Instead of narrowing, as economists routinely forecast, and despite the dollar’s
substantial decline, January’s trade deficit widened to a new all time record
high of 43.1 billion dollars. In classic Orwellian fashion, those economists
again dismissed this glaring symptom of a bubble economy as further proof of
America’s prosperity. Currency speculators apparently not only bought
this argument, but the dollar as well, which surged immediately following the
release of the worse-than-expected data.
What economists and currency traders should be contemplating is what will
happen to America when foreign central banks stop funding these trade deficits.
When that inevitable day arrives, the dollar will collapse, consumer prices
and interest rates will surge, and our standard of living will collapse. Forced
to live within its means, the U.S. will enter its most challenging economic
period in its 220 year history. Without the aid of foreign central banks, the
dollar will lose its status as the world’s reserve currency, and Americans
will have to abide by the same economic laws that govern the rest of the world.
Its consumption will be limited by its production, and its economic growth
constrained by its domestic savings.
The transition from an unsustainable, highly dependant, borrow-and-consume
economy into a viable, self-sufficient save-and-produce economy will be long
and arduous. During that period, the American way of life will be far different
from anything to which modern day Americans have become accustomed. The retired
will re-enter the work force, and those who had looked forward to retiring
will have to accept the dismal new reality. University enrollments will plunge,
as students also enter a vastly different American work force. Higher paying,
unproductive service sector jobs will be replaced by lower paying, capital
intensive, goods-producing jobs. To finance this transition, savings and self
sacrifice will replace consumption and indulgence. Doing without, rather than
keeping up with the Joneses, will be the new American reality. After taxes,
interest, and rent, what remains of the typical American paycheck will go toward
food and energy, with the balance being saved.
Conventional “wisdom” maintains that America will be spared this
fate, as her trading partners cannot afford to allow this situation to develop.
This naive theory argues that since the rest of the world so desperately needs
to sells its goods to Americans, they will lend them as much money as is necessary
to preserve the market indefinitely. However, the reality is that the world
is not actually selling its goods to America. A sale implies that the buyer
actually pays for the merchandise. In international trade, imports are paid
for with exports. America’s trade deficit reflects the fact that Americans
are not paying for over 40 billion dollars of imports per month. In lieu of
paying for its imports, America gives its trading partners IOU’s in the form
of U.S. dollars. Because Americans are allowed to defer payment, they are required
to pay interest, which results in the issuance of still more IOU’s. Since America
lacks the industrial capacity to produce the merchandise necessary to redeem
its outstanding IOU’s, it cannot possibly make good on any of the new
IOU’s it is Issuing. Passing IOU’s which can not possibly be redeemed can hardly
be considered legitimate payments.
To believe that the people of the world will forever give the fruits of their
labor to Americans is a leap of faith no rational person could possibly make.
Their willingness to do so will only continue as long they remain ignorant
concerning the true nature of these transactions, and delusional with respect
to America’s true industrial and financial position. Were it not for the foolish
efforts of foreign central banks, that day of reckoning would already be upon
us.
So American consumers once again dodge a bullet, as yet another record trade
deficit provokes little reaction from its creditors. So the shopping and borrowing
can continue, for now, but will we be so fortunate again next month? Perhaps,
but Americans cannot go on dodging these bullets forever; there is definably
one coming with the U.S. economy written all over it.
Commentaries & market updates.
Record Trade Deficit: No Problem?
Record Trade Deficit: No Problem?
Instead of narrowing, as economists routinely forecast, and despite the dollar’s
substantial decline, January’s trade deficit widened to a new all time record
high of 43.1 billion dollars. In classic Orwellian fashion, those economists
again dismissed this glaring symptom of a bubble economy as further proof of
America’s prosperity. Currency speculators apparently not only bought
this argument, but the dollar as well, which surged immediately following the
release of the worse-than-expected data.
What economists and currency traders should be contemplating is what will
happen to America when foreign central banks stop funding these trade deficits.
When that inevitable day arrives, the dollar will collapse, consumer prices
and interest rates will surge, and our standard of living will collapse. Forced
to live within its means, the U.S. will enter its most challenging economic
period in its 220 year history. Without the aid of foreign central banks, the
dollar will lose its status as the world’s reserve currency, and Americans
will have to abide by the same economic laws that govern the rest of the world.
Its consumption will be limited by its production, and its economic growth
constrained by its domestic savings.
The transition from an unsustainable, highly dependant, borrow-and-consume
economy into a viable, self-sufficient save-and-produce economy will be long
and arduous. During that period, the American way of life will be far different
from anything to which modern day Americans have become accustomed. The retired
will re-enter the work force, and those who had looked forward to retiring
will have to accept the dismal new reality. University enrollments will plunge,
as students also enter a vastly different American work force. Higher paying,
unproductive service sector jobs will be replaced by lower paying, capital
intensive, goods-producing jobs. To finance this transition, savings and self
sacrifice will replace consumption and indulgence. Doing without, rather than
keeping up with the Joneses, will be the new American reality. After taxes,
interest, and rent, what remains of the typical American paycheck will go toward
food and energy, with the balance being saved.
Conventional “wisdom” maintains that America will be spared this
fate, as her trading partners cannot afford to allow this situation to develop.
This naive theory argues that since the rest of the world so desperately needs
to sells its goods to Americans, they will lend them as much money as is necessary
to preserve the market indefinitely. However, the reality is that the world
is not actually selling its goods to America. A sale implies that the buyer
actually pays for the merchandise. In international trade, imports are paid
for with exports. America’s trade deficit reflects the fact that Americans
are not paying for over 40 billion dollars of imports per month. In lieu of
paying for its imports, America gives its trading partners IOU’s in the form
of U.S. dollars. Because Americans are allowed to defer payment, they are required
to pay interest, which results in the issuance of still more IOU’s. Since America
lacks the industrial capacity to produce the merchandise necessary to redeem
its outstanding IOU’s, it cannot possibly make good on any of the new
IOU’s it is Issuing. Passing IOU’s which can not possibly be redeemed can hardly
be considered legitimate payments.
To believe that the people of the world will forever give the fruits of their
labor to Americans is a leap of faith no rational person could possibly make.
Their willingness to do so will only continue as long they remain ignorant
concerning the true nature of these transactions, and delusional with respect
to America’s true industrial and financial position. Were it not for the foolish
efforts of foreign central banks, that day of reckoning would already be upon
us.
So American consumers once again dodge a bullet, as yet another record trade
deficit provokes little reaction from its creditors. So the shopping and borrowing
can continue, for now, but will we be so fortunate again next month? Perhaps,
but Americans cannot go on dodging these bullets forever; there is definably
one coming with the U.S. economy written all over it.
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