Trade gap widens to record $68.9 billion

[Sean]

http://money.cnn.com/2005/12/14/news...ex.htm?cnn=yes

WASHINGTON (Reuters) - The U.S. trade deficit widened unexpectedly in October to a record $68.9 billion despite a drop in the cost of imported oil, as the deficits with China, Canada, the European Union, Mexico and OPEC all hit records, government data showed Wednesday. Economists surveyed by Briefing.com had expected the trade gap to shrink in October to $62.8 billion, and the surprising growth in the imbalance suggests fourth-quarter economic growth will likely be even weaker than first thought. The Commerce Department said the deficit widened 4.4 percent from September after growing 11.9 percent the previous month. Imports of goods and services rose 2.7 percent to a record $176.4 billion while exports increased a smaller 1.7 percent to $107.5 billion. While oil import prices declined in the month to an average $56.29 per barrel, the volume of crude imports surged 9.3 percent, driving the value to $17.1 billion, the second-highest on record. Imports of energy-related petroleum products, a wider category that includes propane and butane, hit a record $26.2 billion. Imports of industrial supplies and materials and automotive vehicles and parts rose to records in October. Imports of consumer goods also climbed, while decreases occurred in foods, feeds and beverages and capital goods. Trade through hurricane-damaged Gulf ports picked up in October. Imports rose $3.6 billion while exports climbed $1.3 billion, on a non-seasonally adjusted basis. The politically sensitive trade deficit with China widened 2.1 percent to a record $20.5 billion as imports from that country rose 4.8 percent to $24.4 billion. The increase in the deficit with China came despite a 10.9 percent drop in textile imports in October. Washington and Beijing reached a deal last month to rein in China's surging clothing and textile exports to the United States through 2008. Textile imports from China are up 47.6 percent so far in 2005 compared to 2004. The deficit with Canada, Mexico, the European Union and OPEC countries also widened to record levels. Ten months into the year, the overall trade deficit reached $598.3 billion, just $19.3 billion shy of the record $617.6 billion deficit set in 2004.

So can anyone explain to me, who is extremely curious about this, how GDP growth counters troubling stuff like a growing trade deficit and a national debt?

[bishop]

in our economy, higher gdp growth pretty much always coincides with a larger trade deficit - because 2/3 of the economy if fueled by consumption and we import more than we export.

and federal spending contributes to a larger GDP figure. lowering federal spending would decrease our GDP. this is why we had big GDP growth in 2001-2002.

GDP is simply a statistic, you can't directly influence it, but you can influence spending and trade policies.

[Capitalist Pig]

Quote by: bishop in our economy, higher gdp growth pretty much always coincides with a larger trade deficit - because 2/3 of the economy if fueled by consumption and we import more than we export.

And that's a curious thing, isn't it? Because there is no such thing as a trade imbalance. This is evident from the very definition of trade; a mutual exchange of value for value. The way trade imbalances are deduced is by focusing on just one side of a transaction.

For example, if Country Y exports more to Country X than Country X exports to Country Y, Country Y is said to have a trade deficit, and Country X is said to have a trade surplus. This is stupid because it does not regard the monetary value of what was traded. Another way to invent trade imbalances is by focusing on just the monetary transactions. If Country X pays more for goods imported from Country Y than Country Y spends on goods exported from Country X, a trade imbalance is said to exist. It does not regard what was traded for the money.

For anyone interested in more on the myth of trade imbalances, see this article.

[bishop]

well, it all depends on how you choose to define what a trade imbalance constitutes.. i would err against calling it a myth simply because that implies that there is no real problem. there is a problem.

for all economies except our own, the existance of a current account deficit places the economy at significant risk. many developing countries, mexico for example, have experienced major problems when capital flight occurs. we experienced capital flight prior to 9/11, as foreign investors cashed out of their investments. this precipitated the bursting of the bubble.

so, you could call it a myth, or not, but the fact remains that trade imbalances (or whatever you'd call them) do have big impacts on economies. for us, the continuation of our trade deficit means that we need to continually borrow more money from foreign countries. that's not exactly great for our national security - but sadly, a scant few people in this country (and on this forum) understand the implications of huge budget and trade deficits.

the longer the deficits persist, the faster the gdp will need to grow just so that we can break even. if you like, i can host a detailed table that would highlight what the future could look like.


also, a buddy of mine has an essay i wrote on his website..

http://www.sheikyerbouti.com/eds/bis...editorial.html

[Apeman81]

Wonderful to see the "trade deficit" discussed without the Chicken Little wailing some prefer.

Do you want to pay for the imbalance by a higher cost of living? We buy at the best price, which very often involves foreing manufacture. So be it

[bishop]

that perspective is not something that can last in the long-term.. to use a metaphor, it's nothing more than selfishly eating all the food so that there's nothing left for other people to eat (i.e. future generations)..

there is mathematical proof that can show that our current trade behavior cannot be maintained in the long-term. it isn't even likely that it can survive more than 50 years.

the lower cost of living we have now is all but an illusion, because we have to pay the debts incurred when we run a trade deficit. interest payments will continue to grow to the point where we'll begin to have to make serious spending cuts simply to pay our debts.

[Roberto]

Quote by: Capitalist Pig there is no such thing as a trade imbalance...

Well, sort of, but there are a number of big potential problems. The imbalance has to be paid for somewhere. The party with the surplus has the power to re-invest where she wants, if she buys US assets that means control of US assets is going to foreigners. If she buys non-US assets, America has to replace that capital through productivity.

To say “None of this matters” is short sighted.

[Roberto]

Quote by: bishop the lower cost of living we have now is all but an illusion, because we have to pay the debts incurred when we run a trade deficit. interest payments will continue to grow to the point where we'll begin to have to make serious spending cuts simply to pay our debts.

The fit will eventually hit the shan. And a lot sooner than 50 years. The most likely way the Americans will get out of this fiscal hole is through inflation. It will be very painful.

[bishop]

you're right.. i simply used the 50 year number to serve as a benchmark for the brick wall we're about to face.

(hopefully i'll get the energy to post up the projection/table tonight.)

right now, interest payments on our debts amounts to about 2.4% - 2.8% of GDP.. assuming that the current account trend continues as it has been, interest payments would amount to 50%, 50 years from now.. there's no way we would devote such a huge portion of our national wealth to pay off our creditors..

sadly, i don't see any sign of our situation improving in the foreseeable future.. so who the hell knows what will happen in the coming years.. 20 years from now, interest payments will amount to 13.5% of GDP, which is also as crippling as the 50-year figure - especially when you take into account the structural problems in social security and medicare (which aren't accounted for in my model).

[Sean]

What forces us to pay these creditors? I am a little ignorant when it comes to the scale of the national debt. Also, any suggestions on good overviews of the subjet (either books or sites).

[bishop]

the forex (eg. currency) market would eat us alive..

some $2 trillion is traded every single day - that's over 45 times the trading volume seen in the nyse.. failure to pay our debts would cause debt holders (typically foreign national banks) to dump their dollar assets as fast as possible.. we'd probably see many (heavily indebted) hedge funds collapse overnight. and the effect of all this would cause hyperinflation worse than what germany experienced prior to ww2.. it's probably also cause serious problems in all countries that have a trade surplus with us, and potentially spark a world war..

i've been reading economics books/papers for years, but a good book to start with would be the "global political economy" by robert gilpin. although, that book alone doesn't really touch on the current account deficit and all of its rammifications. the fed has written a lot on that subject though... greenspan's work is the best imo, but you have to read it many times translate every paragraph into simple english in order to understand what he's saying. much of what i'm saying about the current account problem i've learned from deciphering greenspan's writings - although these views aren't solely held by greenspan (they're mainstream)... be it good/bad, greenspan has the most to the point analysis of the current account, even if it's so difficult to understand what he's really saying.

[SteveA]

Quote by: Capitalist Pig And that's a curious thing, isn't it? Because there is no such thing as a trade imbalance. This is evident from the very definition of trade; a mutual exchange of value for value. The way trade imbalances are deduced is by focusing on just one side of a transaction. For example, if Country Y exports more to Country X than Country X exports to Country Y, Country Y is said to have a trade deficit, and Country X is said to have a trade surplus. This is stupid because it does not regard the monetary value of what was traded. Another way to invent trade imbalances is by focusing on just the monetary transactions. If Country X pays more for goods imported from Country Y than Country Y spends on goods exported from Country X, a trade imbalance is said to exist. It does not regard what was traded for the money. For anyone interested in more on the myth of trade imbalances, see this article.

Quote by: Apeman81 We buy at the best price, which very often involves foreing manufacture. So be it

I think these quotes sum up my view on trade deficits rather well.

Personally, I dislike using credit and never buy things I can't afford to pay for up front. So I don't feel responsible nor liable for public deficits. (Private debt is a different of course because it's incurred on a voluntary basis) We've already given

Quote by: Sean What forces us to pay these creditors? ...

All investments involve some risk and that includes credit extended to governmental bodies as well. If our government blows a lot of money and goes bankrupt, I assume these 'investors' will be out of luck as well.

the U.S. government won't really go bankrupt but the dollar can drop significantly in value, which is similar but the value comes from those who were holding/saving dollars. During the Vietnam war we had a very large drop in the value of the dollar and it wouldn't be hard to create a long list of failed currencies throughout history.

Quote by: bishop in our economy, higher gdp growth pretty much always coincides with a larger trade deficit - because 2/3 of the economy if fueled by consumption and we import more than we export.

Economies aren't fueled by consumption - consumption is burning the fuel - production is what fuels the economy. Of course you want to produce things that will be utilized though but what really fuels the economy are capital investments and other beneficial forms of savings.

For example, if you look at how any business or household works, it's not really any different than an entire country except for the scale. The overall welfare of a business or home isn't in how much value can be consumed, but how much tangible value is created and maintained/saved/utilized. So eating all the food in the cabinets doesn't make you better off in the end, growing food instead improves the overall situation, so it's production that improves the economy and lowers prices and reduces debts. Increases in production aren't possible when levels of consumption are so high that there's little to spare to invest in long term improvements/capital investments. Savings in itself doesn't power an economy, but investing savings in production does.

[bishop]

Quote by: steve Economies aren't fueled by consumption - consumption is burning the fuel - production is what fuels the economy. Of course you want to produce things that will be utilized though but what really fuels the economy are capital investments and other beneficial forms of savings.

some people, like myself, include capital investments as being part of the broad term - consumption. there is a real term in economics called "capital consumption"..

also, there's evidence that increases in consuming goods & services tends to correlate with increases in investment. and since the two are so closely related, economists have constantly had to play the chicken and egg game - e.g. what fuels growth? consumption or investment?

i tend to believe that investment is what starts growth at the outset, but once things get rolling, future growth depends on consumption.

[Roberto]

Quote by: bishop some people, like myself, include capital investments as being part of the broad term - consumption. there is a real term in economics called "capital consumption"..

Capital is consumed in the sense that capital goods require replacement.

I don’t know what the agenda is of the guy who wrote the article that Capitalist Pig posted. He’s clearly not an idiot, so why he writes such a shallow and misleading article is beyond me. “You buy more form the grocery store than they buy from you, and that’s not a problem. Ergo: account deficits are not a problem.” What a load!

[bishop]

i don't want to get hung up on terminology, but just so we're all speaking the same language, this is the definition of capital consumption:

The amount of money which must be withdrawn from annual gross income and reinvested to replace the capital used up in production. The reinvestment, however, need not be in the "used up" assets.

this term shows steve's comments about consumption to be technically inaccurate - which was why i decided to bring "capital consumption" into play.

[SteveA]

Quote by: bishop The amount of money which must be withdrawn from annual gross income and reinvested to replace the capital used up in production. The reinvestment, however, need not be in the "used up" assets.

This simply references what the costs would be to maintain production capabilities. Production capabilities degrade, if these costs aren't paid, but that requires an investment to maintain it. Again, capital consumption, as other forms of consumption is using up a resource, and not beneficial in itself. The definition even specifically says this and indicates that there's no guarantee anyone will replace this consumption of capital.

The chicken and egg scenario is cleared up when you look at supply and demand instead of production and consumption. Demand seems to be the initiating force - some people want something - then investments occur to producting it and create a supply. Generally we consume most of the supply, which doesn't provide any long term benefit but fulfills a short term desire but what really fuels growth is reinvesting savings in additional production capabilities (i.e. capital investments).

But I do agree that in the end, a measure of economic performance is how much consumption can be supported, but that's still not the same as consumption fueling growth. Consumption is consuming/using up/losing something and has no benefit in itself.

[SteveA]

Take a simple example of filling up a gas tank for your car - that's consumption of gasoline but an investment into transportation. The consumption is a negative but the investment is a positive thing. Things only grow when the benefits of investments outweigh the costs of consumption.

In that example you could increase consumption by reducing the efficiency of the car, so you use more gasoline - lowering your gas mileage. Some people might see that as increasing demand, which raises gasoline prices and creates more petroleum jobs and so 'fuels' an economy but that's a false representation as it ignores the fact that no additional value would be created by this. The gasoline wasn't valuable in itself, it's the transportation that's valuable. Reduced gas consumption would place less burden on this consumable and give others who would be working to supply this additional time or resources to invest in other things instead. Of course this requires an alternate investment into making the car more efficient, so there's a tradeoff that's ideally accurately reflected in market costs.

[bishop]

Quote by: steve But I do agree that in the end, a measure of economic performance is how much consumption can be supported, but that's still not the same as consumption fueling growth. Consumption is consuming/using up/losing something and has no benefit in itself.

well, investment doesn't have any benefit in itself either.. investment is only beneficial if it results in consumption. suffice it to say, there is no correct perspective on this specific "chicken/egg" topic.

i really wish there was more literature out there that provides solutions to the current account problem. it's really difficult to think of solutions that the public, both consumers and investors, would readily accept - not to mention politicians. amazing that even at the fed, where they have loads of phd's doing research, nobody has really put forth any real proposed solution that people can analyze.

[Roberto]

Quote by: bishop there is no correct perspective on this specific "chicken/egg" topic.

Yes, the supply side argument holds water too. But this is getting slightly off topic.

The issue is the trade gap. Sure you can buy more from your grocer than he buys from you, but you need to have income to do that. In an individual’s case productivity may not be related to income, ie he might have very low productivity but keeps his job because his Uncle is the boss.

But for a country the deficit must be filled by a loan that will increase productivity in the future, or transfer of assets. This is one of ways Americans have been able to ride the gravy train for so long, they are selling off the farm, literally, piece by piece. Luckily it’s a huge farm, but that doesn’t mean it’s infinite.