Fed Chair Powell “Very Worried” about the National Debt

January 11, 2019

https://www.cnbc.com/2019/01/10/fed-chairman-powell-says-he-is-very-worried-about-growing-amount-of-us-debt.html

As reported in the above-linked article, Federal Reserve Chairman Jerome Powell is very worried about the national debt.

“I’m very worried about it,” Powell said at The Economic Club of Washington, D.C. … “it’s a long-run issue that we definitely need to face, and ultimately, will have no choice but to face,” he added.

Then he’d better start raising alarm about the trade deficit, by far the biggest cause of the federal budget deficit.  And he’d better start being more supportive of Trump’s efforts to impose tariffs in an effort to restore a balance of trade.  That’s not just my opinion.  More economists are beginning to see the light.  This op-ed piece appeared on CNBC just a few days ago:  https://www.cnbc.com/2019/01/07/central-banks-are-not-the-fixers-of-last-resort—commentary.html.  Economist Michael Ivanovitch writes:

“… a rapidly improving trade balance is the only thing that could serve as a strong prop to U.S. economy.

That’s what Wall Street should be rooting for, instead of carping about Washington’s trade wars. Losing half-a-trillion dollar of purchasing power on an annual basis, America has been a victim — a trade war victim — of Chinese, European and Japanese mercantilist policies. Remember, those trade deficits are subtractions from the U.S. GDP. Over only the last five years, trade deficits have reduced the U.S. economic growth by a total of about 2 percentage points.

And the U.S. stands accused of waging a trade war!? “

Consider this:  Over the past ten years, the growth in the national debt is approximately $12 trillion.  Growth in our nation’s GDP (gross domestic product) during that same time frame has been approximately $6.3 trillion, rising from $14.4 in 2008 to $20.7 trillion in 2018.  So without the growth in the national debt (caused by the federal budget deficit), U.S. GDP would have collapsed by $5.7 trillion, a decline of nearly 40%.  In other words, without the federal budget deficit and growth in the national debt, we’d have been in a depression worse than the Great Depression for the past decade.

Over that same ten-year period, the cumulative trade deficit has totaled almost $5 trillion.  It’s no mere coincidence that the cumulative trade deficit, when added to GDP growth, almost exactly equals the growth in the national debt.  Federal deficit spending has just barely been able to offset the monetary drain caused by the trade deficit while also providing some illusion of economic growth.  Look at this chart, showing the growth in the national debt and the cumulative trade deficit:  cumulative trade deficit vs growth in national debt.  Notice how closely the two lines have tracked.  Whenever the growth in the national debt has dropped below the cumulative trade deficit, a recession has ensued.  Whenever the growth in the national debt exceeds the cumulative trade deficit, we’ve experienced an “economic expansion.”  For example, since the financial market collapse and “Great Recession” of 2008, we’ve experienced steady economic growth.  The difference between the two lines – between growth in the debt vs. the cumulative trade deficit – that you see in 2018, accounts for all economic growth since 2008.

It’s absolutely unconscionable that the Federal Reserve and the broader economic community, instead of mocking his tariffs, haven’t given Trump more support for his efforts to restore a balance of trade.

 

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What Trump Needs to Do to Survive

December 17, 2018

Donald Trump was never a very likable person -arrogant, obnoxious, inconsiderate, demeaning, a womanizer and narcissistic.  The list could go on.  He’s not eloquent, not inspiring and not a role model unless, that is, you fancy yourself an entrepreneur like him.  There’s no arguing his success as such.  What he lacked in the aforementioned qualities he made up for with ruthless ambition and a keen sense for business.  So it’s not surprising that his reality TV show, The Aprentice, was a hit at a time when millions of workers were falling victim to globalization and were left with few options but to try their hands as entrepreneurs.  Even if you didn’t like Trump, it was entertaining to watch contestants get a heavy dose of reality about what it took to make it as a businessperson.

But Trump as president?  I scoffed at the idea.  No way could such an unlikable person get enough people to vote for him.  I never would have.  When he announced his candidacy, I just assumed that a businessman like him would, of course, be another globalist.  People often said that we needed a businessman to run the government more like a business.  I always replied that what would really happen is that the government would be run for the benefit of business, to the detriment of everyone else.  But he got my attention when he started talking about “making America great again” and what that meant – tearing up bad trade deals, bringing jobs back home and reining in out-of-control immigration – especially illegal immigration.  These were all the things I’d been writing about for years.

So I turned a blind eye to all of his onerous qualities and took a chance.  Why not?  It wasn’t as though I hadn’t voted for populist losers before.  To my amazement, the “silent majority,” who’d been getting their asses kicked by globalization for decades, had had enough of it and voted for him too.  Like me, they were willing to overlook his many flaws and take a chance.  It’s not as though we didn’t know what we were getting.  The Access Hollywood tape had long since been made public.  News about his affairs with “Stormy” McDaniels and Karen McDougall had already come out.

I’ve been pleased with the results – with his policy decisions – but not ecstatic.  He’s been tough on illegal immigration, but where’s the badly-needed border wall?  Making Mexico pay for it would have been easy.  Just tear up NAFTA and slap tariffs on Mexican imports.  Instead, he became mired in a year-long renegotiation of a trade deal with Mexico, which still isn’t signed and is questionable as to whether or not it represents any improvement at all for the U.S.  The tariffs on steel and aluminum were a great first step, followed by the small tariffs on half of Chinese imports.

But now his agenda is stalled, thanks to caving into to the Chinese when they promised reforms at the G20 meeting in Argentina.  We all know how that’ll go.  There’ll be promises from the Chinese that’ll never be kept, but they’ll be enough to win them more concessions from Trump.  The long-talked-about tariffs on auto imports have never happened.  The problem with all of this is that, while what Trump has done so far has been a good start toward an overhaul of trade policy, it hasn’t been enough yet to achieve the desired effect – a migration of manufacturing back to the U.S.  Our trade imbalance is now worse than ever.  Trump has ceded the podium to the hand-wringing globalists who scare the hell out of markets with their daily dire warnings of a trade war or worse.  Now they’re conjuring up images on a new Great Depression, worse they say than 1929.  It’s ridiculous, of course, but it’s having an effect as people turn negative on the economy.  And companies clearly aren’t yet taking this new trade policy seriously, as GM recently announced plans to close plants in the U.S. and move more production to Mexico, and as Boeing just announced that they’re moving some assembly to China.

Given this past week’s news about the conviction of former Trump attorney Michael Cohen on felony charges of campaign finance law violations, it seems inevitable that Trump will face impeachment.  Never mind the fact that the hush money payments were already old news when Trump won the election, indicating that those events weren’t enough to dissuade voters from desperately seeking a change in direction for the country.  Trump won’t stand a chance of re-election with impeachment hanging over his head.  And you can be sure that the House Democrats are smart enough to bring it to a head just as the election draws near.

There’s only one chance for Trump to survive.  The economy has to be going gangbusters when the next election rolls around.  The only way that happens is if he aggressively resumes his implementation of tariffs.  That means that as soon as the 90-day “truce” agreed to at the G20 ends on March 1st, he must immediately raise the tariffs on Chinese imports to 25% as originally promised, and must extend them across the board to all Chinese imports.  Secondly, he needs to immediately implement the long-promised 25% tariffs on all imported autos.  Finally, he must make it clear that the tariffs will remain in place regardless of any promised concessions from China or any auto exporters.  Tariffs cannot be negotiated away.  Lowering the tariffs can only be considered when a balance of trade has been restored, and then only incrementally.  Trump needs to immediately change the conversation, refocusing news coverage on changing trade policy and away from his legal predicaments.  If he does all of this – and the economy is doing great – voters will be willing to overlook an impeachment just as they overlooked his many flaws two years ago.

Anything short of that and Trump will be gone in two years, replaced by globalists who will undo everything he did.  And history will judge his presidency a failure.


Population Density Disparities Drive Global Trade Imbalances

July 14, 2018

In recent posts, we looked at lists of America’s best and worst trading partners in terms of the balance of trade in manufactured goods, and found strong evidence of a link to population density.  The lists of our biggest trade deficits, in both absolute and per capita terms, was dominated by densely populated nations like Germany, Japan and China.  The lists of our biggest trade surpluses was dominated by low population density nations, and by net oil exporters (caused by the fact that oil is traded in American dollars).

Now let’s include all nations*, dividing them equally around the global median population density (which is 194 people per square mile).  Look at this chart:  Balance of Trade Above & Below Median Pop Density.  With those half of nations below the median population density, the U.S. enjoyed a small surplus of trade in manufactured goods of $36 billion in 2017.  However, with those half of nations above the median population density, the U.S. suffered an enormous deficit of $761 billion.  Also, note how the disparity has dramatically worsened over the 14-year time period from 2005 to 2018.  The longer the U.S. attempts to engage in free trade indiscriminately, ignoring the role of population density, the worse the effects become.

One may argue that perhaps dividing the nations of the world around the median population density skews the results, since the more densely populated half of nations includes far more people than the less densely populated half.  Fine.  Let’s divide the world in a way that compares the half of people who live in more densely populated conditions vs. the half of people who live in less densely populated conditions.  If we do that, in 2017 the U.S. had a trade deficit in manufactured goods of $510 billion with the half of people living in more densely populated conditions, and a deficit of only $214 billion – less than half – with the half of people living in less densely populated conditions.  Still a strong correlation to population density.

But maybe that’s not the right way to look at it either.  Perhaps we should divide the world in half according to land mass – that is, the half of the world’s surface area that is less densely populated vs. the half that is more densely populated.  (No, Antarctica is not included in this analysis.)  If we do that, the results are even more dramatic.  With the half of the world’s surface that is more densely populated (accounting for 6.6 billion of the world’s 7.1 billion people), we had a trade deficit in manufactured goods in 2017 of $831 billion.  With the less densely populated half of the world, we had a trade surplus of $107 billion.  (It’s worth noting here that the split occurs at a population density of 56 people/square mile.  That is, the less densely populated half of the world has a population density of 56 or less.  The more densely populated half is greater than 56.  The population density of the U.S. is about 90.)

Think about that.  This means that the U.S. economy would fare much better if the population of the more densely populated half of the world were no greater than the less densely populated half – which would yield a world population of about 1 billion people instead of 7.1 billion.  Instead of a net trade deficit in manufactured goods of $724 billion, we’d have a trade surplus of $214 billion (double the trade surplus that we currently have with the less densely populated half of the world).  One can debate what would be an optimum population density in economic terms, but there’s no question that this is a powerful argument for factoring population density into our trade policy.  Beyond that, it also debunks in a strong way the contention of economists that an ever-growing population is essential to sustaining a healthy economy.  It does nothing of the sort.  Instead, the crowded conditions that characterize a dense population stifle consumption – and thus employment – making people dependent on manufacturing for export to escape poverty.

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* Not all nations are included in the study.  Tiny island nations have been omitted since they don’t factor into the trade equation and, while such nations tend to be densely populated, they also enjoy unique economies, based primarily on tourism.


EU Scared to Death by Trump’s Tariff Threat

July 5, 2018

Precisely as I recommended he do in response to EU (European Union) tariffs on Harley-Davidson motorcycles, President Trump has threatened to impose stiff tariffs on European auto imports.  In return, the EU responded much like the cartoon cockroaches in the RAID insect killer commercials – full blown panic.  The end of the world is at hand!  Their world, for sure, but they want you to believe it’ll be the end of yours too.  Prices will rise, they say.  Sales will decline.  So too will GDP (gross domestic product), a measure of the overall U.S. economy.

Perhaps their most interesting warning was in regards to BMW production at their Spartanburg, SC plant that produces their SUV models.  (They call them “SAVs”, or “Sports Activity Vehicles.”)  They claim that most of the cars made there are exported, and it’s true.  As other nations respond with their own tariffs on American cars, they say, exports of those American-made BMW SUVs will decline and production will be cut, costing jobs.

Let’s look at the facts.  That Spartanburg BMW plant does export about 75% of the vehicles it builds, with those exports having a value of about $10 billion.  Is it really the loss of those BMW exports the EU is worried about, or is it something else?

Here are some more facts.  In 2017, Germany exported approximately $30 billion worth of cars and parts to the U.S., while importing only about $10 billion from the U.S., resulting in a $20 billion surplus for Germany.  The EU as a whole enjoyed a surplus of $44.1 billion in cars and parts with the U.S.

So what is the EU worried about most?  The American economy and BMW’s $10 billion in exports, or their $44.1 billion surplus?  The answer is obvious.  They’re making a killing in the U.S. market, and Trump’s tariffs threaten to put an end to it,

And it’s not just the EU.  Other globalist organizations have used similar scare tactics.  General Motors made similar warnings, but are they more worried about domestic auto sales or their China operations?

Every day, the news is filled with stories about how trade war fears are weighing on global markets.

Will car prices go up?  Probably.  But they didn’t mention to you that your wages will rise faster.  Will car sales decline?  No, the opposite will happen.  Sales of American-made models will rise faster than the decline in sales of EU cars as Americans grow more prosperous and opt for the less expensive American cars over the tariff-laden EU imports.

So don’t fall for the Chicken Little scare tactics.  It’s impossible for the U.S. to do anything but win a trade war, since a trade deficit is what defines a loser in global trade and the U.S. has the biggest deficit by far.  Anything that reduces that deficit makes America the winner.

If raising tariffs on imports were going to hurt the U.S. economy, then how do you explain that the economy is on a tear, putting up the best numbers in a long time – especially in the manufacturing sector of the economy?  Investors seem to understand.  While foreign markets – especially in Asia – have been taking a beating in the past few months, American markets are holding just below their record highs.  Like the saying goes – money talks and BS walks.  The big money knows that Trump’s tariff plan is good news for the American economy.

 

https://www.cnbc.com/2018/07/04/eu-considering-international-talks-to-cut-car-tariffs-report-says.html


America’s Best Trading Partners in 2017

June 22, 2018

In my last post, we looked at a list of America’s biggest trade surpluses in 2017 and found the list populated primarily with two groups of nations – primarily those with low population densities and those who are net oil exporters.  It also included nations both large and small.  What we’re studying here is the effect of population density on per capita consumption and its effect on trade.  Does a low population density facilitate high per capita consumption (and a high standard of living), making the people who live in less densely populated conditions better trading partners?  The only way to know is to factor the sheer size of nations out of the equation and look at our trade surpluses expressed in per capita terms.  On that basis, here is a list of the top twenty nations whose people import the most American-manufactured products:  Top 20 Per Capita Surpluses, 2017.

Again, the list is dominated by two groups of countries – those with low population densities and net oil exporters.  Twelve of the twenty nations have population densities less than that of the U.S.  Eight are net oil exporters.  (Canada and Norway share both characteristics.)  That leaves only two nations with high population densities – the Netherlands and Belgium.  As I noted in my previous post, both of those tiny nations share the only deep water sea port on the Atlantic coast of Europe, which they use to their advantage as a distribution hub for American imports.

The average population density of these twenty nations is 210 people per square mile (compared to 551 for the nations with whom we have the worst per capita trade deficits).  The population density of these twenty nations taken as a whole – the total population divided by the total land mass – is only 21 people per square mile.  (The average was skewed by tiny oil exporters with high population densities.)  Compare that to 375 people per square mile for our worst trade partners.

Note too that the average purchasing power parity (PPP, roughly analogous to wages) of the nations on the list of our best trade partners is $46,000 – which is actually slightly less than the PPP of our worst trading partners at $50,700 per person.  Clearly, low wages play absolutely no role in driving trade imbalances.  That’s not to say that low wages don’t attract business to locate in such nations.  But when they do, wages quickly rise where there is a low population density and any trade imbalance soon vanishes.  But where there is a high population density, labor is in such gross over-supply that wages rise little and a trade deficit persists.  It’s the high population density that causes a long-term trade deficit, not the low wages.

Now that we’ve examined the two ends of the spectrum of trade imbalances – our twenty worst per capita trade deficits in manufactured goods vs. our twenty best surpluses – we’ve found a very compelling relationship between trade imbalance and population density.  Next we’ll look at all 165 nations included in my study and see if the relationship still holds.


2018 Predictions Posted

January 3, 2018

I just posted my annual predictions for 2018.  Check them out:  https://petemurphy.wordpress.com/more-good-stuff/predictions/2018-predictions/.

 


Trump on Trade with China: Media Misses the Point

November 10, 2017

http://www.cnn.com/2017/11/08/politics/donald-trump-xi-jinping-statement/index.html

As was widely reported yesterday morning, Trump emerged from two hours of a meeting with Chinese premier Xi Jinping and had this to say:

I don’t blame China. “After all, who can blame a country for being able to take advantage of another country for benefit of their citizens? I give China great credit.”
The above-linked article goes on:
Instead of pointing the finger at Beijing for exacerbating trade disputes, Trump blamed past US administrations “for allowing this trade deficit to take place and to grow.”  It was a notable shift in tone from a President who was elected to office partly for his tough talk on holding other countries accountable for practices that disadvantage US workers.
Trump went on:
We want a vibrant trade relationship with China.  We also want a fair and reciprocal one. Today, I discussed with President Xi the chronic imbalance in our relationship as it pertains to trade and the concrete steps it will take to solve the problem of massive trade distortion.
A “notable shift in tone?”  Maybe a shift in tone, but the media is completely missing the not-so-subtle and huge shift in U.S. trade policy that this represents.  Previous presidents have chided China for unfair trade practices like currency manipulation, theft of intellectual property, subsidizing their exports, and manufacturing in sweat shops that also pollute with reckless abandon.  They used to put all of the onus on China for helping to correct our enormous trade imbalance.  The Chinese must have been rolling in the aisles with laughter when our trade negotiators left.
Not this time.  What Trump is saying is that the time has come for the U.S. to take the matter of restoring a balance of trade with China into our own hands.  Trump has been itching to begin levying tariffs on imports from countries that have large trade surpluses with the U.S. and, though he made no mention of tariffs in this speech, his vow to take matters into our own hands should send chills down the spine of Xi.  Restoring balance with China by slowing their exports with the use of tariffs would practically collapse the Chinese economy.
But so far it’s just talk.  What is Trump waiting for?  It seems clear that he’s biding his time with China in the hope that their help with reining in “Little Rocket Man” in North Korea will lead to his demise.  Probably a smart move but, if it doesn’t work by the time North Korea has the ability to put a nuke on an ICBM, the U.S. will have to act and the Chinese will lose whatever leverage holding the North Korean attack dog at bay has afforded them.
In the meantime, our trade deficit in manufactured goods grows worse.  Here’s the latest chart, gleaned from the trade data for September that was released on last Friday:  Manf’d Goods Balance of Trade.  Nothing has changed since Trump took office, and nothing will until he stops dithering with pointless negotiations and begins applying tariffs to these countries with bloated labor forces and emaciated markets.  My sense is that that time is growing nearer, but time will tell.