The Effect of Currency Valuation on Trade? None!

January 30, 2016

Whenever some senator or congressman wants to appear tough on trade – usually during a campaign for re-election – they call on the president label a country like China or Japan a “currency manipulator.”  They do this because under the rules of the World Trade Organization a country that’s guilty of manipulating its currency can have tariffs levied against it.  Of course, it never happens.

The reasoning is that a nation that takes actions designed to weaken its own currency gives them an unfair trade advantage, making its own domestically-produced products cheaper for its citizens and for foreign buyers while making imports more expensive.  It all sounds perfectly logical.  But is it really valid?

In my recent posts, we found that there is a very powerful relationship between population density and trade imbalances in manufactured products.  Free trade with nations much more densely populated than our own is almost assured to produce a trade deficit, while free trade with nations less densely populated usually results in a trade surplus.  So strong is this relationship that it seems to be the dominant driving force in determining the balance of trade.  However, that then calls into question just how much of a role currency valuations have, if any.

I have done an exhaustive study of the subject, plotting the change in currency valuations for 159 nations vs. the U.S. dollar against the change in America’s trade imbalance with those nations over a ten-year period ending in 2014.  What I have found is that there is absolutely no correlation between the two whatsoever.

If there were some correlation, what we should see is that a strengthening of a nation’s currency vs. the dollar should yield an improvement in our balance of trade with that nation, since our exports become more affordable to the people of that nation while their exports are more expensive for our citizens.

Here’s what actually happened.  During the ten-year period from 2005 to 2014, the currencies of 80 nations rose vs. the dollar.  The currencies of 67 nations fell vs. the dollar.  And the currencies of 12 nations remained unchanged against the dollar.  Of the 80 nations whose currencies rose vs. the dollar, our trade imbalance improved with 44 of them.  That shows that the currency valuation theory is valid?  Not so fast.  Of the 67 nations whose currencies weakened vs. the dollar, our trade imbalance worsened with only 16 of them.  Add these together and our trade imbalance changed as the currency theory would have predicted with only 60 of the 147 nations, or 41% of the time.  (With the twelve nations where their currencies were unchanged, our trade imbalance improved with ten of them.)

In fact, if we plot the data for these 159 nations on a scatter chart, here’s what we see:  Currency Valuation vs. Balance of Trade2.  On a scatter chart such as this, if there is a correlation between the two variables – change in currency valuation vs. change in trade imbalance – the data points would tend to fall along a line.  As you can see, they don’t – not at all.  When I had Excel calculated a trend line with a “determination coefficient,” the coefficient (“R-squared”) came out to 0.002.  A perfect correlation would yield a coefficient of 1.0 and the data points would fall into a perfectly straight line.  Here, the coefficient is about as close to zero as you can get, meaning no correlation whatsoever.

Let’s take a closer look at our ten largest trade partners in 2014 and see how their currencies and our trade imbalances have fared over the past ten years.  Check this table:  Currency Valuation vs. Balance of Trade.  These ten nations accounted for nearly 73% of all U.S. trade in manufactured goods in 2014.  Their currencies increased in value vs. the dollar for seven of them, and fell for the other three.  But of these ten, our balance of trade changed as currency valuation would predict in only four cases.

Look at China.  In spite of the yuan appreciating in value vs. the dollar by 33%, our trade imbalance actually worsened by 82%.  Look at France and Germany.  In spite of the Euro rising by 12%, our balance of trade with these two nations worsened by 56% and 97% respectively.  (By the way, the next time you hear someone say that America needs to improve its productivity in order to be more competitive, ask them to explain why it is that the U.S. has a large trade deficit with France, arguably the least productive nation in the developed world.)

For anyone who bothers to actually study the matter, the real world data on currency valuation and trade imbalances proves beyond a shadow of a doubt that there is absolutely no correlation between the two.  It’s disparities in population densities that drives trade imbalances and currency valuation has nothing to do with it.

U.S. Trade: A Tale of Two Worlds

January 21, 2016

Divide the world in half by population density and the results couldn’t be more different.  In 2014, it grew worse again.  The half of nations with a population density above the world’s median – 184 people per square mile – left the U.S. with a trade deficit in manufactured goods of $669 billion in 2014.  That’s up by $35 billion from the record set in 2013.  It has worsened every year since 2009.

The other half of nations – those with a population density less than the median – yielded starkly different results.  The U.S. enjoyed a trade surplus in manufactured goods of $132 billion with those nations.  That’s down from $147 billion in 2013 and down from the record of $153 billion set in 2011.

Here’s the chart:  Deficits Above and Below Median Pop Density.  If this isn’t proof of the relationship between population density and trade imbalances, I don’t know what is.  The number of nations is the same, but the less densely populated nations give us a $132 billion surplus, while the more densely populated nations leave us with a $669 billion deficit.  Still the U.S. applies the same free trade policy to all nations without any consideration to population density.  Doesn’t make much sense, does it?

One may counter that the results are skewed by the fact that the more densely populated half of nations includes more people than the other half, and that it includes China, which accounts for more than half of the above deficit.  Fine, so let’s analyze the data in some other ways:

  • Dividing the world in half by population is a little awkward, because China falls right in the middle.  It requires including some of China’s people in the more densely populated half, and some in the less densely populated half, and dividing our deficit with China proportionately.  If we do that, we find that the U.S. has a trade deficit in manufactured goods of $464 billion with the half of people living in more densely populated conditions.  By contrast, we have a trade deficit of $72.8 billion with the half of people living in less densely populated conditions.  The trade deficit with the more densely populated half of people is more than six times worse than our deficit with the half of people in less crowded conditions.
  • Let’s look at it another way.  Let’s divide the world’s land mass (not including Antarctica) exactly in half and compare the more densely populated half to the less densely populated half.  Then we have a trade deficit in manufactured goods of $666.8 billion with the people living in the more crowded half of the world, and a trade surplus of $130 billion with the less crowded half of the world.
  • Instead of dividing the world in half, let’s divide it around the U.S. population density – those nations more densely populated vs. those less densely populated.  Of the 165 nations studied, 112 are more densely populated than the U.S. and 53 nations are less densely populated.  The U.S. has a trade deficit in manufactured goods of $701.2 billion with nations that are more densely populated, and a surplus of $164.5 billion with those that are less densely populated.  That’s a difference of $865.7 billion.
  • The U.S. has a trade deficit in manufactured goods with 56 nations.  Of these 56 nations, only four are less densely populated than the U.S.:  Sweden, Finland, Estonia and Laos.

Any way that you look at it, the relationship between population density and trade imbalance just absolutely screams out at you.  But economists don’t see it.  They don’t see it because they won’t look.  They won’t look because of their adamant refusal to give any credence to the notion that population growth has any economic consequences.

Trade deficits, they say, are the result of other factors:  low wages, currency manipulation, lax environmental and labor standards, etc.  Or they say that trade imbalances are merely transitory, that such imbalances will correct themselves as the economies of underdeveloped nations grow.

Proving that trade imbalances are caused by disparities in population density also requires disproving the above pet theories of economists.  We’ll tackle that in my next posts.

America’s Best Trading Partners

January 16, 2016

A few days ago, we looked at the list of America’s worst trading partners – the countries with whom, on a per capita basis, we rack up the worst trade deficits in manufactured goods – and saw that the list was dominated by nations that are much more densely populated than the U.S.  Clearly, population density is the dominant force in driving trade deficits with overpopulated nations.

But what about the other end of the spectrum?  If there is truly a relationship between balance of trade and population density, then we should see exactly the opposite effect in trade with nations less densely populated than the U.S.  A list of our top trade surplus nations (again, on a per capita basis) should be dominated by nations with a lower population density.

Here’s the list:  Top 20 Surpluses, 2014.  Thirteen of these twenty nations are, in fact, less densely populated than the U.S.  But there are seven that aren’t.  In fact, some are much more densely populated than the U.S.  What’s special about these nations?  First of all, I’ve marked with an asterisk and high-lighted in yellow those nations that are net oil exporters.  Whether or not they are more densely populated than the U.S. (four are, three aren’t), there’s a solid explanation as to why we have a trade surplus in manufactured products with them.  It’s because all oil is priced in U.S. dollars.  As a result, they are flush with dollars that, ultimately, can only be spent in the U.S. on either U.S. products or U.S. investments.  You may argue that lots of places in the world accept U.S. dollars.  That’s true but, ultimately, all U.S. currency must eventually return to the U.S.  So it’s inescapable, really, that net oil exporters will be net consumers of American products.

Consider Canada.  They are a net oil exporter to the U.S.  In fact, they’re our largest source of imported oil.  But they’re also a large country with a very low population density.  As a result, we have a big surplus of trade in manufactured products with Canada.  How much is due to which factor?  Well, since 2005, our trade deficit in oil with Canada has grown by 44%.  But our trade surplus in manufactured goods with Canada has grown almost 30-fold.  Clearly, it’s their low population density that is the driving force.

We see the same thing with Norway.  Although they’re an oil exporter, our trade deficit in oil with Norway has actually shrunk by 91% in the past ten years.  In spite of that, our surplus in manufactured goods has grown by 611% over the same time frame.  Again, it’s clearly Norway’s low population density that is driving the surplus.

Of the 20 countries on the list, there are really only two that seem to defy both the oil and population density explanations:  Belgium and The Netherlands.  They are the only European nations on the list (except Norway).  Both are tiny, neighboring nations and both are very densely populated.  Neither is an oil exporter.  But the Netherlands has the only deep water port on the Atlantic side of the European continent and is a major transportation hub for Europe.  Belgium has river access to the same port and is also a major transportation hub.  It seems that both have used their strategic location to build their economies around trade.

A couple of other observations are in order.  The average population density of the nations on this list is 202 people per square mile.  Compare that to 539 per square mile for the nations with whom we have the worst per capita trade deficits in manufactured goods.  Secondly, note that America’s surplus grew in the last ten years with 18 of the 20 nations on this list – many quite dramatically.  Conversely, our trade deficit worsened over the past ten years with 19 of the nations on the list of our 20 worst deficits.  So, not only does population density determine whether we’ll have a trade surplus or deficit in manufactured goods with any particular nation, but the effect of population density is intensifying dramatically over time.

Still not enough proof for you that it’s population density that drives trade imbalances?  Stay tuned.  The best stuff is yet to come.

Mr. President: Who’s really peddling fiction?

January 13, 2016

President Obama repeated a claim last night several times in his State of the Union address about the state of America’s economy:

“… the United States of America, right now, has the strongest, most durable economy in the world.”

“Anyone claiming that America’s economy is in decline is peddling fiction.”

“… all the talk of America’s economic decline is political hot air.”

Just to set the record straight, here are some facts about America’s economy:

  • In the past ten years, America’s “purchasing power parity” (or “PPP”) – a rough measure of the wealth of the citizens of each nation – has grown by 30%.  Sounds good until you realize that most of the world has actually fared much better.  The U.S. actually ranks 106th out of 165 nations studied, and is tied with Eritrea in terms of its growth in PPP over the past ten years.
  • To be fair, many 3rd world nations are starting from such a low PPP that it’s easy for them to experience rapid growth.  So let’s look at it in terms of actual PPP.  In 2014, the most recent year for which the data is available, the U.S. ranks 19th in terms of PPP.
  • Of the 23 nations with PPP of at least $40,000, the U.S. ranks 20th in terms of growth in PPP over the last 10 years.
  • In terms of its growth in GDP, the U.S. ranked 131st in 2014.
  • The U.S. ranks 98th in terms of gross national savings.
  • 67 nations had lower unemployment rates in 2014
  • The U.S. ranks 43rd in the world in terms of its “Gini index,” a measure of income disparity.
  • As a percentage of GDP, the U.S. ranks 32nd in terms of public debt.
  • In terms of current account balance – essentially, the trade deficit – the U.S. ranks 195th.

These are the facts, as published in the CIA World Fact Book.   (10-year data is from Index Mundi.)  Interpreting the above facts to mean that we have the “strongest, most durable economy in the world” is analogous to concluding that the last creature left barely alive among a group of creatures that has been infested with some parasite (which is an apt analogy for the effect of free trade on America’s economy) was the strongest and most durable.  It’ll soon be no less dead than the others.

America’s Worst Trading Partners

January 12, 2016

I have finally finished tabulating the trade data for each country for 2014.  (2015 data won’t be released by the Bureau of Economic Analysis until sometime in March.)  What took me so long?  This is no small task.  Since the BEA doesn’t track “manufactured products” as a category, I have to take the data for hundreds of product codes for each of 165 nations and subtract out the categories of raw materials in order to arrive at a figure for manufactured products.  I maintain a massive spreadsheet for each nation and then compile the results for all on an even bigger spreadsheet.

Anyway, the results are in and over the next couple of weeks or so, beginning with this post, we’ll break down and analyze the results.  I like to begin by listing America’s 20 worst per capita trade deficits in manufactured goods.  In essence, this is a list of America’s 20 worst trade partners.  These trade deficits are expressed in per capita terms in order to put the citizens of all nations on an equal footing.  For example, our trade deficit with China, when expressed in dollars, dwarfs that of every other nation because they represent one fifth of the world’s entire population.  But when it comes to trade, borders are meaningless and China could just as easily be 100 smaller nations instead of one.  It would have no effect on our total trade deficit whether we draw a line on a map around 1.3 billion people, or draw 100 lines around clusters of 13 million people each.  Expressing the deficits in per capita terms eliminates the sheer size of nations as a factor.

If you’re new to this web site, you probably expect to see this list populated with poor nations.  You’d be wrong and, by the end of this post, you’ll understand why.  So let’s take a look at the list for 2014:  Top 20 Deficits, 2014.  Some observations are in order:

  1. The key take-away from this list is that 18 of these 20 nations are more densely populated than the U.S.  Most are much more densely populated.  The average population density of this list is 539 people per square mile.  This compares with the U.S. population density of about 87 people per square mile.  This average is up from the average population density of 504 people per square mile on the 2013 list.
  2. Instead of poor, low wage nations, this list is populated by rather wealthy, high wage nations.  The average purchasing power parity (PPP) of the nations on this list is $40,700 per person, up from $35,330 in 2013.  Only one nation on this list has a PPP of less than $10,000 – Vietnam, at $5700 per person.  Only three other nations have a PPP of less than $20,000 – Costa Rica, Mexico and China.  By comparison, U.S. PPP was $54,400 in 2014.
  3. Though our trade deficit with China has exploded since they were first granted “Most Favored Nation” status in 2000, their position on this list has barely budged since I published Five Short Blasts in 2007.  They were 19th on the list in 2006 and have risen only one point to 18th in 2014.  That’s because our trade deficit with nearly all of these nations has grown just as rapidly.  To illustrate this, I’ve included a column on the chart that shows the percent change in our balance of trade with each nation over the past ten years.  Our deficit with China has grown by 82%.  But the results with some other nations have been even worse.  In 2006, Costa Rica didn’t even appear on this list.  In fact, in 2005, we had a trade surplus with Costa Rica.  That has now reversed into a large trade deficit, big enough to move them to number 8 on this list.  The same is true for Vietnam.  In 2005 they were nowhere close to being on this list but, in the past ten years, our deficit with Vietnam has worsened by almost 500%.  Our deficit with Switzerland has worsened by over 200% in the last ten years, moving them to 2nd on the list.  It’s worth noting here that Switzerland is the one nation on the list that is even wealthier than the U.S.  But the one thing all of these nations have in common is a high population density.
  4. In case you’re tempted to conclude that Costa Rica, Vietnam, Mexico and China are on this list because of low wages (low PPP), consider this.  In the past ten years, their PPPs have risen by 41%, 136%, 50% and 184% respectively.  If wages are a factor in trade imbalances, then such rapidly rising wages should tend to slow or even reverse our trade deficit with these nations.  Instead, each is accelerating.
  5. It’s also worth noting here than one of the only two nations on the list less densely populated than the U.S. – Sweden – is slowly sliding off of this list.  Our trade deficit with Sweden has actually improved by 44% over the past ten years – the only such improvement on this list.  As a result, they’ve slid from no. 2 on the list in 2006 to no. 12 in 2014.
  6. Another nation that has slid noticeably on this list is Japan.  They were no. 4 on the list in 2006, sliding to no. 10 in 2014.  Why?  Other nations, most notably South Korea and Germany (who have each risen on the list), have cannibalized their auto exports.  This explains why Japan’s economy has been mired in recession for years.

In 2014, the U.S. suffered a total trade deficit in manufactured goods of $539.9 billion.  The trade deficit in manufactured goods with just the twenty nations on this list was $728.3 billion.  In other words, these twenty nations account for our entire trade deficit in manufactured goods, and then some.  It should be clear to anyone that it’s the large disparity in population density between the U.S. and these nations that drives our trade deficit.  It’s just as clear that low wages play no role whatsoever.  Any trade policy that fails to take into account the role of population density in driving trade imbalances is doomed to failure, just as U.S. trade policy has been for decades.

Those who blame trade imbalances on low wages either don’t understand trade or are simply lying.  So too are those who blame currency valuations – something we’ll examine later.  And those who tell you that we simply need to be more competitive are playing you for fools.  The only way to restore a balance of trade is by applying tariffs to counteract the effect of population density.

Not enough proof?  Stay tuned.  In my next post we’ll take a look at the opposite end of the spectrum – America’s twenty best trade partners – and see if population density is a factor there too.



Per Capita U.S. Auto Sales Declining

January 9, 2016

New vehicle sales were released a couple of days ago.  The headline of the story is that sales set a new record in 2015 – 17.47 million, beating the previous record set in 2000.  It got me wondering.  2000 was fifteen years ago.  Since then, the U.S. population has grown by about 13%.  So the new record should have easily topped the 15-year-old record, right?  Wrong.  It barely beat the 2000 record by only about 100,000 vehicles, or by about 0.6%.

So I couldn’t help but wonder:  is it possible that we’re already beginning to see a decline in the per capita consumption of vehicles in the U.S., which is what the inverse relationship between population density and per capita consumption that I presented in Five Short Blasts would predict?  In Chapter 10 of the book I theorized that the U.S., though much less densely populated than many other nations, had already crossed the threshold where a growing population density begins to erode per capita consumption and, with it, the economy, and that this happened sometime perhaps in the ’50s or ’60s when our population was half of what it is today.

New vehicle sales is one piece of consumer data that’s readily available and not a closely-guarded secret of some market research company.  So it was time to find out how new vehicle sales have changed over time as our population has grown.  I plotted such sales going back to 1968 versus the U.S. population and here’s the result:  auto sales 1968-2015.  The following are some observations about this chart:

  1. New vehicle sales tend to swing up and down pretty wildly, dropping precipitously during recessions and shooting back up during recoveries.
  2. I don’t know what  happened prior to 1968, but it’s clear that between 1968 and 1978, the per capita consumption of new vehicles was rising quickly, jumping 44% to .067 vehicles per person, which is about one vehicle for ever 15 people.
  3. That figure of .067 vehicles per person in 1978, when our population was about a third lower than today, still stands as the record level.  The next peak of per capita consumption of new vehicles in 1986 didn’t quite rise to the same level, reaching 0.66.  The next peak in 2000 – the record that was just broken this year – reached only 0.62 new vehicles per person, well short of the 1978 peak.
  4. This total vehicle sales record set in 2015, when expressed in per capita terms, even misses the 2000 mark by quite a large margin.

Clearly, per capita consumption of new vehicles is in decline, and has been declining since as far back as 1978.  One could argue that 2015 may not be a peak, that vehicle sales have been climbing steadily since 2009 when they reached their lowest level of the entire 1968-2015 period.   The auto industry projects that sales could go higher in 2016.  I think that’s unlikely.  First of all, though 2015 was a record year, the sales rate in December fell to its lowest level since June, and December is typically one of the strongest sales months of the year.  Secondly, 2015 was the sixth consecutive year of sales volume increases, the longest of the 1968-2015 period.  Previously, the longest period of annual sales volume increases was four years, from 1983-1986.  Finally, look at what’s happening in the economy in general beginning in December.  Many economic indicators are now turning negative.  Most would agree that the auto industry’s expectations of a stronger 2016 are a pipe dream.

So just how fast is per capita consumption of new vehicles declining?  To find out, I re-plotted the data beginning with 1978 and had the computer generate a trend line with an equation to describe it.  Here’s the new chart:  auto sales 1978-2015.  Now you can see the clear downward trend.  Of the four different mathematical formulas that could be used to describe the trend – linear, logarithmic, exponential and power – the best fit was a linear equation.  The formula is included in the chart:  f(x) = -.0003x + .06.  (I’ve rounded off the two constants for clarity.)  This means that as our population continues to grow at the same rate – about 1% per year – per capita new vehicle sales will decline by .0003, which is about a 0.5% decline.

Why is this happening?  It’s pretty simple, really.  Most of our population growth is in urban areas where there’s been strong demand for apartment-style housing.  We examined in a recent post how renters are increasingly paying a greater percentage of their incomes on rent.  And people who live in apartments in metropolitan areas face big obstacles when it comes to car ownership – especially the lack and high cost of parking, both at home and at work, not to mention the traffic issues in the cities.  It’s just cost prohibitive to own a car, so many opt for public transportation.  The root cause of this situation, though, is ever-worsening crowding driven by the increase in population density.

Sure, there are many factors that may be at play here but, for each one you can name, I can name another offsetting factor.  Cars are built better and last longer?  Everything about our society pushes people to buy new cars more often – not less.  Cars are less affordable?  Dealers now practically give cars away, with loan durations of six or seven years, when three years was the norm back in ’78.

This decline in the per capita consumption of vehicles is yet another example of the conflict of interest that’s created once a population breaches that critical level and begins to drive down per capita consumption.  If you’re a consumer, it’s in your best interest that the population stabilize or even shrink a bit, increasing your quality of life and enabling you to live in uncrowded conditions where you can enjoy all that life has to offer, including the freedom to own a car and travel at will.  But if you’re General Motors, it’s in your best interest that the population continue to grow because if the population grows by 1% and per capita consumption declines by 0.5%, your total sales volume still increases.  And we saw this happen in 2015.  Sales set a new record in spite of a significant decline in per capita sales.  And so it’s also in the best interests of General Motors to fund candidates who support high rates of immigration.

Immigration-fueled population growth is steadily ruining our quality of life.  Though few really understand why, more and more Americans seem to sense this and it at least partly explains the popularity of the few candidates who at least oppose illegal immigration.


Manufactured Exports Fall in November to Lowest Level in Almost Five Years

January 6, 2016

November’s trade figures, released this morning, provide further evidence of an intensifying global economic slump, both globally and in the U.S.  First the good news in the report:  imports of manufactured goods fell by $4.4 billion and are down  by almost $12 billion from their high in March of this year.  That would be better news if it meant a shift to manufacturing in the U.S.  But that’s clearly not the case, with U.S. manufacturing in a deep recession.  Instead, it’s evidence of a slow-down in consumer spending – a sign that the U.S. may be slipping toward recession.

The news on exports is worse.  Exports of manufactured goods fell to $104.7 billion in November, the lowest reading since March of 2011.  (Remember Obama’s pledge to double exports by 2015?)  The slump in exports is further evidence of a slow-down in the rest of the world’s economy.  Here’s a chart of imports and exports of manufactured goods:  Manf’d exports vs. goal.  It’s worth noting that, if exports had reached Obama’s goal and had simply held at that level, exports would be $67 billion per month higher than they were in November.  That’s enough to put over ten million people back to work.  What has the president done to actually make this happen?  Absolutely nothing, which is no surprise, since neither he nor anyone else has any control over exports.  It was just grandstanding on his part, designed to draw attention away from the fact that, contrary to his campaign promises, he would do nothing to rein in imports.

This trade report is just one more slumping economic indicator that heralds a bleak start for the economy in 2016.