U.S. Trade Deficit with Germany Soars to New Record

March 21, 2013

The U.S. trade deficit with Germany shattered the record set only one year earlier, soaring from $49.3 billion in 2011 to $59.7 billion in 2012.  The deficit in manufactured goods was $59.9 billion, completely erasing a small surplus in all other categories of goods.  Here’s a chart of the U.S. trade balance with Germany since 2001:  Germany Trade

Economists say that a strengthening currency with our trade partner should improve the balance of trade in our favor.  They also say that low wages cause trade deficits, and that our trade deficit should improve as wages rise, making theirexports more expensive and our exports more affordable.  Here are two charts that plot our exploding trade deficit in manufactured goods with Germany against their currency (Euro) exchange rate and against the change in their per capita purchasing power parity (PPP) – a measure of their wealth and analagous to wages there:  Germany Trade vs Exchange Rate, Germany Trade vs PPP

As you can see, as our trade deficit with Germany has worsened dramatically, the Euro has been rising, from 1.16 Euros per dollar in 2001 to 0.8 Euros per dollar in 2012.  And German PPP has risen by 44% during that same time frame (while U.S. PPP rose 38%).  Clearly, the currency theory holds no water in this case.  Nor does the theory about low wages.  So much for economists’ usual trade scapegoats.  Furthermore, economists, how do you explain the following?

  1. If low wages cause trade deficits, why is our deficit with Germany, when expressed in per capita terms (thus factoring the sheer size of nations out of the equation), the worst among our top five trade partners (Canada, China, Mexico, Japan and Germany) – almost three times worse than our deficit with China – in spite of the fact that they are a wealthy nation, second only to Canada? 
  2. And why is our next worst deficit with Japan (again, almost three times worse than our deficit with China), also a wealthy nation?
  3. Why does Canada have a large trade deficit in manufactured goods with the U.S. when U.S. wages are higher than those in Canada? 
  4. Of these top five U.S. trading partners we’ve examined so far, why has our trade imbalance responded to changes in currency valuation as economists would predict with only one country – Mexico? 
  5. And why has our trade imbalance responded to rising incomes as economists would predict in only one case – Canada?

In contrast to economists’ theories on trade imbalances, the disparity in population density between the U.S. and these top five trading partners has accurately predicted the trade imbalance in every single case.  With the one nation less densely populated than the U.S. (much less), the U.S. enjoys a healthy trade surplus in manufactured goods.  With all four other nations – all of whom are more densely populated than the U.S. – we endure big deficits. 

If you’re new to this blog and don’t understand why population density disparity is by far the single biggest determinant of the balance of trade between the U.S. and other nations, making free trade with badly overpopulated nations tantamount to economic suicide, please read my book, Five Short Blasts, and explore the other data presented on this site. 

My next article will summarize in a similar fashion U.S. trade with our top 15 trade partners.


Trade Deficit with Japan Grows 22% in 2012

March 18, 2013

We now turn our attention to Japan, America’s 4th largest trade partner (by total imports and exports), accounting for 5.7% of all U.S. trade in 2012.  In 2012, the U.S. imported $141 billion in manufactured goods from Japan, an increase of $16.7 billion, while our manufactured exports to Japan rose by only $6.3 billion.  The result was that our deficit in manufactured goods with Japan worsened by 12.6%, contributing the lion’s share to an overall worsening of our trade balance with Japan of 22%.  If you’re president Obama, with his myopic focus on exports, the $6.3 billion increase can be ballyhooed as great news – as long as you’re dumb enough to turn a blind eye to the much worse increase in imports. 

It should come as no surprise that automobiles account for $37 billion of the imports from Japan, dwarfing the next biggest category of products – motor vehicle transmission and power train parts, at $6.2 billion.  That’s a $7 billion increase in imports of Japanese vehicles over 2011.   In comparison, the U.S. exported less than $1 billion worth of automobiles to Japan in 2012.  No suprise.  The Japanese auto market is so badly stunted by overcrowding that even Japanese auto companies have trouble selling vehicles there. 

Here’s a chart of our overall balance of trade with Japan, dating back to 2001:  Japan Trade

In response to my suggestion that the U.S. needs to change its trade policy and return to the use of tariffs to assure a balance of trade, people sometimes reply that “tariffs don’t work; they’ll just raise their tariffs too and we’ll lose all our exports.”  Or I hear that “you can’t do that; it’ll start a war.”  Well, here’s a link to an article that appeared on Reuters just a couple of days ago, reporting on Democratic lawmakers’ alarm that Japan might be included in Obama’s trade talks:

http://www.reuters.com/article/2013/03/15/us-usa-japan-autos-idUSBRE92D14A20130315

“In an industry with razor-thin profit margins, the elimination of the 2.5 percent car tariff (as well as the 25 percent truck tariff) would be a major benefit to Japan without any gain for a vital American industry, leading to more Japanese imports, less American production and fewer American jobs,” the lawmakers said in a letter to Obama.

… Levin (Michigan senator Carl Levin) … played a major role in persuading the Obama administration to renegotiate auto provisions of a free trade pact with South Korea.

The revised pact, which took force one year ago, allowed the United States to keep its 2.5 percent tariff on South Korean autos until the fifth year and to keep its 25 percent tariff on South Korean light trucks until the eighth year, when it will begin to be phased out.

Has anyone noticed that you don’t see any Japanese or Korean trucks on American roads (aside from Japanese-brand pickup trucks that are built in the U.S.)?  That’s because 25% tariffs have been extremely effective in keeping them out, preserving market share for American truck manufacturers.  And have you heard any Americans complaining about that?  Has anyone complained that shipping costs are too high because we don’t have enough cheap Japanese and Korean trucks in our trucking fleets?  Of course not.  People do complain about shipping costs, but that’s because of the high price of fuel.  Virtually no one in America even knows that we maintain high tariffs on Japanese and Korean trucks, with the exception of people employed in the truck-manufacturing industry – people who owe their jobs to those tariffs.

Why don’t we take the same approach with automobiles?  Since the Japanese and Koreans won’t buy our cars, why don’t we raise our tariffs on theirs?  Why don’t we take this same approach to all of our trade imbalances with other nations? 

As I’ve done in my previous articles on our top three trade partners – Canada, China and Mexico, let’s now take a look at how our trade balance with Japan has responded to changes in Japan’s currency and Japan’s purchasing power parity – or PPP – analagous to Japanese wages.  Economists are fond of blaming trade deficits on artificially low currency values and on low wages.  Here’s a chart of our trade deficit in manufactured goods with Japan vs. the yen-dollar exchange rate:  Japan Trade vs Exchange Rate

As you can see, while the yen held steady in value in 2012, our trade imbalance with Japan worsened dramatically.  In fact, over the past eleven years, while the yen has appreciated in value by 37% – rising in value from 124.4 yen per dollar to only 79.22 yen – our trade deficit worsened by 14%, rising from $80 billion in 2001 to $91 billion in 2012.  This is exactly the opposite of what economists say should happen.

In the meantime, Japan’s PPP has increased by almost 40%, rising from $25,900 in 2001 to $36,200 in 2012.  Of course it’s gone up.  The Japanese are getting richer from their growing trade surplus.  In the meantime, Americans’ median income has actually declined.  Here’s a chart of our trade deficit in manufactured goods with Japan vs. the rise in their PPP:  Japan Trade vs PPP

Once again, we see that the “low wages” theory doesn’t hold water.  Our trade deficit with Japan gets worse as their wages have risen.  And, in terms of PPP, Japan ranks among the top 16% of the wealthiest nations on earth.  They’re not a “low wage” nation at all.  In fact, our trade deficit in manufactured goods with Japan, expressed in per capita terms,  is three times worse than our deficit with China, in spite of the fact that wages in Japan are four times higher than Chinese wages.  How do you explain that? 

The explanation is that low wages and currency valuations have almost nothing to do with trade imbalances, while they have everything to do with disparities in population density between the U.S. and its trading partners.  So far, with America’s top 4 trading partners, accounting for 48.7% of all of our trade, population density accurately predicts the balance of trade with all four, while the currency valuation theory is batting only .500 and the low wages theory is batting .250.

In my next two articles, we’ll focus next on our 5th largest trading partner – Germany, followed by an overall assessment of trade with our top 15 trading partners.  Stay tuned.


The ‘Malo’ Half of NAFTA

March 15, 2013

In the previous two articles, we examined trade with America’s two largest trading partners (by total imports and exports):  Canada and China.  We saw that while the U.S. has a fairly large trade deficit with Canada, all of it and more is due to the fact that Canada is by far our largest source of imported oil.  The U.S. actually enjoys a healthy surplus of trade in manufactured goods with Canada, making Canada the good half of NAFTA – the North American Free Trade Agreement.

Now we turn to the other half of NAFTA – Mexico.  Mexico is a fairly densely populated nation – almost twice as densely populated as the U.S.  Mexico isn’t a wealthy nation but, by world standards, they’re not poor either.  With a per capita purchasing power parity (PPP) of $15,300, Mexico ranks 83rd out of 228 nations, placing them in the top 40%.  However, 51% of its people live in poverty, though it’s not for lack of jobs.  Mexico currently enjoys a rather low unemployment rate – 4.5% – a rate that is the envy of the United States.

Here’s a chart of overall trade with Mexico, through 2012:  Mexico Trade.

Since 2007, our overall trade deficit with Mexico has moderated somewhat, dropping from $73 billion to $61 billion in 2012.  But all of that decline is due to a drop in oil imports.  Our deficit in manufactured goods rose in 2012 to $46.1 billion, only $0.8 billion shy of the record deficit set in 2007.  Expressed in per capita terms, that’s a deficit of $401 with every Mexican citizen.  In 2011, our per capita deficit with Mexico in manufactured goods was our 14th worst – worse than China, with whom our per capita deficit is “only” $258.

So, of our top three trading partners in 2012 (who together account for 43% of all U.S. trade), the U.S. enjoys a surplus in manufactured goods with only Canada, a nation with a population density of less than ten people per square mile.  The U.S. suffers large deficits with China and Mexico, nations with population densities of 361 and 151 people per square mile respectively.  You should be starting to get suspicious that population density may be a factor.

As we did with Canada and China, let’s consider the other factors that economists like to blame for trade deficits – weak currencies and low wages.  The following is a chart of our trade deficit in manufactured goods with Mexico vs. the peso-dollar exchange rate:  Mexico Trade vs Exchange Rate.

As the peso has weakened from 9 per dollar in 2001 to 14 pesos per dollar in 2012, our trade deficit in manufactured products with Mexico has worsened dramatically, almost doubling during that 11-year span.  This is the effect that economists would predict but, so far, the exchange rate theory is only batting 2 for 3, while the population density theory is batting a thousand.  Mexico’s weakening currency may explain why our enormous deficit with Mexico is so out-of-proportion to their population density. 

And I won’t deny that low wages also play a role.  Many American companies have set up shop just across the border for that very reason.  Here’s a chart of our balance of trade in manufactured  goods with Mexico vs. their PPP:  Mexico Trade vs PPP.

As you can see, Mexico’s PPP (analagous to wages in Mexico) has risen by over 50% since 2001.  But, instead of our balance of trade improving as economists would predict, our trade deficit in manufactured goods with Mexico has nearly doubled.    If the “low wages” theory really held water, we should be seeing at least some improvement in our balance of trade with Mexico as their incomes have risen dramatically.  Instead, it has gotten much worse.  Once again, we see that economists have the cause and effect backwards.  Mexicans are growing wealthier because of their surplus with the U.S., instead of rising incomes in Mexico improving our balance of trade.   So far, economists’ “low wages” theory is batting zero.

Taken together, the 55% decline in the value of the peso since 2001 essentially cancels out the 50% rise in PPP (and wages) during the same period in Mexico.  So traditional economic theory should predict that our trade imbalance with Mexico should have held steady instead of nearly doubling.  The real explanation for that is that the effects of the population density disparity are becoming more pronounced the longer we attempt to apply free trade in a situation where it’s a hopelessly inappropriate trade strategy. 

Free trade with sparsely populated Canada – the good half of NAFTA – makes sense and has been enormously beneficial to the U.S.  Free trade with Mexico – the “malo” (or bad) half of NAFTA – has been a trade policy disaster, draining hundreds of thousands of manufacturing jobs from the U.S.  And it’s getting worse as the Obama administration stands idly by and renegs on its promise to fix NAFTA.

Next up, our 4th largest trading partner:  Japan.


China’s Economy: Heavy on Stimulus, Light on Consumption

January 22, 2013

http://www.reuters.com/article/2013/01/20/us-china-economy-idUSBRE90J0I820130120

The above link will take you to an interesting piece that appeared on Reuters this weekend.  Much of the celebrated growth in China’s economy has been driven by debt-fueled infrastructure spending and other private investment-funded development in anticipation of western-style consumption by its 1.2 billion consumers – consumption that has yet to materialize.  The article also notes that the explosion in property values there, while a boon to the developers, is taking a big bite out of the Chinese consumers’ ability to afford anything other than their cramped, overpriced living quarters.  This should come as a surprise to no one, since the price of dwelling space reaches exhorbitant levels in every other densely populated area of the world, whether it’s New York City or the entire country of Japan.  People who spend all of their income on rent and food have little left for the purchase of other products. 

The economy picked up in the fourth quarter as a spurt of infrastructure spending orchestrated by Beijing broke seven straight quarters of a slowdown. Consumption’s contribution to growth fell in the fourth quarter for the third straight quarter even though retail sales were rising in each of the last three months.

Retail sales, or total consumption, continues to grow but consumption’s share of the Chinese economy is declining.  It’s exactly what happens in a society whose population density is beyond that critical point where over-crowding impairs per capita consumption.  It’s happening not only in China, but throughout the world as the global population continues to grow.  While the sum total of the world’s economic output continues to grow, consumption’s share of the economy is declining as unemployment rises, making the world ever more dependent on deficit spending to maintain an illusion of prosperity.  Deficit spending has grown to the point where there aren’t even enough investors willing to fund it, forcing all of the world’s central banks to accelerate their money printing to buy up their nations’ own debts. 

And it’s all to no avail.  Deficit spending is increasingly less effective in stimulating the economy because people living in cramped conditions can’t consume more products no matter how much money you give them to do it.  China’s no different and the world is in for a rude awakening when the big plans for China’s economic growth go bust.


Apartments Shrinking in Major U.S. Cities

December 13, 2012

 As I browsed through the latest issue of AARP Bulletin last night, the following article caught my eye.

Tiny Apartments

 It’s very rare that I come across something like this – hard data on per capita consumption that can be linked to population density.  As reported in the article,  apartments are shrinking in major U.S. cities. 

Compare the size of these apartments to the average-sized home in the U.S.  The average per capita dwelling space in the U.S. is 710 square feet.  That means that the average single person occupies a dwelling (likely an apartment) of 710 square feet.  The average family of four occupies a dwelling (likely a single family home) of 2,840 square feet.  As reported in this article, apartments in large, densely populated major cities of the U.S. are shrinking down to 220-330 square feet. 

The fact that people in large cities tend to live in apartments isn’t news.  Nor is the fact that single young people, just starting out in their careers, choose to live in small apartments.  I did when I was discharged from the Navy and began my career in the Cleveland area.  (My apartment dwarfed those being reported in the above article.)  Even though I was living in the ‘burbs among many nice homes, I chose to live in an apartment because that’s all I could afford at the time and because I had no interest in a bigger home. 

But as I pointed out in Five Short Blasts, population density is a major factor in forcing people into smaller dwelling spaces than they’d otherwise choose.  (See Figure 5-2 on page 88.)  The average japanese citizen occupies a dwelling space less than one third that of the average American’s home, not because they like living in crowded, cramped quarters but, because Japan is ten times as densely populated as the U.S., there isn’t room for anything larger. 

This article is further corroboration of the effect, reporting that small apartments are now getting even smaller as these cities grow more densely populated and as the demand for housing becomes more intense.  Let’s focus on the data reported for San Francisco, where that city is considering reducing the legal minimum apartment size from 290 square feet to 220 square feet.  Consider the impact on per capita consumption.  The per capita consumption of flooring materials is reduced by 24%.  So too is the per capita consumption of materials used in the ceiling.  The per capita consumption of materials used to build the walls – lumber, drywall, nails, tape and joint compount, and paint – is reduced by 13%.  The per capita consumption of wall-hangings is reduced by that amount as well.  And thanks to the 24% reduction in foor space, the consumption of furnishings is reduced even more, since occupants still need the same amount of aisle space between the furnishings. 

The problem is that the denizens of these tiny digs are just as productive as any other workers and just as hungry to earn the income needed to pay for these over-priced dwellings.  Just as productive, but consuming far less.  It’s a trend we find in nearly every aspect of the economy as our world grows more densely populated.  You do the math.  It’s impossible to consume less in per capita terms without having an equal impact on per capita employment.  Worsening unemployment is absolutely inescapable. 

Of course, economists don’t think in these terms.  They see urban population densification as synonymous with a densification of economic activity – more money spent per square mile.  They dismiss  the decline in per capita consumption of dwelling space and other goods with the claim that people will simply spend their money on other things – like services and entertainment, and create jobs in those sectors.  Never mind the fact that the high cost of these apartments leaves people without any additional income or the fact that people in less densely populated conditions enjoy those same services and entertainment in greater measure because they actually do have the money.

That this obvious inverse relationship between population density and per capita consumption continues to elude the field of economics is astounding and tragic.


We Need Better-Trained Workers to Compete with The Rest of The World?

November 26, 2012

It’s often said by our political leaders and economists that the United States needs a better-trained work force in order to compete with other nations and bring manufacturing jobs back home.  If that’s true, then how do you explain the following? 

Regarding illiteracy among the world’s population, the CIA World Fact Book notes that:

… over two-thirds of the world’s 793 million illiterate adults are found in only eight countries (Bangladesh, China, Egypt, Ethiopia, India, Indonesia, Nigeria, and Pakistan) …

I did some checking.  Of these eight highly illiterate nations, the United States actually has a trade deficit in manufactured products with five of them.  It has surpluses with  Egypt, Ethiopia and Nigeria.  (These surpluses are almost entirely in the form of aid.  The U.S. counts aid as exports.) 

In fact, these five relatively illiterate nations – Bangladesh, China, India, Indonesia and Pakistan – accounted for over 77% of our entire trade deficit in manufactured products in 2011.  Clearly, the outsourcing of our manufacturing jobs can’t be explained by companies seeking out highly-trained work forces.  If training were the issue, then why did our manufacturing jobs leave the best-trained work force in the world in the first place in favor of work forces that were completely illiterate? 

The temptation is to say that these jobs actually left not because of better-trained work forces but in search of cheap labor.  However, that argument falls flat when you consider that our trade deficits with high-wage nations like Japan and Germany are even worse than any of these five afore-mentioned nations. 

What they all have in common is an extreme population density, making them incapable of reciprocating our consumption of their imports with consumption of American goods.  We have trade deficits with these nations not because of the training of their workers or because of cheap labor or even because of manipulated currency exchange rates, but because of American trade policy that fails to account for the role of population density in driving global trade imbalances.


Americans Growing Poorer

July 17, 2012

http://www.cnbc.com/id/47774877

On June 11, the Federal Reserve released its triennial “Survey of Consumer Finances.”  OK, so this news is a little stale, but if the Federal Reserve can take 18 months to release the data, I can be forgiven for taking a month to comment. 

The report was anxiously awaited, for it’s the first such snapshot of family finances since the onset of the Great Recession that began in late 2007.  As expected, it’s not a pretty picture.  As reported in the above-linked article, the median net worth of American families in 2010 fell to $77,300 from its peak of $126,400 in 2007.  Most of that decline was the result of fallling home values since, especially among the middle class, most of their net worth is tied up in the equity in their homes.  But “most” isn’t all.  Median incomes also fell, from $49,600 per year to $45,800 per year over the same period.  Most Americans grew way poorer in the three years from 2007 to 2010.  Only the top 10% of wage earners fared better over the same period.  Their median net worth rose to $1,194,300 in 2010 vs. $1,172,300 in 2007. 

OK, that was the aftermath of the Great Recession.  It’s no surprise that net worth declined.  This edition of the Federal Reserve’s survey only reports data back to 2001.  You’d have to do a lot of digging to see how this data fits into the longer range perspective.  Don’t bother.  I’ve done the digging for you and crunched the data to convert it to 2010 dollars to make it comparable to the new report.  Here’s a chart of the data (an update of Figure 1-14 on page 27 of Five Short Blasts):   

2010 family net worth 

Not only did the median net worth fall from its peak in 2007 (a peak fueled by a bubble in the housing market), it fell to a level one third less than the previous peak in 1976.  In fact, it fell to less than the median net worth in 1969. 

Since Americans’ median net worth peaked in 1976, it has enjoyed only two occasions when it has risen:  during the dot-com bubble of the 90s, culminating in 1998, and during the housing bubble leading up to the onset of the financial crash that began in late 2007.  Take away those two events – the “irrational exuberance” of the dot-com bubble in the stock market and the equally irrational exuberance in the housing market leading up to 2007 (fueled in large part by  government regulators turning a blind eye to outrageous lending practices) – and Americans’ net worth has been in steady decline for 36 years. 

It’s no mere coincidence that 1976, the year that Americans’ net worth peaked and then began its decline, also marked the beginning of a 36-year run of consecutive trade deficits.  Of course Americans are growing poorer.  Their jobs have been sent overseas through misguided faith in flawed trade policy that fails to account for the role of extreme population densities among some trade partners like China, Japan, Germany and others in driving huge trade imbalances.  The resulting glut in the labor force is driving down wages and benefits.

All of this is exactly what the inverse relationship between population density and per capita consumption would predict for our economy as our effective population density rises far beyond our actual density, through free trade, combining our economy with the economies of grossly overpopulated nations.  It’s also easy to predict that, failing to change trade policy and immigration policy, it’s going to get worse.  At the onset of the decline in housing prices, I told a realtor friend that it wouldn’t end until the median house price fell to a level affordable on the median income.  And the median income continues to decline.  So don’t look to a recovery in housing to boost your net worth. 

In fact, the bubble scenarios that could be used to mask the effects of population densities that have grown far beyond an optimal level have probably been exhausted.  It’s difficult to envision another dot-com style bubble in the stock market.  There is nothing on the horizon to drive it.  High tech?  Been there and done that.  Health care?  Impossible in today’s environment.  We’ve moved on from the stock market bubble to the real estate bubble and are now locked into a bond market bubble.  But no one’s getting rich from this one.  At current yields and rates of inflation, people are actually losing money in that market, figuring that at least they’re not losing as much as they could in other markets. 

Americans will continue to grow poorer until trade and immigration policy change.  Making that bet is a sure-fire winner.


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