Friday, February 06, 2015

US Economy Burdened by Perpetual, Massive Trade Deficits

The U.S. trade deficit soared 17.1% in December, reaching a two-year high. The trade gap spiked to $46.6 billion from a revised $39.8 billion in November, the Commerce Department said Thursday.

It was the biggest percentage increase since July 2009, and the largest month-over-month increase, in dollar terms, ever recorded.

U.S. exports slipped 0.8% to $194.9 billion, while imports increased 2.2% to $241.4 billion. The stronger dollar made imports more affordable, while making exports more expensive. The dollar has strengthened steadily since July, recording its second fastest acceleration in 20 years.

For all of 2014, the goods and services deficit was $505 billion, up $28.7 billion (6 percent) from $476.4 billion 2013, the Commerce Department reported. Exports were $2.35 trillion, up $65.2 billion or 2.9 percent. But imports were $2.85 trillion, up $93.9 billion or 3.4 percent.

So, imports were higher than exports in terms of total dollars, in terms of an increase in dollars, and as a percentage increase.

Annual trade deficits of half-a-trillion dollars are now the norm.

Year after year, the trade deficit sucks hundreds of billions of dollars, and millions of jobs, out of the U.S. as we continually buy products from overseas that could instead be made here at home.

The trade deficit in 2013 was $476.4 billion, which was the lowest since 2009. Think about that for a moment; the trade deficit in 2013 was nearly half a trillion dollars, yet it was the smallest in four years. It was down from $534.7 billion in 2012, according to the Commerce Department. The deficit shrank in 2013 due to lower petroleum imports.

The unfortunate reality is that the trade gap is a decades-old problem.

The United States has been running persistent trade deficits since 1974 due to high imports of oil and consumer products. The trade gap increases the debt held either by Americans or by the federal government.

Since a strong U.S. dollar makes American exports more expensive, the trade deficit will almost certainly increase again this year. As long as the trade deficit persists, the U.S. will continue borrowing from abroad to pay the difference between imports and exports.

Every $1 billion of a larger deficit subtracts about 0.1 of a percentage point from the annualized GDP growth rate. That's bad news for an economy that is currently struggling to eek out a mere 2 percent annual growth rate.

Traditionally, countries that have a trade surplus with the U.S. have used their surplus dollars to buy government or corporate bonds, to make investments in U.S. real estate, or to invest in the U.S. stock markets.

But what if a country, such as China, decides to use its surplus dollars to instead purchase gold? Unless that gold is purchased from the U.S., those dollars are never repatriated. In essence, they never come home.

China has a ravenous, and apparently growing, appetite for gold. While the world's second-largest economy has not formally disclosed any changes to its gold holdings since 2009, when it claimed to possess 1,054.1 tonnes of gold, it is now estimated by gold analysts to have around 2,000-3,000 tonnes of gold reserves.

As sovereign bond yields plummet, the tendency for gold will be to move higher. Though gold has a zero interest rate, that is still higher than the negative rates currently being offered in some countries.

When China diverts its dollar holdings for the purchase of gold, those dollars no longer have any beneficial investment affect in the U.S.

The danger of a trade deficit was spelled out quite clearly in Discourse of the Common Wealth of this Realm of England, in 1549: "We must always take heed that we buy no more from strangers than we sell them, for so should we impoverish ourselves and enrich them."

This is not a new concept. No nation can indefinitely buy more than it sells.

A wider trade deficit creates a drag on economic growth because more of the nation's consumption is coming from overseas rather than from domestic production.

The U.S. has led the world in imports for decades. Meanwhile, exports represent just 13.5% of our economy, according to the World Bank. It's a bad combination.

The massive U.S. trade deficit is emblematic of the fact that we are the world's biggest debtor nation.

For decades, we have imported more than we have exported, consumed more than we have produced, and spent more than we have saved. The result is that we must continually borrow to fund our nation — to fund our debt-driven ways.

It's all led to an unsustainable debt problem that will likely have a very bad ending.