Tuesday, January 10, 2012

Trade Deficit Forces U.S. to Borrow Billions

The U.S. is now confronted by a massive $15.23 trillion national debt. However, it is also facing another serious debt problem — its massive trade deficit.

In 2010, the total U.S. trade deficit was $497.9 billion, resulting from $2.3 trillion in imports minus $1.8 trillion in exports.

Countries with big, persistent trade deficits have to borrow to fund themselves. This is a reality that many deficit hawks aren't considering in their quests to shrink the U.S. budget.

Even if Washington somehow managed to balance its budget, the trade imbalance alone would continue sucking billions out of the U.S. each and every day.

The U.S. trade deficit surged to more than $50 billion in May of 2011, marking its largest gap since October 2008. And by October of last year, the latest month of available data, the U.S. trade deficit was still a whopping $43.5 billion.

A surge in exports was one of the lone bright spots in a string of negative economic indicators last year. Exports have been aided by a declining dollar.

The problem is that imports continue to exceed exports each and every month, resulting in an ever-expanding trade gap.

More than half of that deficit is with China.

The U.S. trade deficit with China swelled to a record $273.1 billion in 2010, from about $226.9 billion in 2009. The cumulative Jan-Oct 2011 deficit with China, of around $245.5 billion, was on track to top that.

China aside, one of the biggest drivers of the U.S. trade deficit is imported crude oil. Since oil is priced in dollars, the weakened dollar is punishing Americans every time they fill up their tanks. Simply put, the dollar is buying less these days.

In 2001, the U.S. Dollar Index traded around $120. Today, the U.S. Dollar Index is trading at $81, about 32 percent below the 2001 high. That's a serious decline in value.

Though a declining dollar makes U.S. exports cheaper overseas, our No. 1 import is oil, which is also priced in dollars. A weak dollar makes oil, and ultimately gasoline, more expensive, forcing the trade deficit further into the negative.

As long as the U.S. remains so reliant on foreign oil, the trade imbalance will remain a source of trouble, leading to billions of dollars flowing out of the country every day.

Moreover, as long as the trade deficit continues, the U.S. will also continue borrowing from abroad to pay the difference.

Since imports shrink the nation's gross domestic product, U.S. GDP will continue to face downward pressure. Every $1 billion of a larger deficit subtracts about 0.1 of a percentage point from the annualized growth rate.

This means that the trade gaps in May and June of last year, alone, likely reduced GDP by more than half-a-percent. As it is, the economy was already growing at an anemic pace through most of the year.

U.S. GDP expanded 1.8 percent in the third quarter of 2011, and just 1.3 percent in the second quarter.

The trade deficit just makes maters worse.

The flow of imports into the U.S. is also displacing American jobs. We're buying all these foreign goods instead of making them here at home.

The U.S., the world's No. 1 importer, has been able to run continual trade deficits for many years because it has been receiving an inflow of capital from surplus nations, such as China, Japan and Saudi Arabia. If these surplus nations ever hope to get repaid (i.e. to reverse those capital flows) then those trade imbalances must be reversed.

Every nation would love to be a net exporter. This simply isn't possible.

Countries cannot run surpluses forever, just as they cannot run deficits forever. Unless deficits and surpluses are ultimately reversed, debt eventually builds to unsustainable levels in the deficit countries — like the U.S. That time seems to have finally arrived.

Trade deficits are nothing new to U.S. In fact, the U.S. has run deficits in the trade of goods every year since 1976.

The U.S. has long since reached the point of unsustainability. No nation can continually buy more from abroad than it sells abroad. It's simple arithmetic. Where will the money for all the purchases come from?

The trade deficit has helped make the U.S. the world’s biggest debtor nation. Balancing the federal budget won't even begin to address the nation's trade deficit.

That will require less consumption, more saving and more production here at home, plus more consumption and less saving in places like China.

Those will be tough trends to reverse.

1 comment:

  1. Anonymous10:40 AM

    Ladies and gentlemen, please pay no attention to that iceberg up ahead!!