The End of Growth

October 22, 2014

Last week, markets were in a steep sell-off, driven largely by increasing worries about global economic growth.  (See the above-linked Reuters article from last week.)  In the wake of the Great Recession, years of interest rates at zero and money printing by the central banks of the U.S., Europe and Japan have yielded pretty disappointing results.  Europe is once again on the brink of recession.  And Japan has either been in recession or been on the brink for decades.  And slowing economic data in the U.S. is making it look as though we won’t avoid backsliding into recession either.

We’ve all seen cartoons depicting pessimists standing on street corners wearing sandwich-board signs declaring that “the end is near.”  Well, folks, it’s time to face facts.  When it comes to economic growth, the end is, in fact, here.

Let’s begin with a step back – way back – to World War II.  The imperialist ambitions of both Germany and Japan had similar roots.  Both nations were badly overpopulated, short on resources and long on unemployment.  Both embarked on huge land grabs.  In the wake of the war, in 1947, the Global Agreement on Tariffs and Trade – the precursor of today’s World Trade Organization – was implemented, with the primary goal of preventing such wars by giving Germany and Japan easier access to resources and more access to U.S. markets, thus alleviating the high unemployment that fostered Hitler’s rise to power.

No problem, at first.  Americans had done without for years, with the nation’s manufacturing capacity devoted 100% to the war effort.  There was a lot of catching up to do and Americans’ appetite for goods seemed insatiable.  The economy boomed and the federal government was able to cut spending and whittle away the debt it had racked up during the war.

The infrastructure and economies of Germany and Japan were rebuilt.  Slowly, the new trade regime enabled imports from those nations to erode America’s trade surplus.  First came Volkswagens and a sprinkling of Mercedes and BMW’s from Germany.  Those were followed first by motorcycles from Japan, and then Hondas – pathetic little cars that were painted in paisley and sold as jokes, but they got their foot in the door.  By the early 70’s our trade surplus was gone.  We oscillated between surplus and deficit for a few years.  We ran our last trade surplus in 1975.  Since then, we’ve experienced 38 (soon to be 39) consecutive years of trade deficits.

At about the same time, America’s budget deficit began to grow again too.  It had to, to offset the trade deficit’s drain of money from the economy.  Soon, new terms began to creep into the American economic lexicon:  “redundancy,” “down-sizing,” “right-sizing” and “outsourcing.”  American manufacturers began closing their doors en masse, unable to sustain a profit margin in the face of the onslaught of foreign companies snatching up American market share.

Even with their new-found trade surpluses and manufacturing jobs cannibalized from American manufacturers, the Europeans and Japanese both found it necessary to lean heavily on deficit spending, just as America was doing, to keep a lid on unemployment.  Rising productivity enabled manufacturers to meet growing demand without growing employment at the same pace.

At the end of World War II, the world’s population stood at just under 2.5 billion.  Today it has nearly tripled.  All of this growth has been concentrated in urban areas.  Cities have expanded and grown vastly more crowded, and it’s a fact that people living in crowded conditions consume less out of necessity.  Growth in the global labor pool outpaced the rate at which workers were absorbed into the economy, putting downward pressure on wages.  And that situation grew exponentially worse when China was factored into the global trade equation, growing the global labor pool virtually overnight by 25%.

For a time, government deficit spending, used primarily to fund social safety net programs and other programs designed to supplement incomes and prop up a perception of wealth, sustained consumption and kept the economy growing.  But that tactic has run its course.  National debts have risen to worrisome levels.

Developed economies looked to China to pick up the slack by developing its economy, turning 1.3 billion people who had nothing into western-style consumers.  By that measure, China has been a huge disappointment.  Collectively, they consume a mountain of goods, but nowhere near enough to even consume their own productive capacity, much less to develop into a market for other nations.  Their growth is faltering and it looks like their domestic consumption will settle at the same diminished level as Europe and Japan.

Growth is now virtually dead and all the deficit spending in the world can’t prop it up.  Economists won’t admit that fact and adamantly refuse to give any consideration to the fact that population growth lies at the heart of the problem.  But markets don’t care, and what we’re witnessing is an adjustment to a no-growth world.  Interest rates have fallen to zero.  Bond yields, projected to rise as the economy “recovered” never did, and are now sliding backward to near-zero levels.  Central banks’ hands are tied, left only with thinly-disguised money printing programs to fall back on to provide stimulus to the economy, a tactic that’s already begun to make them nervous about unintended consequences.

The world’s economy is reaching a critical and dangerous point, where the inverse relationship between population density and per capita consumption begins to take hold in a big way that can trigger an irreversible downward spiral.  People consume less than they’d like for two reasons – because they lack space to make use of products, and because they are simply too poor to afford them.  When the proportion of people in the first condition reaches a critical level, the downward pressure on wages begins to make everyone poorer, accelerating the downward pressure on consumption.  Governments’ and central banks’ resources and abilities to hold this economic force at bay will soon be exhausted.

Economists had better extract their heads from that place where the sun doesn’t shine, and soon, if this economic fate that they don’t understand and are unable to see is to be avoided.  I fear that they won’t.  Growth isn’t always desirable.  Sometimes it’s cancerous.  Left unchecked, population growth will soon present the one challenge that none of them are clever enough to overcome – worsening poverty that gets so bad that it throws the world population into decline.  In essence, if economists and world leaders aren’t smart enough to manage our population to a level where all can enjoy a high quality of life, their stupidity will surely drive it to a level that no one wants.


Manufactured Exports Fall in February, Lag President’s Goal by Record Margin

April 3, 2014

As announced by the Bureau of Economic Analysis (BEA) this morning, the nation’s trade deficit rose in February to $42.3 billion.  Not mentioned in the report (because the BEA doesn’t even track it, but can be derived through some simple math) is the fact that a $0.7 billion decline in manufactured exports contributed to the rise in the deficit. 

Exports of manufactured goods, at $108.7 billion in February,  have not risen in two years, actually falling by $0.1 billion from February, 2012.  In January, 2010 the president set a goal of doubling exports in five years, the implication being that the growth would occur in manufactured goods as a cornerstone of his economic “plan” to grow manufacturing jobs.  February’s exports lagged the president’s goal by $42.6 billion – a record margin which, once again, exceeds the entire trade deficit.  Here’s a chart of the balance of trade in manufactured goods, followed by a chart of the deficit in manufactured goods:  Manf’d exports vs. goal      Manf’d Goods Balance of Trade.

The point is that the president’s failure was inevitable because neither he nor anyone in the U.S. has any control whatsoever over exports, which are determined solely by foreign demand for U.S. goods.  Cajoling our trade partners into buying more U.S. goods has been a strategy tried and failed by presidents for decades.  Federal programs designed to help manufacturers improve efficiency and to fund research don’t work either, since foreign manufacturers are working just as hard to improve efficiency. 

And it’s equally predictable that the trade deficit isn’t just magically curing itself as other nations develop into more western-style consumers, as economists have long predicted.  Global trade imbalances have nothing to do with any of these things.  They are driven almost entirely by differences in population density, as badly overpopulated nations, crippled by endemic low per capita consumption, rely ever more heavily on manufacturing for export to employ their bloated labor forces.  And American workers pay the price for their overpopulation – a problem they had no role in causing and are powerless to remedy. 

Applied in appropriate situations, like between reasonably populated nations, free trade works just fine.  But U.S. trade policy fails to account for the limitations of free trade, and applies it blindly to situations where it’s guaranteed to fail.  In the final analysis, globalization and free trade, as they are currently applied, constitute nothing more than a poverty-sharing program, conceived in the wake of World War II as a means of heading off the kind of social unrest that arises from high unemployment in overpopulated nations like Germany and Japan.

America’s Worst Trading “Partners”

April 2, 2014

The word “trade” implies a mutually beneficial exchange of goods and services.  I buy stuff from you and, in return, you buy stuff from me.  A good trading partner is a nation that buys (imports) as much as it sells (exports).  A bad trade relationship is one in which a nation sells (or exports) while buying little in return.  Such a relationship isn’t mutually beneficial.  In such a relationship, one nation creates jobs at the other’s expense and drains funds away from the other’s economy.

America’s free trade policy has resulted in both good and bad trade relationships.  On balance, its many beneficial trade relationships have been more than offset by a minority of really bad ones.  But what’s the best way to judge?  Some differences in trade imbalances are due to a huge disparity in the size of nations.  Is a big nation that maintains a large trade surplus with the U.S. any better than a tiny nation with a proportionately large imbalance?  The only way to judge such imbalances fairly is to express them in per capita terms.  That is, how much does each person in that nation buy from the U.S. vs. how much they manufacture and sell to us? 

When expressed in per capita terms, the results are surprising.  Here’s the list:  Top 20 Deficits, 2012.  The key take-aways from this list are as follows:

  • Note the population density of the nations on this list.  By comparison, the population density of the U.S. is approximately 86 people per square mile.  Eighteen of these twenty nations are more densely populated than the U.S.  Eight are more than five times as densely populated.  In fact, the average population density of the nations on this list is 493 people per square mile – more than five times the density of the U.S.  Only two are less densely populated – Sweden and Finland.  When I first published this list in 2006 in Five Short Blasts, Sweden ranked number two.  By 2012, they have fallen to number eleven.  And their surplus with the U.S. has been reduced by half. 
  • Note the “per capita purchasing power parity (PPP)” of the nations on this list.  By comparison, U.S. PPP is approximately $48,500.  Most of the nations on this list are relatively wealthy nations, debunking the myth that trade deficits are caused by low wages.  If low wages are to blame, how do you explain the presence of Ireland, Switzerland, Taiwan, Denmark, Germany, Japan and Austria (among others) in the top ten of this list?  Also, the PPP of this list has risen dramatically in the past six years.  (More on this topic in a later post.)
  • Though China gets all of the attention for its massive trade deficit with the U.S., it barely makes the top 20 list, coming in at number 18.  It has risen only one place on this list since 2006.  In per capita terms, its trade imbalance with the U.S. is rather unremarkable relative to the other nations on this list.  In fact, when you understand the role that population density plays in driving trade imbalances, the huge trade deficit with China, given its sheer size and enormous population, is exactly what should have been expected. 

People who live in overcrowded conditions buy fewer products because they have no room to utilize them.  They buy or rent smaller homes because there is no room for larger homes.  They own fewer cars because their roads are choked with traffic and they choose mass transit instead.  Because their homes are smaller, they buy less furniture, far less lawn and gardening equipment and smaller appliances.  They buy less sporting equipment like boats, golf equipment, tennis equipment – you name it – simply because of the scarcity of resources for using such.

When two nations grossly disparate in population density atttempt to trade freely with each other, the work of manufacturing is spread evenly across the combined labor force, but the disparity in per capita consumption remains.  They buy less from us than we buy from them.  The result is inescapable – a trade deficit and loss of jobs for the less densely populated nation.  In effect, a host-parasite relationship is established in which the more densely populated nation feeds on the market of the other nation.  The less densely populated nation pays the price for the other nation’s overpopulation.  It hardly seems fair, does it?

Rice for Vehicles

February 21, 2014

This epitomizes what’s wrong with American trade policy and the American economy as a whole.  As reported in the above-linked Reuters article, President Obama is running around the world selling meat and produce and is willing to surrender manufacturing jobs as payment.  In the case of Japan, he wants them to lower their tariffs on American farm products and, in return, is considering giving up our small tariffs on their cars and our big tariffs on imported trucks.  (By the way, in case you wonder whether tariffs work, take a look around at how few imported trucks are on the road compared to cars.)

At the same time that he’s marketing the U.S. as some rural, agrarian society – something we haven’t been for a century, he’s desperate to liberalize immigration policy to turn us into even more of an urban jungle than we’ve already become. 

Is the condition of our economy any wonder, when our president considers rice for vehicles an even exchange?  Does he not understand the difference in the labor involved in producing these products?  Can’t he acknowledge what a disaster the same trade deal with South Korea has been for American jobs? 

God help us.  Obama won’t.

China to Let Yuan Rise. Don’t Get too Excited.

November 20, 2013

As reported this morning by Reuters in the above-linked article, it seems that China wants to allow its currency to rise further and faster in value.  Many have blamed China’s control of its currency – keeping it artificially low – for America’s enormous trade deficit with China.  A weak currency makes imported American products more expensive for Chinese consumers, and the correspondingly stronger dollar makes imports from China cheaper for American consumers, resulting in the large trade deficit, or so economists would have us believe.  So this should be great news for American manufacturers, right?

Not so fast.  I’ll use this news story to make the point once again that currency exchange rates have absolutely nothing to do with trade imbalances.  For every example you give me where a trade imbalance has responded to a change in currency exchange rate as economists would predict, I can give you an example of where exactly the opposite has happened.  Our trade imbalance with China is a perfect example.  In 2005, when China let the yuan begin to rise from its long-fixed rate of 8.6 yuan per dollar, our trade deficit with China was about $200 billion per year.  Today, the yuan has risen by 29% to 6.09 per dollar but, instead of falling, our trade deficit with China has soared to by 60% to $320 billion per year.  Here’s a chart:  China Trade vs Exchange Rate-3.

Economists reply that this is because the yuan is still too cheap.  Hogwash.  Either there is a relationship between exchange rate and trade balance or there isn’t.  If there were, then a change in exchange rate would have some effect – if not reversing the trade imbalance, then at least slowing its growth.  There’s simply no evidence of that here.

No doubt, a stronger yuan will put the squeeze on Chinese companies, cutting into their profits.  But no company faced with such a situation simply throws up its hands and concedes the market to its foreign competition.  It responds by cutting costs and improving efficiencies in order to maintain market share.  Thus, the trade imbalance remains.

The real driver behind our trade imbalance with China is the large discrepancy in population density between the two countries.  With a density four times that of the U.S., China’s per capita consumption is stunted by over-crowding.  When the economies of two nations are combined through free trade, the work of manufacturing is spread evenly across the combined population (jobs naturally flow to where labor is in the greatest state of over-supply), while the disparity in consumption remains.  The result is an inescapable shift in manufacturing to the more densely populated nation.  This is precisely what we’ve witnessed with China – a shift in manufacturing to that nation without a corresponding growth in their consumption.

A study of exchange rates vs. trade imbalances for all nations of the world finds no correlation whatsoever between the two, but yields a strong correlation between population density and trade imbalances.  The lesson to be learned is that free trade between nations grossly disparate in population density, as in the case of trade with China, simply doesn’t work.  A massive trade deficit is inescapable.  We see the exact same situation in trade with other densely populated nations like Japan, Germany, South Korea, Taiwan and a host of others.  The only hope for restoring a sustainable balance of trade is a return to the use of tariffs.  And the only hope of that ever happening is that economists pull their hands out of the sand and begin to ponder the full range of economic implications of population growth.

Detroit Files for Bankruptcy

July 19, 2013

One of my predictions for 2013 was that three major U.S. cities would file for bankruptcy, beginning with Detroit.  Now it’s begun.  As reported in this article, Detroit filed yesterday. 

Detroit was once synonymous with U.S. manufacturing prowess. Its automotive giants switched production to planes, tanks and munitions during World War Two, earning the city the nickname of the “Arsenal of Democracy.”

Now a third of Detroit’s 700,000 residents live in poverty and about a fifth are unemployed.

Truth be told, everyone in Detroit is living in poverty.  If not actually poor themselves, they’re living among the effects – the blight highlighted in the article. 

In its heyday, Detroit had over 2 million residents.  The population has since shrunk by nearly two thirds.  The reason is no secret; in its heyday, the domestic auto manufacturers had nearly 100% of the share of the domestic auto market.  Today they have barely half, without picking up any foreign market share.  The blind application of flawed free trade theory has brought Detroit to its knees and, indeed, has hobbled the economy of the entire country. 

Where has all of this auto manufacturing gone?  To high wage nations like Germany, Japan and South Korea.  The problem isn’t low wages or currency manipulation.  The problem is that these nations come to the trading table with nothing to offer but badly bloated labor forces hungry to manufacture for export.  They are so densely populated that their own per capita consumption of automobiles is emaciated by severe overcrowding.  With a population density seven times that of the U.S., Germany is actually the least densely populated of the three.  South Korea is fifteen times as densely populated as the U.S.  Wherever you live in the U.S., just imagine fifteen times as many people trying to crowd onto the roadways and you begin to understand how a rising population density erodes per capita consumption. 

So we blindly give away free access to our market, never thinking about whether we’re getting access to an equivalent market in return.  Free trade with badly overpopulated nations is nothing more than a poverty-sharing program, with the U.S. taking on the poverty that those nations would otherwise have to endure.  Nowhere is it felt more in the U.S. than in Detroit. 

That’s Detroit.  Amongst all the media hubbub about Detroit, little notice was paid to the fact that Moody’s also slashed the city of Chicago’s credit rating yesterday and gave the city a negative outlook.  Chicago’s problems are much the same as Detroit’s – pension obligations – obligations that, when they were made, seemed reasonable but now can’t be met from a tax base that has had so much manufacturing removed from it. 

Our trade deficit in manufactured goods continues to drain away a half trillion dollars from our economy each year – now a cumulative $12 trillion since our last trade surplus in 1975.  It’s no wonder that pension obligations can’t be met.  If the federal government isn’t willing to acknowledge that backstopping and bailing out such key aspects of our economy is part of the price of pursuing failed trade policy, then more bankruptcies are sure to follow.

America’s Worst Trade Partner

May 4, 2013

No, it’s not China.  Our largest trade deficit, by far, is with China, but China is also a very, very large country that accounts for one fifth of the world’s population.  And it’s not Japan or Germany, with whom we suffer our second and third largest trade deficits.  Obviously, I need to define my criteria for “worst trade partner.”  I’m putting this into per capita terms.  That is, man-for-man, citizen-for-citizen, which country sucks more trade dollars out of Americans’ pockets than any other?

The hands-down winner is Ireland.  In 2012, every man, woman and child in Ireland was $5,012 wealthier because of Ireland’s $24 billion per year trade surplus with the U.S.  And Ireland has fewer than five million people.  That’s over $20,000  per year for every family of four.  And every family in America is poorer because of it.  But that’s actually an improvement over 2011, when our per capita trade deficit with Ireland set a record of $6,244.  Here’s a chart of our balance of trade with Ireland since 2001:  Ireland Trade.  The improvement in our balance of trade with Ireland in 2012 was due entirely to a slowdown in imports of pharmaceuticals from Ireland.

To put the size of our per capita trade deficit with Ireland in perspective, it’s seven times worse than our per capita trade deficit with both Germany and Japan.  And it’s almost twenty times worse than our per capita deficit with China. 

Ireland is almost twice as densely populated as the U.S., which accounts for some of this trade imbalance.  (There is a strong correlation between the population density of our trading partners and our trade imbalance with them, both in terms of whether the imbalance is a surplus or deficit, and how large the imbalance tends to be.)  But that doesn’t explain such an enormous imbalance with such a small country.  Ireland offers huge tax incentives to foreign corporations to set up shop there.  Pharmaceutical manufacturers in particular have taken advantage of it.  Never mind the fact that this tax policy bankrupted Ireland and landed them on the list of EU “PIIGS” (Portugal, Ireland, Italy, Greece and Spain).  Like those other nations, they have the EU to bail them out.  This situation constitutes a blatant unfair trade practice.  But, as with all unfair trade practices, the U.S. simply turns a blind eye. 

So, the next time you’re sick and at least try to take a little comfort in thinking that your spending for pharmaceuticals may be helping some American workers and the American economy, think again.  Our trade policy with Ireland is a good part of the reason that all of us are becoming increasingly dependent on the federal government to provide us with health care.


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