainties require flexible and pragmatic policymaking -- nimble is the adjective I used a few weeks ago."

December 11, 2007 Somehow the Fed misses the obvious.
[Image from:]
December 13, 2007 [from The Christian Science Monitor]
"The odds of a recession are now above 50 percent," says Mark Zandi, chief economist at Moody's "We are right on the edge of a recession in part because of the Fed's reluctance to reduce interest rates more aggressively." [see my comments of September 11]
January 7, 2008 The real problem now is that consumers can't rescue the economy and manufacturing, which is already weakening, will continue to weaken. We've gutted the forces that could avoid a downturn. The question is not whether there will be a recession, but can it be dampened sufficiently so that it is very short.
January 11, 2008 This is death by a thousand cuts.
January 13, 2008 [N.Y. Times]
“The question is not whether we will have a recession, but how deep and prolonged it will be,” said David Rosenberg, the chief North American economist at Merrill Lynch. “Even if the Fed’s moves are going to work, it will not show up until the later part of 2008 or 2009.
January 17, 2008 A few days ago, Anna Schwartz, nonagenarian economist, implicated the Federal Reserve as the cause of the present lending crisis [from the Telegraph - UK]:
The high priestess of US monetarism - a revered figure at the Fed - says the central bank is itself the chief cause of the credit bubble, and now seems stunned as the consequences of its own actions engulf the financial system. "The new group at the Fed is not equal to the problem that faces it," she says, daring to utter a thought that fellow critics mostly utter sotto voce.
January 22, 2008 The cut has become infected and a limb is in danger. Ben Bernanke is panicking and the Fed has its emergency triage team cutting rates... this time by 3/4%. ...

What should the Federal Reserve do now? Step back... and don't be so anxious to raise rates at the first sign of economic improvement.
Individuals and businesses need stability in their financial cost structures so that they can plan effectively and keep their ships afloat. Wildly fluctuating rates... regardless of what the absolute levels are... create problems. Either too much spending or too much fear. It's just not that difficult to comprehend. Why has it been so difficult for the Fed?

About Me

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Michigan, United States
Air Force (SAC) captain 1968-72. Retired after 35 years of business and logistical planning, including running a small business. Two sons with advanced degrees; one with a business and pre-law degree. Beautiful wife who has put up with me for 4 decades. Education: B.A. (Sociology major; minors in philosopy, English literature, and German) M.S. Operations Management (like a mixture of an MBA with logistical planning)