Earlier this past week, the Commerce Department released the trade figures for the month of December. The news wasn’t good. The overall deficit jumped to $53.1 billion, the highest since the Great Recession in 2009. Worse yet, the deficit in manufactured goods soared to a new record of $69.0 billion as a $2.7 billion increase in exports was swamped by a $6.7 billion increase in imports, which rose to $183.2 billion. Check this chart: Manf’d Goods Balance of Trade. This is the 3rd month in a row that the deficit in manufactured goods has set a new record. This is quite the opposite of what Trump promised during the campaign. To be fair, the increase in the deficit is due to the improved economy, leaving Americans more willing to open their wallets and buy, and is not due to any trade policy blunders by Trump. But Trump’s dithering on trade is directly responsible for the lack of improvement. All we’ve gotten is talk, threats and endless (and pointless, I might add) negotiations (primarily on NAFTA) – nothing more than we’ve gotten from previous administrations for decades.
In another story last week, Congress approved (and Trump signed) a spending bill that ended the brief government shutdown – a bill that grows the national debt by an estimated $1.5 trillion over ten years. This is on top of the $1.5 trillion added by the Republicans’ tax cut legislation. And all of that is on top of the $1.5 trillion cost of the American Recovery Act implemented under Obama. Yesterday, Trump introduced a budget plan that would grow the national debt by $7.5 trillion over the next ten years.
So what’s the relationship? Why do I bring up the trade deficit and the national debt in the same post? As I explained in Five Short Blasts, the trade deficit is the root cause of our federal budget deficit. To understand, draw a line around the United States on a map. Now, draw arrows that represent cash outflows from that circle and cash flowing in. The money spent on imports – currently running at about $3 trillion per year – is an outflow. The money we collect from exports that we sell – currently running at about $2.4 trillion per year – is an inflow. That leaves a deficit of about $600 billion per year. If that money didn’t come back in some fashion, every penny of U.S. wealth would eventually be gone. Every American would be flat broke. It’s exactly the same as your check book. Keep taking money out without putting any back in and – well- you know what happens.
So the trade deficit puts us in a huge bind. Fortunately, though, it presents those countries who sold us those imports with an equal but opposite problem. They’re now collecting a big pile of U.S. dollars that ultimately have value in only one place. The U.S. is the only place on earth where U.S. dollars are legal tender. This means that those countries who sold us those imports now have to reinvest those dollars back in the U.S. in some fashion. For one, they can use them to buy exports from the U.S. – which they do – but obviously not in equal measure. What to do with the rest? Invest in American companies? That makes no sense. Those are the same companies that their exports are trying to drive out of business. So they use the money to buy American debt obligations, or “treasuries.”
The federal government then uses the money collected by selling treasuries to finance deficit spending, thus plowing back into the economy the dollars that the trade deficit took out. In this way, the federal government is able to keep the economy on a positive footing, maintaining an illusion of prosperity in the U.S. And the biggest way they do this is by collecting less tax revenue from you than it takes to finance their programs. Essentially, the federal government subsidizes your income.
Check out this chart. It graphically shows the relationship between the growth in the national debt and the cumulative effect of the trade deficit: Cumulative Trade Deficit vs Growth in National Debt. Notice how closely the two parameters track each other. Also, you’ll notice that any time the growth in the national debt lags the cumulative trade deficit, a recession is the result – the most recent being the “Great Recession” of 2008. In the run-up to that recession, Congress focused on reining in the deficit and the result was George Bush’s famous “jobless recovery” from the recession that occurred at the turn of the century. Home ownership was declining and the housing/mortgage industry turned to sham loans to put people into homes – bad loans that nearly collapsed the entire banking industry. When Obama took office, he correctly blamed global trade imbalances, and world leaders agreed. What did they do about it? Not a damn thing. Like parasites, they could all agree that they were killing the host, but all continued to hungrily feed on it.
So how bad is the national debt? Let’s begin with a little historical perspective. In 1929, the national debt was $16.9 billion dollars, which was about 16% of GDP (gross domestic product). By the end of World War II, it had understandably ballooned to $269.4 billion, or 121% of GDP – unacceptably high. By 1973, it was whittled back down to only 33% of GDP. Then it began to grow again. Not coincidentally, in 1975 the U.S. ran its last trade surplus and became a “debtor nation.” Soon after, the national debt began to explode.
Some economists have used the benchmark of the GDP to gauge the seriousness of the debt. As long as it doesn’t exceed 100% of GDP, they would claim, the national debt is manageable. Where do we stand now? Take a look at this chart of national debt, measured as a percentage of GDP: National Debt as Percentage of Chained GDP(2). We’re back over 100%. It actually declined slightly last year as the budget deficit shrank a little and as the GDP grew more than it has in years. We’re not likely to see it decline again any time soon as the national debt is now expected to grow by $7 trillion in the next ten years. Although it took 32 years to climb from 32% of GDP to 100% in 2013, it will hit 200% in much less time if nothing is done about the trade deficit.
However, the situation is actually worse than that. The “GDP” isn’t the one who is on the hook for the national debt. It’s taxpayers – you and me. So let’s take a look at the national debt in per capita terms – that is, how much of it each one of us owes. Take a look at this chart: National Debt Per Capita, 1929-2017. This should scare the hell out of anyone. Each of us is now on the hook for $50,000 of the national debt, which is 2-1/2 times the burden of each American at the end of World War II! And look at this chart: National Debt as Percentage of Total Household Net Worth. In 1962, the national debt was only 3% of the total household net worth of all Americans. Today, it’s hovering near 30%.
“Total household net worth” includes some very wealthy households, like those of Bill Gates, Warren Buffet and other billionaires. Where does your household’s net worth fit in? Take a look at this chart of household net worth, as measured by the Federal Reserve in its tri-annual survey of household finances: Household Net Worth. While the “mean” (or average) household net worth has grown nicely from $163,000 in 1962 to $692,000 in 2016, the “median” value remains stuck at about $100,000 where it’s been for two decades.
You need to understand the difference between “mean” and “median.” If nine people have $1 in their pockets and a tenth person has $100 in his pocket, then the “mean” value of what these ten people have in their pockets is the total divided by the number of people which, in this case, is $10.90. The “median” represents the value at which half of the people have more and half have less. In this case, the “median” value of how much these people have in their pockets is only $1. Half of these ten people have $1 or less, and half have $1 or more. (One of them has a lot more!)
This means that the household net worth of at least half of all Americans is $100,000 or less. And, in all likelihood, most of the other half don’t have a whole lot more than $100,000. The median value is skewed by only a small percentage of households.
On average, a household has 3.2 people. Remember that each American “owes” $50,000 of the national debt. That means that each household owes about $160,000 on the national debt. Compare that to the median household net worth of $100,000. In all likelihood, if the amount you owe on the national debt were subtracted from your net worth, you’d be completely broke. You’d actually be “in the hole” by about $60,000!
To be honest, I’ve been hearing warnings about the national debt for all of my nearly seven-decade life. So far, nothing really bad has happened. At some point, you have to begin to wonder if those who claim that the national debt doesn’t matter are right. Who knows how this might actually turn out? Nobody knows. Will Americans ever have to pony up the money to pay the debt? I doubt it. It’s in no one’s interest to bankrupt Americans. After all, the rest of the world depends on us continuing to buy their products. What is likely to happen, in my opinion, is the same thing that has happened in other cases where nations have been unable to repay their debts. There will be a “debt-forgiveness” program of some sort, perhaps overseen by the World Bank, that will let us off the hook, but will come with some extremely harsh concessions – a Greek-style austerity program as a minimum. The U.S. will become a slave-state for the rest of the world, never again able to exert any influence over world events or even our own destiny.
Is that what we want? There’s only one escape from this dilemma – the restoration of a balance of trade. The only way to make that happen is through the use of tariffs. It’s exactly what Trump proposed during his campaign but now seems unwilling or unable to implement. Where is the media outrage over this situation? Instead of the news being dominated by stories of our looming economic demise – which it should be, all we get is stuff that more properly belongs in tabloids or on page 20 of The Times, at best. It seems that our journalists are either too ill-informed on the subject of economics to probe the issue, or are too lazy to bother looking into it. The salacious “she said, he said” stuff is easier and sells better. It’s not exactly “fake news” but, in the grand scheme of things, it’s certainly trivial news. There are much more important things, like the trade deficit and the national debt, that needs our focus.