Today, the Commerce Department released another “unexpected” rise
in the monthly trade deficit. April’s deficit, which came in at a staggering
48.3 billion dollars, follows March’s revised 46.6 billion dollar record,
and is no doubt a precursor to a 50 billion dollar monthly deficit in June
or July. Such enormous monthly trade deficits will result in the accumulation
of 600 billion dollars of new external debt per year. Yet this number,
perhaps the single most important gage of a nation’s economic performance,
passed obscurely, with little notice and even less understanding, into
the economic night.
As has become common, most observers were fixated instead on the far less
economically significant release of May’s retail sales, which rose 1.2% for
the month (no doubt in large part the result of inflation). Little concern
seems to be placed on the fact that an increasing percentage of these sales
are of imported products, and that the more imports that Americans buy on credit
today, the greater the cost of paying for those products tomorrow, and the
more future retail sales will have to suffer as a consequence.
Most Americans illogically believe that the trade deficit represents some
form of economic benefit that they bestow upon the rest of the world. After
all, it means that they buy more from the world than the world buys from
them. In other words, American consumers are doing their part to support
growth, while foreign consumers are not. Nothing could be further form the
truth. The fact is the trade deficit does not represent goods that Americans
buy form the world, rather it represents goods that Americas cannot afford
to buy from the world, but which were nevertheless supplied to them on credit.
In the world of international trade, imports must be paid for with exports.
The fact that in April Americans could only sell $93.9 billion worth of goods
in exchange for the $142.3 billion of goods purchased means that the difference
(48.3 billion) had to be bought on credit, I.E. payed for with U.S. dollars
instead of goods. In effect, these dollars are claims on America’s future
production of goods, as they represent promises to pay for current imports
with future exports, plus additional exports in interest.
However, as manufacturing continues
to decline as a percentage of America’s GDP, where will all the merchandise
come from to redeem these IOU’s? When
the piper finally asks to be paid, he will realize that all the while he
wasting his breath, for his “patron” IOU’s will prove to be of little
value, redeemable with few real goods for his own consumption. In the mean
time, these IOU’s keep piling up, a phenomenon that was clearly evidenced by
the Federal Reserve’s recent revelation that foreign ownership of marketable
U.S. treasuries has surpassed 50 percent, with better than half of this year’s
increase attributable to central bank buying.
The fact that foreigners, who have no vote in American elections, have such
a large percentage ownership of America’s sovereign debt (which, if the rate
at which such debt is being accumulated continues, will result in them owning
virtually all of it in time) should be of enormous concern to foreign holders.
After all, as servicing this debt becomes a greater burden, and as the percentage
of foreign ownership increases, the easier it becomes politically to repudiate
the debt. Since most of this debt is short term, and since short-term rates
are about to rise, this burden is about to get a whole lot heavier.