TWIN DEFICITS THAT ARE HARMING OUR FUTURE!
October 28th, 2019
ECONOMIC NEWS OF THE 3rd QUARTER, 2019
TWIN DEFICITS THAT ARE HARMING OUR FUTURE
TRADE DEFICITS-WE ARE LOSING THE TRADE WARS!
We look back to the very basic concerns of economists. They are listed below:
● Continuous growth of the economy.
● Having low unemployment.
● Having low inflation.
● Maintaining a long-term trade balance.
The last one listed is what we will look at in this newsletter; the maintaining of a long-term trade balance for the United States. It is a cornerstone measure for the long-term economic health of any nation, to be able not only to buy and sell goods internationally, but to have balance between the buying and selling of goods. If we look at the United States record over the last 43 years, we see clearly there is a problem that we need to address. Listed below we see the trade deficit over the last 43 years; including the trade surplus and deficit of goods and services; and how large the trade deficit was as a percentage of the nominal Gross Domestic Product (GDP) of the United States. (The value below is in billions of dollars.)
Year Total Trade Balance Goods Services %GDP
1976 (-6) (-9) +3 (-0.3)
1977 (-27) (-31) +4 (-1.3)
1978 (-30) (-34) +4 (-1.3)
1979 (-25) (-28) +3 (-1.0)
1980 (-19) (-25) +6 (-0.7)
1981 (-16) (-28) +12 (-0.5)
1982 (-24) (-36) +12 (-0.7)
1983 (-58) (-67) +9 (-1.6)
1984 (-109) (-112) +3 (-2.8)
1985 (-122) (-122) +0 (-2.9)
1986 (-139) (-145) +6 (-3.1)
1987 (-152) (-160) +8 (-3.2)
1988 (-115) (-127) +12 (-2.3)
1989 (-93) (-118) +25 (-1.7)
1990 (-81) (-111) +30 (-1.4)
1991 (-31) (-77) +46 (-0.5)
1992 (-39) (-97) +58 (-0.6)
1993 (-70) (-132) +62 (-1.1)
1994 (-98) (-166) +67 (-1.4)
Year Total Trade Balance Goods Services %GDP
1995 (-96) (-174) +78 (-1.3)
1996 (-104) (-191) +87 (-1.3)
1997 (-108) (-198) +90 (-1.3)
1998 (-166) (-248) +82 (-1.9)
1999 (-259) (-337) +78 (-2.8)
2000 (-373) (-447) +74 (-3.8)
2001 (-362) (-422) +61 (-3.6)
2002 (-419) (-475) +56 (-4.0)
2003 (-494) (-542) +48 (-4.5)
2004 (-610) (-665) +55 (-5.2)
2005 (-714) (-783) +69 (-5.7)
2006 (-762) (-838) +76 (-5.7)
2007 (-705) (-821) +116 (-5.0)
2008 (-709) (-832) +124 (-4.9)
2009 (-384) (-510) +126 (-2.7)
2010 (-495) (-649) +153 (-3.4)
2011 (-550) (-741) +191 (-3.7)
2012 (-537) (-741) +204 (-3.3)
2013 (-461) (-701) +239 (-2.7)
2014 (-490) (-750) +260 (-2.8)
2015 (-499) (-762) +263 (-2.7)
2016 (-503) (-750) +247 (-2.7)
2017 (-550) (-805) +255 (-2.8)
2018 (-628) (-887) +260 (-3.0)
2019 (-655) projected (-3.1)
As you can see, over the last 43 years the United States has never had a trade surplus. If we compare that to the previous years of 1901-1975 we see a rather disturbing trend. From 1901-1975 the United States had 72 years of trade surpluses and three years of trade deficits. This comparison is charted below, which shows clearly the changes that have occurred.
Year’s % in Surplus % in Deficit
1901-1975 96% 4%
1976-2019 0% 100%
This change is one reason why the United States, which was the largest creditor nation in the world in 1978, became the largest debtor nation by 1985. (The other major reason was the large fiscal deficits of the Federal Government during the early 1980’s.) We are now the largest debtor nation in the financial history of the world. (Japan is currently the largest creditor nation in the world with a $3 trillion dollar surplus.)
We have only been able to do this because the United States dollar is considered the Reserve Currency of the world and foreign investors and nations trust the continued value of the U. S. currency.
During all of the 20th century the United States was the largest exporter of goods and services in the world. (It’s been only in the last 43 years that we have imported more than we exported.) But, in 2003 Germany passed the United States as the largest exporter in the world. This is rather troubling that a nation of 82 million people can out-export a nation of 325 million. In 2010, China passed Germany, moving the United States to third place. We were able to capture the number two spot in 2013.
Looking back over our data we see two periods in which our trade deficits declined; the first, 1987-1991 and then again in 2007-2009. These declines were for two completely different reasons. By 1985, the United States trade deficit had grown so large (it had risen to 2.9% of GDP or about $122 billion deficit) that it was troubling to the Reagan Administration, thus led to the signing of the Plaza Accord in September of that year. The aim of this agreement was to raise the value of the Japanese Yen, the German Mark, and the English Pound; this was to make United States-made goods more competitively priced on the world market. This Accord was very successful; it raised both the value of the German and Japanese currency by nearly 55% compared to the United States dollar. (England had to drop out of this agreement because of their own economic problems.) This temporarily gave United States-made goods a boost on the global market. It eventually severely damaged the German and Japanese economies (but that is another story). Since it takes over a year for any change in the value of a currency to affect the level of trade, it wasn’t until 1987-88 that we see a correction in the United States trade deficit. In 1991 we came extremely close to having a balance in trade. (The deficit was about 0.5% of GDP or about $31 billion.)
The second trade deficit decline between 2006-09 was caused by the severity of the world-wide recession, which affected all trade between nations. In the United States we see a drop in consumers’ wealth, which then caused a decline in imported consumer goods and oil imports (because of less consumer driving and lower price of imported oil). An interesting fact that is buried in trade statistics that doesn’t get much notice is the very positive trend in the oil production area of the United State economy and how this did not help our trade deficit. In 2005, oil and petroleum-product imports rose to a record of more than 13 million barrels a day; and in 2009, (trade deficit that year in goods and services was $384 billion.) nearly half of our trade deficit was caused by $20 billion a month in the importation of petroleum to the United States. Since 2005, oil production in the United States has steadily increased because of new drilling of shale oil and new technology of fracking. In November of 2018, we began for the first time since 1973 to be a net exporter of oil. This should have improved our balance of trade by $240 billion a year; rather we began to import more and more finished goods and consumer goods. Starting in 2013 our deficit has grown each year from $461 billion to $655 billion in 2019. This gave the United States a temporary reprieve, but as we can see as the economy improved in the United States we went back to a growing trade deficit.
The problem we face with our trade deficit is that in the long-term we cannot continue to be a net importer of goods. As we have seen in the 1980’s we nearly solved our trade deficit problem by appreciating the value of our closest competitors by over 50% (which they agreed to). Probably we won’t be able to do this again. Currently, our largest trading partners are the European Union, China, Canada, Mexico, and Japan; this group represents 69% of all trade with the United States (2017). Over the past year the currencies of these nations have dropped by an average of 1.7% against the United States dollar. Given the present relationship we have with these nations, I don’t see any of them willing to do us a favor and appreciate their currency like England, Germany, and Japan offered in 1985. We could try to increase our productivity at a faster rate than our competitors; over time this would solve the trade deficit problem. But, with a truly global marketplace our advances and adjustments are copied nearly as rapidly as we make them, never allowing us to gain any real comparative advantage. The other method is lowering the standard of living and wages earned here in the United States. This would reduce the need to import consumer goods and expensive energy and lower the cost of our goods produced here. Lastly, we could depreciate our own currency; this would make our goods, which we want to sell to the world, cheaper and at the same time make our competitor goods more expensive, whereupon we would want to buy less of them. This would eventually balance our trade, as it did in 1991, but there is a catch. If the United States decides to lower the value of the dollar by 50%; currently foreign investors have purchased $6 trillion on our national debt, and we would be expecting these investors to take a 50% loss on their investment. This could lead to international investors no longer wanting to lend us the money we need to pay our bills. We would then be forced to raise interest rates to attract investors to lend us money. By raising interest rates two things happen. First, the cost of carrying nearly $23 trillion in debt would become vastly more expensive and, secondly, bring on a recession that would rival the “Great Recession” of 2007-09!
“Trade wars are easy to win.” This statement kind of sums up the misguided approach this administration has taken when it comes to a trade policy for the United States! The current administration seems to think the trade deficits are proof of unfair trade agreements and nations taking advantage of the United States. Since the publication of “Wealth of Nations” in 1776 by Adam Smith the idea of “mercantilism” (A nation’s wealth is the amount of gold and silver it owns.) has largely been left on the trash heap of bad ideas. Smith explained that it is the ability of people to produce products and trade in free markets that creates a nation’s wealth. Over the past 240 years every mainstream classical and modern economist agrees that free trade benefits all nations that engage in it.
The present administration has offered no evidence, proof or stated exactly what unfair action that dozens of nations have engaged in, whereby taking advantage of the United States. The idea of raising tariffs to protect domestic markets is government trying to pick winners and losers in the marketplace, and that is never a good idea. Raising tariffs and quotas on goods has never been shown to work or correct trade deficits. We can look back at the Smoot-Hawley Tariff Act of 1930, and see how this Act helped make the Great Depression worse and set back free trade for nearly 20 years. We need to realize that the greatest economic expansion, occurred in the United States between 1950 to 1980 and it was during this period that we championed the lowering of tariffs and trade barriers throughout the world. For most of those years we had trade surpluses here in the United States.
Presently neither political party seems to have an answer to this problem. In fact, since the present administration started talking of trade wars and how easy they are to win, our trade imbalance has worsened by nearly $150 billions a year over the last three years. Until we lower the cost of doing business in the United States we are not going to lower our trade deficit, in the long-term. We need to lower our cost of healthcare, education, tax code, and the judicial system, or the trade deficit will continue to be a part of the economic difficulties here in the United States. If the United States ever gets to a trade deficit of between 6 and 7% of GDP, if economic history as our guide, probably the marketplace will force the United States to change. This change will be the rapid decline of the U.S. dollar, forcing us collectively to have a lower standard of living.
FISCAL POLICY EXPLAINED
Fiscal Policy is the use of government spending and taxes to influence the nation’s output, employment, and price level. Using fiscal policy to influence the performance of the economy has been an important idea since the Keynesian Economic Theory was first introduced in the 1930s. In the simplest explanation, the federal government spends more money or cuts taxes to allow citizens to spend more money to help a nation avoid or to get out of a recession. Both methods increase spending by increasing annual budget deficits and adding to the national debt. Since the United States normally has budget deficits, the larger the budget deficit the greater the stimulus to the nation’s economy. Listed below is the United States budget deficits over the past 19 years. Also included is the actual increase in the national debt and the growth in the economy as measured by the growth in GDP. Please note: because of the budget cycle of the United States that starts on October 1st of each year and ends September 30th of the following year, every president passes on to the next president a budget that they have little control over. The first real budget any president offers is the budget that starts 8 months after they take office. The federal budgets and deficits below reflect that reality. The national debt at the end of the fiscal year 2001 was just over $5.8 trillion, about 55% of GDP, by the end of the fiscal year of 2019 it had grown to over $22.7 trillion or just over 106% of GDP. During the fiscal year of 2001 we paid out $360 billion in interest payments on our outstanding national debt; by the fiscal year of 2019 we paid out $575 billion in interest payments.
FEDERAL OFFICIAL BUDGET DEFICITS, ACTUAL INCREASE IN NATIONAL DEBT AND GDP GROWTH FOR NINETEEN YEARS
Because Linkin does seem to handle columns of information well-listed below are the column heads in order
Year, Official budget Balance, % of GDP, Actual increase in National Debt, % of GDP, Growth of GDP.
William J Clinton’s last year budget
2000-01 +$128.2 billion (+1.2%) (-$133.3 billion) (-1.2%) 1.0%
George W Bush’s eight budgets
2001-02 -$157.8 billion 1.4% $420.7 billion 3.8% 1.7%
2002-03 -377.6 billion 3.2% 555.0 billion 4.8% 2.9%
2003-04 -412.7 billion 3.3% 595.8 billion 4.9% 3.8%
2004-05 -318.3 billion 2.4% 553.7 billion 4.3% 3.5%
2005-06 -248.2 billion 1.8% 574.3 billion 4.2% 2.9%
2006-07 -160.7 billion 1.1% 500.7 billion 3.5% 1.9%
2007-08 -458.6 billion 3.1% 1.017 trillion 6.9% -0.1%
2008-09 -1.412 trillion 9.7% 1.885 trillion 13.1% -2.5%
Barack H. Obama’s eight budgets
2009-10 -$1.294 trillion 8.5% $1.652 trillion 11.0% 2.6%
2010-11 -1.300 trillion 8.2% 1.226 trillion 7.9% 1.6%
2011-12 -1.077 trillion 6.6% 1.276 trillion 7.9% 2.2%
2012-13 -679.8 billion 4.0% 672 billion 4.0% 1.8%
2013-14 -484.8 billion 2.7% 1.086 trillion 6.2% 2.5%
2014-15 -442.0 billion 2.4% 762.7 billion adj 4.1% 2.9%
Republicans take control of both the House and Senate
2015-16 -584.7 billion 3.1% 986.7 billion adj 5.3% 1.6%
2016-17 -665.4 billion 3.3% 909.2 billion adj 4.6% 2.2%
Donald J Trump’s first two budgets
2017-2018 -779.1 billion 3.7% 1.034 trillion adj 5.2% 3.1%
2018-2019 -984.0 billion 4.6% 1.171 trillion 5.4% 2.3% est
There is a lot of information here to absorb, let me point out the background information and the important facts. First, this information comes from three different governmental agencies; the Department of the Treasury, the Congressional Budget Office (CBO), and the Bureau of Economic Analysis (BEA). The CBO is the agency that reports on the total revenue and expenses each year and then what the “official” budget deficit is for that year. This seems pretty straightforward, but the government keeps two sets of books. The official budget includes all revenue from any source, including those that are designed to trust funds that the government has set up for particular purposes; the largest of these is the Social Security Trust Fund. Department of the Treasury collects all payroll taxes and then deposits them into the Social Security Trust Fund; it then immediately borrows those funds and leaves an IOU with the Social Security Trust Fund. This debt then doesn’t show up on the CBO books. As of the end of the fiscal year 2018, the Department of the Treasury had borrowed a total of $2.894 trillion from Social Security, leaving an IOU in its place, which is then added to the national debt. This is why you see in nearly every fiscal year the national debt has increased by a greater amount than the “official” budget deficit for that year.
Looking at our data it is the last two columns that are the most important. By comparing the actual debt increase measured by GDP, and the growth in GDP, we see that over the last 19 years there hasn’t been a single year where the economy grew faster than the growth in the national debt. From the end of the fiscal year of 2000 to the 2nd quarter of 2019 the growth in GDP was 104% and during the end of the fiscal year of 2000 and 2019 the growth in the national debt was 298%. In the very simplest of terms, for every dollar of growth in GDP, it cost the United States $2.86 in new debt. Most economists today would agree that this can’t go on forever!
DEVELOPED NATIONS WITH THE LARGEST DEBT BY GDP-Oct 2019 (or latest)
Percentage $ Amount 10yr Bond Yd
1. Japan 256% $ 9,751,000,000,000 (-.13%)
2. Greece 198% $ 406,000,000,000 1.22%
3. Italy 146% $ 2,924,000,000,000 0.98%
4. Portugal 141% $ 313,000,000,000 0.2%
5. United States 106% $22,943,000,000,000 1.84%
Listed above are the most indebted developed nations in the world, by percentage of debt in relationship to Gross Domestic Product (GDP). Included is the 10-year government bond yield for each country, which is a good measure of how risky the market believes each country’s debt load is and its ability to pay interest and that debt.
Please note that the United States pays the highest interest on its ten-year bonds in this group of countries. There are several reasons for this: In Japan almost all of their debt (93%) is held by domestic savers; they do not have to go out into the international marketplace to finance their debt. In Greece, Italy, and Portugal their debt is backed by the European Central Bank (ECB) and currently is it offers a negative yield on their debt. (In other words, investors are paying to loan money to the ECB.) On the other hand, the United States must rely on the international marketplace for financing; about 30% of our debt is owned by foreign investors and we need to attract them by offering higher interest rates than other countries. Also, the size and how rapidly our debt is growing is staggering; currently we are increasing our debt at $100 billion per month.
This would be normal if we were in the middle of a recession, but we are not. It’s also important to note that currently because of the size of our debt and the interest we are paying, that 48 cents of every new dollar of debt we create is to pay for the interest of our previous debt that we issued. This is like a person borrowing money from their credit card to pay the interest on last month’s balance; this can’t go on!
Christian M. Staples
756 Worden Avenue
Kalamazoo, MI 49048
3430