The Budget / Debt Ceiling Standoff: What 38 Years of Trade Deficits Hath Wrought

Forgive my use of archaic English in the title of this post.  But here we are again, with the federal government bumping its head against the debt ceiling, and each time it happens the debate about federal spending becomes nastier.  And once again, as in the past, the real root cause of the deficit spending and soaring national debt is completely absent from the debate.  It’s the trade deficit. 

It’s no mere coincidence that federal deficit spending tends to match the trade deficit – generally somewhere in the range of $500 billion to $1 trillion per year.  The following chart compares the growth in the national debt to the growth in the cumulative trade deficit since 1975, the year of our last trade surplus:  Cumulative Trade Deficit vs Growth in National Debt.  Notice that the lines generally parallel each other, occasionally criss-crossing.  If you study the chart carefully, you’ll find a strong correlation between recessions and periods when the deficit spending slacks off a bit and converges with the trade deficit.  And note that in 2013, as always happens when the growth in the national debt runs too far ahead, pressure to reduce the deficit spending has begun to once again bring the two lines into convergence – something that always triggers a recession. 

The reason for this is pretty straightforward.  Ultimately, since the United States is the only place where U.S. dollars are legal tender, net outflows of dollars from the U.S. economy (like the trade deficit – which is the biggest outflow), must balance with net influxes of dollars.  Foreign exporters need some vehicle for plowing those dollars back into the U.S. economy.  Since, by now, after decades of U.S. trade deficits, foreign investors already own virtually every physical asset in the U.S. (either directly or indirectly by buying mortgage-backed securities) there is little left for foreigners to buy except U.S. government bonds.  The federal government sells bonds to China, Germany, Japan and others and then returns that money into the economy through deficit spending. 

It’s very similar to your own bank account.  If you continue to drain funds from your account, then either you’re going to have to begin running up a debt to maintain your lifestyle or you’re going to soon be living like the pauper that you are. 

The reason the debate grows more heated each time the debt ceiling is reached is that it’s growing faster than our ability to repay it.  The following chart tracks the debt as a percentage of gross domestic product.   National Debt as Percentage of Chained GDP.  As you can see, it’s been worst in the past, like at the end of World War II.  By that measure, it doesn’t seem to be such cause for alarm.  Some other nations actually have much higher debts relative to their GDP. 

However, it’s not the “GDP” that would have to repay the debt.  It’s the taxpayers – you and me.  No, it’s not corporations.  Sure, they pay taxes, but you and I ultimately pay their taxes for them through higher prices for their products.  It’s individual taxpayers who will bear the brunt.  Here’s a chart of how the debt burden has grown for American taxpayers:  National Debt Per Capita, 1929-2013.  As you can see, the debt per capita has hit another record this year and the situation is much worse than it was at the end of World War II.  The debt is growing exponentially. 

But the situation is even worse than that.  As the debt grows, our ability to repay it is shrinking.    Here’s the chart:  National Debt as Percentage of Total Household Net Worth.

So why is the connection between the trade deficit and our national debt completely absent from the debate?  Because the corporate interests who fund the campaigns of our congressmen don’t want that dirty little secret exposed.  They want you to believe that excessive federal spending is the reason that you’re struggling when, in fact, you’d actually be struggling a lot worse if the government stopped the spending and pulled that money out of the economy.  They don’t want you to think about the fact that misguided trade policy that drained millions of manufacturing jobs out of our economy is the real reason that you’re struggling, because that same trade policy does wonders for their bottom lines. 

It’s all just a bit heartless for congressmen to promote trade policy that ruins people’s lives and then demand that the government not spend money on programs to help mitigate the suffering. 

On the PBS Newshour last night, when asked about the effect that not raising the debt ceiling would have on the economy, an economist correctly replied that it’d immediately lop about 4% from our GDP.  That’s a lot.  That’s as much as we experienced in 2009 when we were on the verge of another depression.  But what he didn’t point out was that it wouldn’t be a one-time thing.  There’d be another 4% reduction every year – a downward spiral into another depression. 

I’ve got mixed emotions.  On the one hand, if we don’t raise the debt ceiling, we’re all going to experience an economic calamity and many of us will be wiped out by soaring interest rates and collapsing stock and bond prices.  On the other hand, maybe that’s what it will take for someone to finally come clean about the connection between the deficit spending and the trade deficit.  How I’d love to hear an admission that we can’t cut the deficit spending as long as we continue our free trade policy.

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