Trade Deficit Threatens a Second Recession
Bio: Economist
and professor
The following article originally appeared on UPI.com.
Thursday, the U.S. Commerce Department will report the January deficit on international trade in goods and services. Analysts expect it to increase to $41 billion from $40.2 billion in December. My forecast for January is $41.5 billion.
The trade deficit, along with the credit and housing bubbles, was among the principal causes of the Great Recession. Now, a rising trade deficit and continued weakness among regional banks threaten to stifle the emerging recovery and keep unemployment near 10 percent through 2011.
At 3.1 percent of gross domestic product, the trade deficit subtracts more from the demand for U.S.-made goods and services than U.S. President Barack Obama's stimulus package adds. Moreover, Obama's stimulus is temporary, whereas the trade deficit is permanent and growing.
Subsidized manufactured goods from China and petroleum account for nearly the entire deficit and both will rise as consumer spending and oil prices rise through 2010.
Money spent on Chinese coffeemakers and Middle East oil cannot be spent on U.S.-made goods and services, unless offset by exports.
When imports substantially exceed exports, Americans must consume much more than the incomes they earn producing goods and services or the demand for what they make is inadequate to clear the shelves, inventories pile up, layoffs result and the economy goes into recession.
From 2004-08, the trade deficit exceeded 5 percent of GDP and Americans borrowed from abroad to keep the economy going. To consume more than they produced, they posted as collateral overvalued homes financed on shaky mortgages. When mortgages and banks failed, home prices and retail sales tanked, the shortfall in demand for U.S.-made goods and services drove up unemployment, further choked consumer and investment spending and thrust the economy into the worst recession in 70 years.
Now huge federal stimulus spending is required to resuscitate business activity. However, as the economy recovers the trade deficit on oil and with China will grow, taxing demand for U.S. goods and services. Once that money is spent, demand for American products will fall and the economy will be at risk of a second recession.
Obama ignores the fundamental causes of trade deficit; consequently, his policies to fight the recession will deliver only a moderate recovery in 2010. Imports of oil and Chinese consumer goods will rise as the economy recovers. As stimulus spending runs out, the escalating trade deficit will push the economy down again and threatens a second recession -- the feared "W"-shaped recovery.
So far, the Obama administration has not challenged Beijing's most protectionist policies -- large government purchases of U.S. dollars that drive down the exchange rate for the yuan, subsidize Chinese exports and artificially elevate Chinese savings and suppress U.S. savings. The China-U.S. savings imbalance is not entirely a natural phenomenon rooted in consumer behavior.
Industrial policies to promote green industries championed by Obama will create jobs numbering in the thousands and will hardly replace the millions lost to the trade deficit. Green jobs are not a realistic prescription to resolve what are macroeconomic and systemic problems -- the overvalued dollar vis-a-vis the Chinese yuan and the inability of the World Trade Organization and International Monetary Fund to discipline and end China's predatory currency and trade polices.
In 2010 the trade deficit is slicing $400 billion to $600 billion off GDP and, longer term, it reduces potential annual GDP growth to 3 percent from 4 percent.
Manufacturers are particularly hard hit by subsidized imports. Through recession and recovery, 6 million manufacturing jobs have been lost since 2000. Following the pattern of past economic expansions and business cycles, the manufacturing sector should have retained about 3 million of those jobs, especially given the very strong productivity growth accomplished in recent years.
The trade deficit is the single most important reason why the private sector has failed to add a single job since 1999.
Thanks to the record trade deficits accumulated over the last 10 years, the U.S. economy is about $1.5 trillion smaller. This comes to about $10,000 per worker.
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This Work, Trade Deficit Threatens a Second Recession, by Peter Morici is licensed under a Creative Commons Attribution-No Derivative Works license.
Copyright © 2010 Peter Morici
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- I would make sure no high
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18 hours 47 min ago
The recession was already causing adverse selection in health insurance due to the fact that healthy people have been dropping coverage and less healthy people have been hanging onto coverage (i.e. note recent rate increases of near 40% in California and ?% in Illionis - more of that on the way).
Recessions are always problematic in terms of adverse selection. Add to this:
New mandates for coverage begining immediatelty in the new healthcare bill forcing insurers to cover things they wouldn't otherwise cover.
New taxes from the new healthcare bill (effective 2010).
Commercial real esatate re-sets coming soon.
End of the Bush tax cuts in 2011.
The recession will continue. More people will drop coverage. High claim insureds will hang on as long as possible and rates will death spiral upward.
How will this not cause the "evil" health insurers (who operate on a very thin margin anyway) not to collapse? The government does not have the infrastructure in place to accomodate the administration of health insurance.
End result, health insurers will go the way of GM and Chrysler. They are too big to fail and will be sucked into the government via new bailouts. You can't just have them fail, right? $14 trillion debt and now this? I'd like one rational explanation how such a collapse doesn't happen.
Are the windmill components, and solar panel components, which are now being produced in China, part of the "green job" strategy?
Will the guys who gather the dead eagles and hawks from under the windmills be counted among the "green jobs?"
Will the guys who clean the bird poop off the solar panels (which stops them from generating electricity) be counted among the "green jobs?"
Can anyone tell me the payback period for a windmill? For a solar panel? (Please show your calculations.)
The old, the new, and the future, super high-tech nano-bio-whatever jobs are all going to China and India -- green or otherwise, with the exceptions I have noted above.
Why does anybody believe that the US government will be able to continuously borrow enough of the US dollars (that US citizens paid foreigners to make the imported US consumer goods that we consumed) back from China, India, Pakistan, Brazil and the other foreign industrial nations to pay US medical doctors, nurses, hospitals, clinics, laboratories and medical technicians with these borrowed US dollars to provide government bureaucrat payrolls, free medical care for all US citizens, for job stimulation spending to temporarily pay unemployed US citizens for digging holes today and then re-filling the same holes tomorrow, construct pork barrel projects, free educations, subsidized housing, humanities, art, music, writing poems, all sorts of make-work schemes, entertainment, wars, social entitlements, welfare, healthcare, environmental clean-ups, and/or similar things that do not contribute positively to our negative foreign trade balance.
I hope that our US government does not make Communist China and/or any of the other industrialized nations mad, because they might not loan our US government any more US dollars to pay for our US government expenses.
But wait a minute, these industrialized nations do not loan the US dollars that US citizens paid for the imported products that US citizens consumed back to the US government, these industrialized nations buy freshly printed paper US bonds at Federal Reserve Auctions (at a discounts less than face value and/or present worth) in return for the US dollars that they earned buy making and selling consumer goods to US citizens.
But wait another minute, these freshly printed paper US Bonds and other security instruments that the US government printed on fresh paper and then sold to people in industrialized nations HAVE ABSOLUTELY NO VALUE, except that they are redeemable for title to privately owned businesses, factories, casinos, hotels, farms, land, ports, breweries, refineries, forests, ports, breweries, refineries, and other privately owned assets located in the USA that were created by previous US generations instead of redeeming these US dollars with Gold from Ft. Knox. The US Government only has $11B of gold left in reserve at Ft. Knox according to the AP Dec. 21, 2009, 3:44PM.
After the industrial foreign entities have redeemed their freshly printed paper US Bonds for title to everything of value in the USA, these foreign industrial entities will not buy any more of these freshly printed paper US Bonds, or they will only pay a tiny fraction of a penny on the dollar for these freshly printed paper US Bonds. This will cause the US dollar to lose all of its purchasing power, and then your life savings in US dollars might only last you a few weeks, and your paycheck might only buy one loaf of bread!
If the USA could re-industrialize, make the things that we consume, export some of the things that we manufacture, then the USA would not have to borrow US Dollars back from the industrialized nations for US government expenses, but re-accumulate the gold reserves in the US treasury at Ft. Knox, pay off the US bonds that we printed, and also have the resources to expand Government to provide Healthcare Benefits, Unemployment Benefits, and other benefits with the income taxes provides by fuller employment with the industrial manufacturing jobs that the USA would re-create. We probably do not have any technology base available even if the USA did decide to re-industrialize to reduce or eliminate unemployment.
Over the past few decades, both political parties of the US government has decided to destroy our manufacturing capability with "Free Trade" legislation and also destroy the US manufacturing capability and destroy the database of technically oriented people that won WWII and created the economic power that the USA enjoyed for a few decades after WWII. Maybe we can no longer re-industrialize without the human technical database that we destroyed.
Both political parties of the US government have created our current non-producing lifestyles by allowing the trading of US located private assets (that were created by past generations) to pay for our imported products and imported commodities that we consumed, with the resulting massive US factory closings and the massive US job and title to US assets paid to foreign countries. This is instead of US citizens being employed to manufacture the things that US citizens consume. The US future is bleak, unless we change our educational, environmental and foreign trade priorities.
The US government is also going to have to start printing and selling these freshly printed US T-Bills, US Bonds, and other WORTHLESS FINANCIAL INSTRUMENTS to foreign industrial manufacturers FASTER AND FASTER AND AT GREATER AND GREATER DISCOUNTS FROM FACE VALUE in order to get enough foreign held US dollars (that will be declining in purchasing power) back from foreign manufacturers in sufficient quantity to pay for the growing US government expenses that are in excess of our US federal government tax collections.
US citizens have elected congressmen that spend our hard earned inheritance for government expenses that are in excess of the dollar amount of taxes that the US citizens paid plus to pay for imported consumer products instead of US citizens working to produce the things that US citizens consume. This is sort-of like selling our body parts to keep from working!
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