American trade: hurtling towards the tipping point


How serious is America's trade crisis? The best way of framing the answer is that no great power since the last days of the Ottoman Empire has tried to project so much power abroad from such a weak economic base at home. By Eamonn Fingleton.

With the announcement of a worse-than-expected $41.3 billion U.S. September trade deficit last week, the scene is being set for a major trade crisis. Certainly the trend is little short of disastrous and, all wishful thinking in the Bush administration to the contrary, there is virtually no hope of a turnaround before the 2004 election.

The new figures mean that in September alone the United States incurred a larger deficit than in the entire year of 1992 (which, as President Bush is well aware, was the last year of his father's administration). The U.S. goods-and-services trade deficit is on track to top $515 billion for 2003.

This will represent an increase of nearly 20 percent on the record 2002 total and will be more than triple that of 1998 (which was already a disturbingly large record).

The new figures confirm that the U.S. current account deficit this year will top the psychologically important level of 5 percent of GDP. This will be the worst performance since American economic statistics were first compiled in the nineteenth century. By comparison, the notorious U.S. trade crisis of
1971-72, so well remembered by older Americans, was a mere blip. The U.S. trade deficit in 1972, at 0.5 percent of GDP, was less than one-tenth of the current level. Yet it was the prospect of a "disastrous" trade deficit in
1972 that forced President Nixon into a humiliating devaluation that severed the erstwhile "mighty" dollar's historic link with gold.

By all world standards, America's trade deficits are stunningly unsustainable. We have to go back to Italy in 1924 to find a major nation that, in percentage terms, has run a larger peacetime trade deficit. The full significance of this is that Italy in 1924 was a true economic basket case -- so much so that in January 1925, Mussolini seized dictatorial powers.

Of course, in recent years the consensus both on Wall Street and in the media has been that the trade deficits "don't matter." The economic thinking underlying this conclusion is as facile as the profits-don't-matter ethos that created the disastrous late 1990s bubble in dot.com stocks.

Why does trade matter? For a start the worsening trend has obvious and politically explosive implications for American jobs. True, most displaced workers eventually find new jobs but these are rarely as well paid.

Even if policymakers think they can continue to ride roughshod over the legitimate concerns of American workers, they will eventually be jolted out of their insouciance by a force they cannot ignore: money. The point is that the trade deficits have to be financed and the question is how long foreign investors will continue to finance America's recklessly misguided trade policies.

For every $1 of current account deficit, the United States has to sell $1 of American assets to foreigners. In the short run, the question is whether President Bush can struggle through next year without suffering a disastrous run on an already weak dollar. Such a run would raise the price of imports across the board, discomfiting American consumers and businesses alike. It would also drastically exacerbate America's problems in financing the Iraq reconstruction work and other huge foreign commitments. Perhaps most politically hurtful would be that it would almost certainly be accompanied by a shocking increase in American interest rates.

In the long run the United States faces a rapidly growing pattern of foreign ownership of key American assets. More and more U.S. Treasury bonds, for instance, are being bought by foreign financial institutions, leaving the U.S. government increasingly dependent on the whims of financial regulators in nations like Japan and China. Such erstwhile pillars of American industry as Amoco and Chrysler have been bought by foreigners. Japanese corporations have recently bought two of the crown jewels of American high technology, IBM's path-breaking disk-drive division and Lucent's optical fiber operations. Much of Wall Street is now owned by foreign capital and German corporations alone own more than 50 percent of the American book publishing industry.

In effect America is selling the family silver -- and, as profligate households have discovered down the ages, you can only sell the family silver once. Eventually there will be a reckoning as the money runs out. Within the space of a single generation America is presiding over the sell-off of much of its industrial and commercial base. Need it be added that this base required the sweat and enterprise of many earlier generations to create.

If this trend continues, the power of foreign bankers, investors, and financial regulators will soon become a dominant force in American public life. This has profound implications for everything from the level of U.S. interest rates to the way American corporations are run. Basically the issue in the long run is who owns the United States. In truth no great power since the last days of the Ottoman Empire has tried to project so much power abroad from such a weak economic base at home.

Up to a certain level, Americans will hardly notice the rise in foreign ownership -- but history in other nations shows that beyond a certain tipping point, foreign ownership becomes a bitterly hated and sometimes violently opposed intrusion on national sovereignty. It is for this reason that both Adam Smith and David Ricardo, the two founding fathers of Western economic thought, counselled that it is best for all concerned if economic assets are owned by local people. We are not at this tipping point yet but we are hurtling towards it at a frightening rate.


Eamonn Fingleton's latest book, Unsustainable: How Economic Dogma is Destroying American Prosperity, is being published this month by Nation Books. His 1999 book In Praise of Hard Industries: Why Manufacturing, Not the Information Economy, Is the Key to Future Prosperity, foreshadowed the dot.com collapse.

I guess this fits in perfectly with Governments seeming total disinterest in controlling immigration or our borders.

We’re are rapidly losing the battle to maintain our status as a sovereign nation.  The socialists in power and those that support them are pushing us towards “One World”.  They have no idea what the world (and themselves) are about to lose in this process.

Last days of Rome, anyone?  I sure as hell feel like I’m living them.

Yep.

I can almost hear Nero fiddling while Rome burns.

(sigh...)

Talking to my bro yesterday about the same thing, all I kept thinking about is, "I'm on a giant ship, heading for a colossal iceberg, and there is not one damn thing I can do about it but enjoy the ride."

[i]HE[/i] sold all his worldly goods and entered a seminary in Austria. That's how serious he is taking it.


sigh...again

- LS

Over the past 30 years, I've heard the exact same thing being railed about.  Just like "We're running out of oil" or "We're running out of water", etc.

Bad news makes people read, and most people would rather think the worst than think that things are going OK.

As for me?  I'm happy, in shape, have a great job, and looking forward to the future with a smile.  This sort of news makes me shake my head and be glad I'm not such a pessimist.

I’m not contemplating killing myself or heading for the monastery but I AM planning to become far less dependant on the world than I am now over the next couple of years (and a lot less likely to go down with the ship should it come to that).

Getting out of the urban areas, setting up a modest and sustainable lifestyle, thinking and planning ahead for whatever may come.  Planning for the worst doesn’t mean becoming some survivalist nut job that expects the world to end tomorrow, that’s an extremist view.

Besides, I’m more than fed up with so-called “civilization” as it now exists in major urban areas.  I’d be thinking rural and modest even without future uncertainties on the horizon.

Well, the fact is that Americans aren't having enough children to support the economy and, especially, the Gov't entitlements. We need more young people starting at the bottom of the economic ladder to support the upper rungs of the ladder (elderly, retired, unfit folks).
Since we don't have them, the Gov't allows their wholesale import.



What was Rome like without Romans? Answer: The Dark Ages.

Remember, we didn't win WWII because of our superior numbers, we won WWII with our superior productive capacity. How do you think we'll fair when the enemy is say, China and all of our productive capacity is there?
Barring war coupled with the loss of productive capacity, I think we can go on with trade deficits indefinitely as long as we create more wealth domestically, whether exported or not, than we import on a dollar basis. As long as I keep making more than I spend. It's when you start dipping into your savings to finance your consumption that there is a problem. I'd look at average individual savings rates to judge that.

You want to save the nation? Have more children and save more of your paycheck. Every child you have is one more worker to finance your retirement and every dolllar you put in the bank is one more dollar that doesn't get exported.

Excellant, thought-provoking posts, guys. Thanks.

These two would seem to be mutually exclusive.

I agree that we are being out reproduced.  Those that would make the best parents and produce good citizens aren't.  Those that breed like roaches are the ones most likely to be on .gov's teat forever.

The system doesn't encourage the productive memembers of society to reproduce.

The so-called "consumer society" demands consumption at the expense of savings.  Must have that big house, new car, etc... Debt?  Yeah, so what?  Must keep up with Joneses at all costs.

I agree, it's a deadly combo and one that will eventually bite us in the ass.

Hmmmm, if his thesis is the same as the title of his book (and it sounds like it) he was dead wrong about that.

"Unsustainable" is one of those words that throw up red flags for me, indicating [bs].  Others include "global warming".

keep middle-class tax cuts; replace tax cuts for the wealthy and corporations with tax credits for practices that help america and americans...

HaHaHa! [ROFL] Yes, Jarhead. You are absolutely right.
Investments of any type are painful to make. You just don't want to do something like that unless there is hope of a substantial payoff. I propose that the upside is great enough, indeed our very future depends upon it, that we must make these investments.
One, at least,is an investment I enjoy making.   [:D]   [sex]

It's not as critical as you think...

England ruled the world for YEARS based on minimal home production... The 'British Empire' was merely the political consolidation of their ecconomic supply chain, with the colonies & posessions serving the same role that the 3rd world serves for us today...

It only fell apart because they lost the will to maintain it, post WWII.

Think about it: The amount of investment we make in overseas production generally results in more profits for US corporations. Yes, we buy foreign products. But who makes the most money? The chinese company that makes a $2 margin on a $2 item, or RadioShack/WalMart/Costco selling that $4 (to them) item for $29.99?

Finally, as for WWII and 'productive capacity', we as a nation don't have the attitude to win a war by that sort of brute force (build more than they can blow up) approach.... The population is so used to near-bloodless victories that we now have to win by whiz-bang gadgetry or face a skeptical-to-hostile reaction from the general public (Oh, P.S. the Allies DID win by superior numbers, courtesy of the USSR.)....

In a US v China scenario, the Chinese will take the 'build more than they can kill' approach (since their society can handle (and is conditioned for) human wave/brute force tactics), and we will take the 'kill it faster than they can build it' approach (since we are prepared for and conditioned to expect victory through superior technology/firepower, a/o numbers/production)...

For an example, just look at tank design.... Back in WWII, we produced 'expendable' tanks (Shermans) designed specifically so that we could make more of them than the enemy could of their models... The country was prepared for 'victory at any cost', and this factored in heavily...

Now, we produce the M1A2.... It's huge, it's heavy, it's most certainly not 'expendable'... However, it's also as close to indestructable as a tank has ever been...

Different times, different tactics...

Bah, Humbug!

This is coming from a man that wrote a book in 1995 entitled, [u]Blindside: Why Japan is Still on Track to Overtake the U.S. by the Year 2000[/u].  Did THAT happen?

As soon as I read, "...which, as President Bush is well aware, was the last year of his father's administration.", I knew where the article was going.

I am not an economist but isn't a trade deficit simply where a country imports more than it exports?  Who cares!  We are a nation of consumers and we cannot get all we require from domestic production.

The only fear we have is that foreign investors might take some of it's capital out of the U.S. economy back to their homelands if they fear the U.S. is not a "good risk".  I do not see that happening in the foreseeable future.  Unless, of course, we elect Howard Dean.

Not worried at all.

I rememeber 20 years ago when America was worried about all the increased foreign ownership.

Then we had a recession, the Japanese and other countries took a bath on their American investments and property. Americans bought our property back and our productivity increases and Japan stagnates.

Don't worry about the low birth rate, Bush and the Dems are about to announce a new ammensty for the 9 million illegals. America will be bilingual.