[promoted by BooMan]

It is in the nature of people and organisations to strive for greater things. But other than in the sense of sheer growth and bulk, it’s doubtful anyone could employ the word great, or any variant thereof, to describe the US trade deficit.

Yes, it’s another month, and another record, an occurrence that has taken on the regularity of Babe Ruth home runs, an evil Babe Ruth, who bats bags of money out of the park and over the border. This particular bag, the January one, contained no less than $68.5 billion. That’s a lot of hot-dogs and Havanas.

The U.S. trade deficit swelled to a record $68.5 billion in January, as America’s ravenous appetite for foreign goods hit new heights and overpowered record exports, a government report showed.

The monthly trade gap widened 5.3 percent from a revised estimate of $65.1 billion in December and surprised Wall Street analysts who had forecast less of a surge.
(…)
The January trade gap followed the record annual trade deficit of $723.6 billion in 2005.

Another annual record of more than $800 billion would be set in 2006 if the trade gap continued to run at the pace set in the first month of the year.

“The trade deficit, if you can still use the term deficit to describe the GDP of a small country, just keeps getting wider. This is the Energizer bunny on steroids as it keeps growing and growing and growing,” said Joel Naroff, president and chief economist of Naroff Economic Advisors.


Governor of the Bank
of England, Mervyn King

The United States is often berated, or admired, for being a modern empire and colonial power. But it’s an odd sort of empire, one in which raw materials and capital flows out of the imperial centre, and manufactured and luxury goods flow in. It’s inverse colonialism. And it’s skewing the global trade and financial system ever more out of whack.

Bulk carriers from the Far-East are putting to port all along the Pacific coast, unloading their wares, and leaving, carrying nought but ballast, or scrap iron to be recycled back in Asia into more manufactured goods. Their only other cargo is debt instruments, lots and lots of papers marked IOU.

LondonYank cut to the heart of the matter in an article on a speech by The governor of the Bank of England, Mervyn King, in which he warned that the imbalances in the international economy are becoming a grave risk to the system.

Read carefully the speech is a stark warning that the “debt denial” of the United States poses a great risk to the world’s financial stability. Like a credit card abusing consumer who can’t control an addiction to shopping, the US is past the point where it can pay off its debts without pain to itself and its creditors internationally.

If, for some reason, the creditors supplying the capital to keep the scheme going (mainly central banks in the countries running trade surpluses vis-à-vis &The United States, which is just about all of them, other than Belgium and Australia) should tire of hoarding US treasuries and other bonds, and cut back on their purchases, or the American consumer, whose hunter-gatherer excursions to the mall now represents north of 70% of GDP, should swoon beneath the burden of their own personal debt, made possible by the housing bubble (which in turn is made possible by foreign purchases of US debt instruments keeping the interest rates down), then (pant pant!) the US economy will not be the only one to suffer.

While a collapse of the housing market and consumer-driven economy would be disastrous for many Americans, it would be no less disastrous for many Japanese, Chinese and Indians too. Many Japanese depend on their holdings of US Treasuries to finance their retirement security. China has invested billions in an industrialisation which is aimed solely at fuelling American consumption of electronics goods, clothes and other consumables. India’s economy has oriented itself toward exporting services and technology closely tied to the burgeoning service economy and financial bubble. A collapse in the USA would be felt in every part of the world, but would echo most loudly in the creditor-states in Asia.

And it’s not primarily a question of sagging exports, though US manufacturing is suffering, but sheer spending. Brad Setser goes through the numbers and finds that exports actually went up quite a bit. The only snag is that imports, both of the petroleum variety and other goods, went up at a faster clip.


Brad Setser

Exports are doing fine.  January exports are up 12% y/y.   Boeing had a good month.  And corn and soybeans seem to be flowing out of the mouth of the Mississippi to world markets again.

The argument that the trade deficit is growing because the world isn’t growing doesn’t hold water.  Right now, strong global growth is propelling strong US export growth.  Even with a stronger dollar.

But 12% y/y export growth doesn’t cut it if imports are up by about 16% y/y – and non-oil imports are up 11.2% y/y.

The real story in my book is the continued acceleration in non-oil imports.  

Consider the trend in non-oil goods imports

(I’ll try to put in a graph in a bit)

July: $116.2b (roughly the same as in the first half of 2005)
August: $117.3
September: $120.2
October: $122.3
November: $121.5
December $125.35
January: $130.1b

You don’t need to be a rocket scientist to see something of an acceleration in US imports of “tangible” goods – even leaving out oil.


Chart showing the monthly changes
in the trade deficit for the past
14 years. Associated Press Graphics

In the end the question is, do these deficits matter? Many economist, and the Vice President of The United States, would say that no, they do not. They are just a symptom of a world in which people and organisations outside of the US are saving far too much money, keeping their own economies sluggish (they aren’t spending like drunken sailors with platinum Master Cards), and want to send it to the dynamic US economy where they will be put to good use.

But a deficit is a deficit, and debt is debt, no matter the motive behind the transfer of funds. And debt is piling up. This simply is not a sustainable situation. And the longer it lasts, the greater the chance of it ending in a bad way. To quote myself, from an earlier article on this matter:

“It’s all too easy to see ways in which this will lead to future problems. Yes, it’s a nice life if you come across a bank willing to lend you far more than is warranted by your expected future income. But sooner or later that debt has to be, if not repaid, then at least serviced. And this debt is handled through the market, where pricing, in this case bond yields, are set on the margin. If buyers show up for only 95% of the bonds on offer at auction, yields will have to rise, and interest rates for both private and public debt will go up.

Yes, as in the housing market, it’s the monthly payments that matter, far more than price. But if you’re leveraged to the hilt and banking on low interest rates to keep the monthly payments down, and interest rates suddenly rise, as they do tend to on occasion, you’re all kinds of screwed on the monthly budget, whether you’re a home “owner” or the federal government.”

See you next month, when Babe goes for another humdinger.

This article is also available at Bitsofnews.com and Daily Kos.
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