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Generational Dynamics Web Log for 11-Nov-05
US trade deficit hits new monthly record high

Web Log - November, 2005

US trade deficit hits new monthly record high

Once again, economists' hopeful predictions of a fall in the trade deficit continue to be thwarted.


Trade deficit, 2002-present. <font size=-2>(Source: WSJ)</font>
Trade deficit, 2002-present. (Source: WSJ)

Among the analysts who claim that the economy is in good shape and poised to continued growing, there are two classes: (1) The analysts who have no idea at all what's going on, and just says things are great to keep their clients happy; and (2) the ones who claim that the economy is "self-adjusting," and that things like the trade deficit will take care of themselves.

Most analysts are in the first category; those in the second category were disappointed today when the Dept. of Commerce announced that the trade deficit had a fresh monthly high in September, $66.1 billion. The analysts who believe that the economy is "self-adjusting" predicted a significantly lower deficit.

It's pretty clear from the unexpectedly high deficit that the trade deficit is not leveling off. As the graph above shows, it's not showing any sign of leveling off. It keeps fooling the experts, since every time it appears to be going lower, it takes another jump up to an even higher level, and continues its persistent growth.

Some expert analysts are saying the increase is only temporary, because it was caused by high oil prices and by hurricane Katrina. The say that these problems are only temporary, and that they'll go away soon. In fact, that's what they said last April, which was the last time I wrote about this subject. Obviously, little has changed.

Actually, the article I'm writing today is little changed from the article I wrote in April except, of course, that seven more months have passed and the problem continues to get steadily worse.


Imports and exports <font size=-2>(Source: Dept. of Commerce)</font>
Imports and exports (Source: Dept. of Commerce)

A more detailed picture is shown by examining the components in the adjacent graph, taken from the full US Dept. of Commerce report (PDF file).

The trade deficit is computed by subtracting the amount of our exports to other countries from the amount of our imports from other countries. As this graph shows, the amount of imports keeps rising, while the amount of exports has leveled off.

In fact, imports are now 63% higher than exports. That's a very big percentage. If that difference were narrowing it might still take years until exports equalled imports, but in fact the difference keeps increasing, not decreasing.

In a recent column appearing in the L.A. Times, Stephen S. Roach, the chief economist for Morgan Stanley, wrote that this trip is nearing the end of the road.

"Running at an annual rate of close to $800 billion in the first half of 2005, [the trade deficit] requires foreign funding to the tune of $3 billion per business day. To accomplish that without a sharp drop in the dollar and/or a related backup in interest rates requires extraordinary confidence on the part of foreign investors in U.S. assets."

Roach points out that the today's account deficit equals 6.4% of gross domestic product, while 1.5% was a common level in times past.

This corresponds to the astronomically high level of public debt -- higher than it's been since the 1930s Great Depression. And, as I've said many times, both I and other analysts have computed, the "true value" or book value of the stock market today to be around Dow 4500, which means that the market is overvalued by more than 110% -- at about the level as just before the 1929 stock market crash.

Roach's article is entitled, "The ambush waiting for Bernanke," referring to the Ben S. Bernanke, Bush's appointee to replace Alan Greenspan at the Fed.

According to Roach, the transition at the Fed could trigger a loss of foreign confidence in the dollar, while the account deficit continues to increase.

"In short, the U.S. is going to be asking a lot more of the foreign investor at precisely the moment the Fed is transitioning from Greenspan to Bernanke. As the maestro leaves the building, the hard-won aura of foreign confidence that surrounds him could be quick to follow. Bernanke could be faced with a dollar crisis and the related need on the part of foreign investors to seek compensation for taking currency risk. That compensation invariably spells higher interest rates the last thing the nation's housing bubble and overly indebted consumers need."

Roach concludes, "History warns us to expect the unexpected when the nation's second-toughest job changes hands." (11-Nov-05) Permanent Link
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