The Titanic Budget Battle

April 6, 2011

As the fur flies in Washington this week, I think it’s appropriate to take the time to remind my readers that, regardless of which way this fight turns out, it won’t make a damn bit of difference for the future of this country.  It can’t because it does nothing to address the two issues that have ravaged our economy:  worsening overpopulation and the effects of trading freely with other nations that are even more, much more, overpopulated. 

It’s like two committees formed on the Titanic to solve the problem of rising water.  The approach of one committee, the Democrats, is to put every passenger to work hauling lumber from the carpenter’s shop and building additional decks to keep everyone’s head above water as the lower decks disappear.  Never once do they consider that there isn’t enough lumber to keep building decks until the ship has sunk to the bottom.

Then there’s the Republican committee.  They’ve decided that the solution is to jettison passengers, lightening the load to keep the ship afloat a little longer, giving the poorest of the passengers the heave-ho first. 

All the while, water gushes in through the breach in the hull.  It never seems to dawn on anyone to plug the hole.  Or if it has, no one is willing to go below, get their feet wet and do some dirty work. 

And so it is with our economy.  The Democrats’ approach will work for a while:  just throw money at the problem.  Things will be fine for a while, until we drown in debt.  If the Republicans can be believed (a stretch, given what happened to the debt the last time they had anything to say about it), they can prevent the debt problem if we just throw some people under the bus and hope no one notices, or that no more than 50% of voters care.

The reasons for our budget deficit, now estimated at about $1.6 trillion per year, are no mystery.  First of all, there’s all the unfunded Middle East wars.  Secondly, there’s the stimulus spending to piece back together the economy following the financial collapse (a direct result of our $10 trillion, 3-decades-long trade deficit).  And then there’s the social safety net spending to offset the ongoing effects of the trade deficit and the loss of millions of manufacturing jobs. 

The spending on the wars is taking care of itself as first the Iraq war, followed by Afghanistan, are being wound down, though given the recent bombing of Libya, one has to wonder if anything has been learned. 

The trade deficit and loss of manufacturing jobs is another matter.  The Democrats’ approach is to throw money at the unemployed and at everyone else whose wages and benefits are now in decline as our over-supply of labor grows ever more out of balance with the demand.  Truth be told, the Republicans’ approach while they were in power was little different.  But now we’re to believe that in Reagan-era style, their solution is to cut taxes, slash spending, and let the trickle-down put everyone back to work. 

This isn’t 1980, when stimulus spending in the form of tax cuts was spent on products still made in America and the trickle-down effect actually worked.  Our manufacturing base is gone and “trickle-out” has replaced trickle-down.  The economies of China, Japan and Germany get all the stimulus while all we get is debt piled onto our future generations.  And, come on, does anyone believe that the voting electorate will tolerate the poor being turned away from hospitals because the fixed lump sum allocated to Medicaid has been exhausted?  A budget is one thing, looking so good when the votes are cast.  Sticking to it is an entirely different matter.

What really ails this economy is the steady loss of our manufacturing base and millions of manufacturing jobs (not to mention millions more in supporting them) since our last trade surplus in 1975.  At least the administration seems to have finally come to that realization.  Give them credit for that much.  But all of the spending and tax cuts in the world won’t have one iota of impact on changing that situation.  Neither will Obama’s efforts to boost exports of the few products we do still make – mostly machinery used by foreign manufacturers to boost their capacity to drown us in even more imports. 

We’ve got to start making every product that we consume.  We’ve got to build and start up factories to produce iphones, ipads, laptops, appliances, clothing and every other product you find on the shelves at the big box stores.  There is only one way to make that happen and that’s to impose tariffs on the importation of those products.  If you were a manufacturer in such an environment, would you continue to make your products in China, only to have all your profit and more eaten up by tariffs?  Or would you bring your plant back to the U.S. where it would be tariff-free? 

Don’t worry, consumers.  Sure, your prices will go up.  But let’s not forget that you’re also workers, whose wages and benefits will be driven up even faster by a high demand for labor.  That’s how the economy worked – how America built itself into the world’s preeminent industrial power – before we pulled the trigger on free trade, not realizing that the barrel was pointed in the wrong direction.

Finally, let’s not forget the role of home-grown overpopulation in driving up spending on social safety net programs.  For all the talk about how we need talented immigrants to drive our economy forward, the facts tell a different story.  As population growth and over-crowding erode our per capita consumption, each new immigrant only adds to a labor pool already out-of-whack with the demand for labor.  It doesn’t matter whether the immigrant is illegal or legal.  Unless that immigrant brings with him or her an ability to consume products that outstrips his or her productive capacity, unemployment will worsen and, with it, poverty and social safety net spending to offset it. 

The budget battle playing out in Washington is like the band playing on deck, distracting our attention from the water rising around our ankles.  Just pass a damn budget already and turn your attention to something that really matters, like fixing our idiotic trade and immigration policies.

Is Globalization in Its Final Days?

February 19, 2011

Globalization, a process begun in wake of World War II with the signing of the Global Agreement on Tariffs and Trade in 1947, may now be in its last days.  Whether those days number in the thousands or hundreds is yet to be seen but, make no mistake, the end of global economic cooperation is near.  As reported in the above-linked article about the G2o meeting in Paris, export-dependent nations, lead by China, are dragging their feet on the 2-step effort to measure and rectify global economic imbalances. 

Finance chiefs of the world’s dominant economies on Saturday pressured China to drop its resistance to a deal on tracking dangerous imbalances in the global economy, in an effort to revive the Group of 20 rich and developing nations as the forum to prevent further financial crises.

More than any other imbalance, current accounts (trade supluses and deficits), have taken center stage in the talks.

China has so far opposed targeting current account surpluses — which show that a country sends much more goods and capital abroad than it receives …

But patience is wearing thin.  Global leaders understand that such imbalances were at the root of the economic collapse of the past couple of years and that the capacity to deal with another such crisis has been exhausted.

The stakes are high: French Finance Minister Christine Lagarde warned Friday that a failure to address imbalances “leads us straight into the wall of another debt crisis,” while President Nicolas Sarkozy said that countries must not get complacent as some parts of the world are starting to recover from the crisis while others are still lagging behind.

“That would be the death of the G-20,” Sarkozy warned.

The following is perhaps the most frank admission I’ve seen yet of the role that global trade imbalances played in the global economic melt-down:

What is clear to most economists is that sticking to the status quo could be fatal.

In the years before the financial meltdown of 2008, countries with trade surpluses plowed money into mortgage and other investments in the United States, helping escalate their value, U.S. Federal Reserve Chairman Ben Bernanke told his G-20 colleagues Friday. But the U.S. failed to safely absorb money flooding in from emerging nations like China, Middle Eastern oil countries and industrialized countries in Europe, Bernanke said.

“… the death of the G20.”  “Sticking to the status quo could be fatal.”   Strong words that highlight the urgency.  Bernanke and others know very well that a repeat of the recent economic crisis will be exactly that – fatal.  The global economic system will come completely unglued and it will be every man (country) for himself. 

How much time is left?  That’s the big, unanswered question.  But if recent history is any indication, it’s not long.  Consider this:  the economic bubbles we’ve witnessed in the last two decades have been fueled by the trade imbalances.  American trade deficit dollars have to come back to America, one way or another.  In the ’90s, those dollars bought stocks and inflated a huge stock market bubble.  It took about six years for that to run its course and for the bubble to burst in March of 2000.  Then those trade deficit dollars were funneled into real estate in the form  of mortgage-backed securities.  Once again, it took about six years before that nearly collapsed the entire global financial system. 

It’s now been about three years since that collapse in late 2007/early 2008, and nothing has been done to address trade imbalances.  First, trade dollars inflated a bubble in treasuries – a bubble whose bursting has been delayed by the Fed’s program to buy up new treasury issues.  More recently, those trade dollars are re-inflating another stock market bubble.  History suggests that there may only be another three years to go before the next economic collapse.  If the G20 can’t address these imbalances in a coordinated way, then the U.S. will have to go it alone and do what’s necessary to restore a balance of trade.  It’s that or economic oblivion.

Export-dependent nations, most notably China, will never go along with any G20 plan to rectify imbalances, wiping out their huge trade surplus.  They may play along a bit longer to buy time, but it won’t buy them much.  When time runs out, so too will the global economic engineering that has forestalled the day of reckoning for overpopulated, export-dependent nations.  From my perspective, that day can’t come soon enough.

U.S. Playing Chicken with Credit Rating Agencies

December 9, 2009

As the Obama administration and the Federal Reserve desperately try to restore the economy to its debt-fueled status quo, relying on deficit spending and Fed balance sheet expansion to goose the economy, they are playing a game of chicken with credit rating agencies that could leave the American economy scattered in pieces all over the road to nowhere down which we’ve been headed for decades. 

As reported in the first of these articles, Moody’s Investor Services has once again warned the U.S. (along with Britain) that its soaring national debt may lead to loss of its triple-A credit rating.  Such a downgrade would have serious consequences for America’s ability to raise cash to finance its deficit spending. 

The United States and Britain must take action soon to get their public finances in order if they want to avoid threats to their top triple-A credit ratings, a leading credit ratings agency said Tuesday, accelerating U.S. and European stock markets’ decline. In an assessment of eight triple-A countries, Moody’s Investors Services said the public finances in both countries are deteriorating considerably and may therefore “test the Aaa boundaries” in the future. 

Moody’s has essentially put the U.S. on notice that it has perhaps only a year or so to get its act together or risk a down-grade:

“Next year, Aaa governments with stretched balance sheets will find themselves under pressure to announce credible fiscal plans and, if markets start losing patience, to start implementing them,” he (Pierre Cailleteau, managing director of Moody’s sovereign risk group and lead author of the report) said. 

None of this is new, of course.  The ratings agencies have been blustering about this for some time.  But this time, at the same time, comes evidence that they’re getting serious.

Ratings agency Fitch has cut Greece’s debt rating, sending markets in Greece into turmoil:

Ratings agency Fitch cut Greece’s debt to BBB+ on Tuesday with a negative outlook, the latest blow to the troubled euro zone country, driving its bonds, bank shares and the euro itself lower.The cut was the first time in 10 years a major ratings agency has dropped Greece below an A grade. Fitch cited fiscal deterioration in one of the 16-member currency bloc’s most indebted member states.

Listen to what Fitch has to say about Greece and tell me it doesn’t sound like they’re talking about the U.S.:

“The lack of substantive structural policy measures reduces confidence that medium term consolidation efforts will be aggressive enough to ensure public debt ratios are stabilised and then reduced over the next three to five years,” it said.

… Greece’s socialist government, elected in October, has revealed the budget deficit was twice as big as previously reported and has pledged to bring it under 10 percent next year.

Debt would soar to more than 120 percent of GDP in 2010, it said.

Analysts said Fitch’s cut would add pressure for the government to take yet more drastic measures and expected more downgrades to follow.

In the terms defined above, the U.S. budget deficit and national debt aren’t terribly different than Greece’s.   And what’s driving Greece’s financial problems?  Their trade deficit.  Among the 31 developed nations of the world (those with per capita purchasing power parity above $25,000 per year), Greece ranks dead last in terms of its per capita trade balance with a deficit of $6,032 per person.  Where is the U.S. on that list?  We’re 28th on the list, with a deficit of $2,734 per person.  (See

Congress is in the process of drafting financial reform regulation, and among those proposed reforms is a crack-down on credit rating agencies who played a big role in the global economic collapse by awarding unrealistic credit ratings to securities backed by risky sub-prime loans.  The rating agencies have gotten the message, so the U.S. can no longer expect that its own debt will continue to get high ratings with a wink and a nod. 

If the U.S. wants to avoid the economic disaster that would accompany a falling credit rating, it’s got to get serious about reducing its trade deficit.  The time for incessant talk with our trading “partners” is past.  It’s time to take matters into our own hands and finally do what’s necessary to assure a balance of trade – impose tariffs on manufactured goods from overpopulated nations.

3rd Quarter GDP Up, Erosion in Underlying Economy Continues

October 30, 2009

Thursday the government reported that GDP rose at an annual rate of 3.5% in the third quarter, rising from an annual rate of $12.901.5 trillion in the 2nd quarter to $13.014 trillion in the 3rd quarter.  (Expressed in 2005 dollars.)  The government would have us believe that this is great cause for cheer – evidence of a rebounding economy and the end of recession.

But how much of this is real growth versus the illusion of growth created by government stimulus spending?  In March the government passed the American Recovery and Reinvestment Act, authorizing the spending of $787 billion to boost the economy.  Proof that it’s actually stimulating the economy would be an increase in GDP if the stimulus spending is removed.

The fact is that the underlying economy continues to deteriorate.  As I reported in Stimulus Spending Masks Huge Decline in 2nd Qtr. GDP, the underlying economy contracted at an annual rate of 8.2% in the 2nd quarter.  In the 3rd quarter, stimulus spending increased to $113 billion, for an annual rate of $452 billion.  If this spending is removed from 3rd quarter GDP, we find that the underlying economy has continued deteriorating, albeit at a slower pace, at an annual rate of 3.5%.  Without the stimulus spending, 3rd quarter GDP would be 7.5% below the peak GDP reached in the 2nd quarter of 2008.  (It should be noted that that figure was also “stimulus-aided,” the result of the Bush administration $150 billion tax rebates.)

Making matters worse, real per capita GDP (sans stimulus spending) fell to its lowest level since 3rd quarter 2003, with the addition of another 300,000 people to the U.S. population contributing to the decline.

This is why some political leaders, economists and financial pundits are raising alarm over the possibility of  backsliding into recession once the government stimulus is removed – because the underlying economy continues to deteriorate, and not at a slow pace.  It’s likely that the government will enact new stimulus measures to sustain the illusion of economic growth, but at the risk of record deficits alarming the financial community in a way that will send interest rates soaring, countering any stimulus measure.  It would be amusing to watch such idiotic economic policy play out were it not for the devastating effects on the vast majority of Americans.

Reshape Global Economy? What Will You Do, Mr. President?

September 21, 2009

The good news is that President Obama understands that global trade imbalances – especially America’s enormous trade deficit – is what collapsed the global economy, and he will push the G20 at the meeting in Pittsburgh to reshape the global economy:

U.S. President Barack Obama said on Sunday he would push world leaders this week for a reshaping of the global economy in response to the deepest financial crisis in decades.

The bad news is that he, like everyone else – including economists – is clueless as to the root cause of the imbalance:

… Obama said the U.S. economy was recovering, even if unemployment remained high, and now was the time to rebalance the global economy after decades of U.S. over-consumption.

Overconsumption in the U.S. is a myth, perpetrated by images of fat Americans returning from the mall with their gas-guzzling SUVs filled to the roof-line.  While this may be an accurate portrait of the top 2-3% of wage-earners, reality for the vast majority of Americans is quite different.  When American families’ median income is something in the range of $48,000, how much money is left for “over-consumption” after paying the mortgage (or rent), putting food on the table, paying the utilities and buying health care?  Precious little. 

The problem with our trade imbalance isn’t that Americans over-consume.  The problem is that virtually everything we do consume is foreign-made.  Would President Obama have us stop consuming altogether?  What would we wear?  Every stitch of clothing sold in this country is foreign.  Would he have us stop maintaining our homes?  Nearly everything on the shelves at Lowe’s and Home Depot is foreign made.  Would he have us stop maintaining our cars?  Try finding an American-made auto part.  Should we stop replacing burned-out televisions?  There hasn’t been an American-made television in decades.

We have no choice but to continue buying foreign-made products, perpetuating the global trade imbalances.  Nothing is going to change until Obama, or some subsequent president with the guts to do it, finally says to the WTO (World Trade Organization) “enough is enough.”  “It’s clear the rest of the world won’t voluntarily eliminate its dependence on exports to America, so we’re putting tariffs back in our trade policy tool box.”  Only then will there be any hope of rebuilding the manufacturing sector of our economy and fixing the trade imbalances that have brought us to our knees.

Obama understands the problem.  He truly does, as evidenced by this last statement:

“We can’t go back to the era where the Chinese or the Germans or other countries just are selling everything to us, we’re taking out a bunch of credit card debt or home equity loans, but we’re not selling anything to them,” Obama said in an interview with CNN television.

OK, Mr. President, the question now is what are you going to do about it?  Talk, talk, talk and asking other nations to fix the problem for you isn’t action, it’s shirking your responsibility.  What are YOU going to do? 

One final comment about the following paragraph is in order:

For years before the financial crisis erupted in 2007, economists had warned of the dangers of imbalances in the global economy — namely huge trade surpluses and currency reserves built up by exporters like China, and similarly big deficits in the United States and other economies.

What a crock.  Economists’ zeal for one of their pet 18th century theory, Ricardo’s principle of comparative advantage, is what led to the creation of this globalized mess in the first place.  For anyone to claim that economists have been “warning of the dangers” is laughable and the epitome of historical revisionism.  If the U.S. ever does take real action to unwind the mess, it’ll be over the howls of protest from economists. 

The only good news here is that Washington’s patience with globalization’s parasitic predation on the American market is clearly wearing thin.   But real action still seems to be a big leap from where we are today.

Obama Imposes Tariffs on Chinese Tires

September 12, 2009

President Obama, after eight months in office, has made his first trade policy move in support of American workers, imposing stiff tariffs (though lower than the tariffs recommended by the U.S. International Trade Commission) on imports of tires from China. 

Subsequent whining by the Chinese about protectionism and violation of World Trade Organization rules was predictable.

“China strongly opposes this serious act of trade protectionism by the U.S.,” a statement posted on China’s Ministry of Commerce Web site said. “This act not only violates the rules of the World Trade Organization but also violates the relevant commitments made by the U.S. government at the G-20 financial summit.”

Obama’s move will harm U.S.-China economic and trade relations, the statement said.

One could only hope. 

Obama had until Sept. 17 to accept, reject or modify a U.S. International Trade Commission ruling that a rising tide of Chinese tires into the U.S. hurts American producers. The United Steelworkers blames the increase for the loss of thousands of American jobs.

The federal trade panel recommended a 55 percent tariff in the first year, 45 percent in the second year and 35 percent in the third year. Obama settled on slightly lower penalties — an extra 35 percent in the first year, 30 percent in the second, and 25 percent in the third, White House press secretary Robert Gibbs said.

… Governments around the world have suggested the United States talks tough against protectionism only when its own industries are not threatened. U.S. rhetoric on free trade also has been questioned because of a “Buy American” provision in the U.S. stimulus package.

What the rest of the world criticizes as “protectionism” is any tariffs imposed by the U.S. on their imports – any violation of the “free trade” spirit of WTO rules.  The fact is this:  while the WTO talks about “free trade,” it actually enforces protectionist tariffs in favor of two thirds of its member states, including China, but not the U.S.  These nations eagerly cry “foul” and deride the U.S. as “protectionist” any time we even consider moves to support our own industries, while they are, in fact, the biggest beneficiaries of WTO-enforced protectionism. 

… Roy Littlefield, executive vice president of the Tire Industry Association, which opposes the tariff, said it would not save American jobs but only cause tire manufacturers to move production to another country with less strict environmental and safety controls, less active unions and lower costs than the United States.

The Tire Industry Association is an international organization representing all tire manufacturers of the world.  Gee, let’s see.  95% of the world’s tire manufacturers are foreign, but the biggest market is the U.S.  Is it any wonder that the Tire Industry Association is opposed to U.S. tariffs?  And notice how these industry associations all adopt American-sounding names and have American presidents.  That way, it sounds like these are American businesses supporting free trade and criticizing American tariffs.  There’s no shortage of these American executives who, for the right price, are perfectly willing to take up the cause of foreign interests to the detriment of their own countrymen. 

Littlefield makes a valid point, though.  What’s to stop the tire imports from shifting to Japan, Korea, Mexico or some other nation where labor is in a gross state of over-supply?  We need import tariffs on tires from all such countries, not just China.  But we need even more.  Domestic auto manufacturers are being put at a competitive disadvantage without access to cheap Chinese tires.  What we need are tariffs on all manufactured products imported from all overpopulated nations.  It’s the only way to eliminate the global trade imbalances that have wrecked our economy, trade imbalances driven by huge disparities in population density.   

For the Chinese government, the tire dispute threatens an economic relationship crucial to China’s economic growth. There was speculation before the decision that new tariffs could produce public pressure on Beijing to retaliate, potentially sparking a trade war.

Let’s see, what’s the worst that could happen in a trade war with China?  A total cessation of trade.  The net result is that $250 billion worth of manufacturing returns to the U.S., boosting GDP by $500 billion.  Sounds like an outcome we could live with!  Bring it on!  So what if China threatens to dump its U.S. Treasury holdings?  Such a boost to the U.S. economy would send the dollar soaring, making other nations eager to buy up every bond the Chinese sold! 

There’s a lot more work to be done on our badly-broken trade policy.  Let’s hope this is a start of that process and not just a token gesture.  Let’s hope it’s a sign of impatience within the administration with the lack of progress by nations who have promised to rely less on exports and to expand their domestic economies.  Maybe they just need a little help in keeping that promise.

July Trade Deficit Far Worse Than Expected

September 10, 2009

The Census Bureau released foreign trade data for the month of July this morning, and the results were far worse than forecasts.  Consensus among economists was that the deficit would worsen slightly, rising from $27.0 billion in June to $28.0 billion in July, with the high end of expectations being $29.5 billion.  Instead, the actual July trade deficit soared to $32.0 billion!  (The above link will take you to the full report.)

Exports rose slightly, but the rise was dwarfed by a rise in imports.  The rise in imports was led by non-petroleum goods (in other words, manufactured products), rising by over $6 billion.  Auto imports led the way, fueled by the “cash-for-clunkers” program. 

This was the worst one-month increase in the trade deficit since 1999. 

Since our last trade surplus in 1975, our cumulative trade deficit (in current dollars) has risen to $9.55 trillion, every penny of which has been financed by a sell-off of American assets. 

These trade results are a slap in the face for President Obama, whose jaw-boning of other nations like Japan, Korea, China and Germany resulted in promises by them to rely less on exports and to stimulate their own domestic economies.  But these results are predictable.  These nations will never, ever reduce their reliance on exports voluntarily.  They won’t because they can’t.  If I’ve said it once, I’ve said it a thousand times, the ONLY way to eliminate the global trade imbalances that collapsed the economy – the only way for the U.S. to restore a balance of trade – is through tariffs. 

The Obama administration, as well as the Federal Reserve, knows full well that the trade deficit lies at the heart of all of our economic problems.  I predicted that Obama would, for some time, try the traditional mamby-pamby, Mr. Nice Guy approach to the trade problem, trying to convince other nations to fall on their own swords and fix our problem for us.  This July trade deficit figure is the clearest evidence to date that that approach is a failure.  The August figure will be even worse, since the “cash-for-clunkers” program was primarily in August, and foreign car-makers were only then scrambling to boost depleted inventories. 

How much worse does it have to get before Obama acts?  Will he sit by and do nothing while our deficit slowly returns to the pre-recession levels?  If he does, he’ll go down in history as another place-holder, do-nothing president who didn’t have the courage to do right by the American people.

Globalization Giving Way to the “Deglobalization Paradigm?”

September 8, 2009

In the above-linked article (one I strongly encourage you to read) Philippine economist Walden Bello, who the Economist magazine credits with coining the term “deglobalization,” advances what he calls the “deglobalization paradigm,” a new economy that he proposes to replace the failed model of globalization.  His article includes what he calls “11 pillars of the alternative” – key features of this new economy.  First and foremost among them is domestic manufacturing. 

At the same time, an article in the Economist (see observes that globalization seems to be in full retreat on all fronts.  Of course, this is a source of great consternation for the Economist, since the failure of globalization would be an indictment of the economic theories at the foundation of the Economist’s core beliefs.  What hope would there be for a magazine peddling what has been proven to be utter nonsense? 

Bello is right on in his observations of the current state of economics.  All major economies of the world have acknowledged the need to depend less on exports and more on domestic consumption as the foundation of their economies.  But none have taken any concrete steps to move in that direction.  Toyota isn’t closing any dealerships in the U.S.  LG Electronics isn’t pulling TVs from the shelves to make room for American-made alternatives.   And China hasn’t told any of its ships to turn around.  Nor has the U.S. taken even the smallest step toward tariffs designed to make domestic manufacturing the logical choice.  Instead, our government is desperately trying to resume the force-feeding of debt for the American consumer.  Like a comatose patient kept alive with feeding tubes and breathing machines, our economy is sustained with an IV drip of printed money by economic doctors who have no clue as to what to try next.  They heave a collective sigh of relief at seeing the vital signs stabilized, but know very well that it’s all an illusion – that the patient is surely dead if that life support is removed. 

Although Obama has publicly disavowed any moves toward protectionism and has, until now, pinned all his hopes on promises by export-dependent nations to boost domestic consumption and rely less on those exports, Monday’s move by Obama to name Ron Bloom a sort of manufacturing czar for the economy may be the first hint that he’s beginning to hedge his bets.  Perhaps it’s a sign that he’s losing patience with the current approach and recognizes the need for a real strategy for boosting domestic manufacturing.  Surely it hasn’t escaped his attention that the economies that have fared best in recent years, most notably China, are those that have been built on a backbone of manufacturing, while those that have eschewed manufacturing in favor of financial wizardry, as the U.S. has done, are now paying a heavy price.  And it was probably no small source of irritation that countries like Korea and Japan, who have promised to rely less on exports, pounced on his “cash-for-clunkers” program, siphoning sales away from domestic auto manufacturers, further eroding their market share and turning the program into a GDP-destroying boost in the U.S. trade deficit. 

The “deglobalization paradigm” is coming, and not a moment too soon.  But before we write the epitaph for globalization, it’s critically important to understand why, instead of boosting all economies, it produced persistent trade imbalances that finally brought the global economy to its knees. Otherwise, there will be constant attempts to re-start the process again.

The hopes for globalization were rooted in a free trade theory that all nations benefit when each specializes in what they do best, trading that product for those of other nations. But this theory failed to account for the relationship between population density and per capita consumption, and what happens when nations grossly disparate in population density attempt to trade freely with one another. When one understands this relationship, it becomes easy to predict that a nation like the U.S. would experience large, persistent trade deficits with nations like Japan, Germany, China and others that are all far more densely populated. And it becomes easy to predict the trade imbalances that finally ground the global economy to a halt.

Nations like Japan, Germany, China, Korea and others didn’t become so heavily dependent on exports out of choice or out of neglect of domestic consumption. Their extreme population densities make them incapable of domestic consumption at a rate that will gainfully employ their bloated labor forces. Globalization allowed their economies to thrive through manufacturing for export, siphoning jobs away from the U.S. and other less densely populated markets. Efforts to boost domestic consumption in such overpopulated nations will fail and without the exports that they’ve come to rely upon so heavily, unemployment in those nations will soar. And it’s just as easy to predict that, unless nations are given the freedom to set tariffs aimed at maintaining a balance of trade, nothing will change and global trade imbalances will persist.

For some period of time, the new “deglobalization paradigm” will spell huge problems for economies now dependent on exports. But in the long run, they’ll be far better off, as long as they recognize that a sustainable economic strategy is one that includes reductions in population densities to a level where domestic consumption isn’t choked off by over-crowding.

June Trade Deficit More Evidence of Pain in American Economy

August 18, 2009

On Wednesday, August 12, the Bureau of Economic Analysis (BEA) released the June balance of trade figures.  The above link will take you to the full report.  The U.S. balance of trade is by far the most important economic data tracked by the federal government, with more influence on the financial well-being of Americans than even GDP (gross domestic product). 

As usual, the report is a mix of good news and bad news, more heavily weighted to the latter.  The good news is that, at $27.0 billion, the June trade deficit remains at far lower levels than just a year ago.  The bad news is that it’s up from $26.0 billion in May.  The really bad news is that $27.0 billion per month is still an enormous deficit.  It’s this trade imbalance that ultimately led to the global financial collapse last year, a financial collapse that would surely have yielded a severe depression were it not for the shaky, jury-rigged, hastily-constructed financial scaffolding that now props up our economy.

The table in this report that really tells the story is “Exhibit 9” found on page 11.  There we can see that petroleum imports were a huge drag on the deficit, worsening by $3.9 billion from May to June.  But it’s the non-petroleum goods that interests me most, because that’s the category that essentially is made up of manufactured products – the real job engine of the economy.  The good news there is a reduction of $2.6 billion in the deficit.  Exports in that category rose by $1.6 billion, while imports fell by $1.0 billion – both moves in the right direction.  And imports of non-petroleum goods fell to a decade low. 

But is this really a measure of any real correction in the trade imbalance – a shift back to domestic manufacturing – or is it merely a measure of just how badly Americans are hurting?  Data on retail sales and on manufacturing don’t support an explanation that Americans are turning to domestically-manufactured products.  And while the June rise in exports from May is nice, exports are also hovering near decade lows. 

The Obama administration has focused virtually all of its efforts to improve our balance of trade on China, constantly driving home the point with China that they must begin to boost their own economy and rely less upon America as an export market.  Predictably, this approach is an abysmal failure.  Our deficit with China rose from $17.5 billion in May to $18.4 billion in June.  And, as proof of the point that I constantly try to drive home in this blog – that our trade deficit is the result of our own failed trade policy and not anything in particular that China is doing – our trade deficit with Japan nearly doubled from May to June, rising from $1.9 billion in May to $3.7 billion in June.  (Almost all of that rise was due to a boost in auto imports.) 

The evidence seems to suggest that the trade deficit remains low (though it’s bottomed out and seems to be rising again) because Americans, whose incomes continue to decline, have snapped their wallets shut.  Improvements in our trade balance are great, but ruining the economy is no way to go about it.  No fundamental improvement can take place until the administration addresses our trade policy in a way that restores domestic manufacturing.

Obama Approach to Economy Faltering

May 12, 2009

With the first 100 days of the Obama administration in the rear-view mirror, the effects of his approach to the economy – especially his approach to the trade deficit – are beginning to come into focus.  And it’s not the picture they hoped for.  Yesterday, the Obama administration increased its project for this year’s federal budget deficit by $89 billion, an admission that the economy is not recovering at the rate they had planned.  

And just minutes ago this morning, it was announced that the March trade deficit rose from $26.0 billion in February to $27.6 billion in March, ending a dramatic, several-month decline.  The rise wasn’t unexpected, but the reason was.  In spite of the fact that oil prices rose as expected, that rise was offset by falling imports.  But what was an unpleasant surprise was that exports also fell a sharp 2.4%.  Exports held up surprisingly well in February, perhaps the result of the rest of the world trying to hold up their end of the bargain struck at the G20 summit in London, when they promised to boost their own economies and start buying more American products, in exchange for Obama’s promise to disavow any moves toward protectionism.  I predicted that approach was doomed to failure, and so it is.  It lasted about a month.  

Some of the stimulus measures taken by the Obama administration are having some minimal effect in slowing our economic decline.  How could they not?  Pour trillions of dollars into the economy, through economic stimulus and through various measures to lower interest rates and boost spending, and it has to have an effect.  But the results are disappointing.  While job losses have moderated slightly, they’re still at a level that would elicit bugged eyes and dropped jaws from economists during any other period.  And home purchases have ticked upward ever-so-slightly, like the twitch of a limb of some poor animal that has come to a violent end.  

Obama has said repeatedly that a recovery in the manufacturing sector is crucial to revival of our economy, especially as the finance sector fades into oblivion.  But falling exports bode ill for any such recovery.  This is exactly the scenario I predicted in my 2009 Predictions.  Obama has relied upon the same approach to our trade problems that decades of experience has proven to be a failure – trying to talk our way out of the deficit instead of taking meaningful measures.  Perhaps he thought that he could make it succeed by simply trying harder, bringing his charisma to bear and shaming other world leaders into pulling their weight.  This will go on for some time as the administration clings to hope that their approach will begin to take hold.  

But it won’t. It can’t.  It ignores the economic realities associated with trading freely with overpopulated nations and ignores our own growing problem of overpopulation, and the consequences of these for unemployment.  The question becomes what “plan B” might be.  He will have only two choices:  stick with “plan A,” relying on even more stimulus or begin moving away from the extreme free trade end of the spectrum of trade policy, which means beginning to adopt some forms of protectionism, whether it’s import quotas or tariffs.  Sticking with Plan A for too long will leave too little time for Plan B to work and will assure a place in history as a one-term president and a failure.