Trade Deficit

[Nbadan]

Good article on the fate of the dollar in AT today...

Growing political instability in the US will weigh heavily on the dollar during 2007. This weight, combined with growing political pressure for dollar devaluation and a slew of negative economic factors, is likely to prompt significant dollar depreciation against most other currencies. The dollar's decline will help send asset values in the US sharply lower and precious metals prices soaring.

-snip-

Over the next few weeks, a spirited debate will increasingly grip Congress over how the legislature can exercise its cons utional powers to impose its will on the Bush administration. This debate will form the backbone of legislation that will significantly reduce funding for the war in Iraq and US military adventures in the Middle East.

If, as expected, the administration ignores such legislation, impeachment proceedings against Bush or Cheney, or both, may ensue. This battle royal between Congress and the Bush administration will create enormous political instability in the US. This instability will weigh heavily on the value of the dollar.

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No legs left to stand on

In addition to rapidly increasing political instability, growing pressure in the US Congress for the devaluation of the dollar will also undermine support for the greenback. Democrats, who now control Congress, have long lobbied for the revaluation of the yuan and yen against the dollar. Revaluation of the Chinese and Japanese currencies means devaluation of the dollar.

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Economic factors in the US are also cutting the legs out from under dollar support. In addition to huge current-account and budget deficits, inflation in the US is much higher than in many other countries. Continued high international energy prices and very rapidly rising grain and oilseed prices - the product of soaring demand for biofuels - will push inflation in the US higher in 2007. The idea that inflation will increase in the months ahead is just beginning to register with financial markets in the US, where nominal bond yields have begun to climb.

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Finally, as the prices for many dollar-denominated agricultural goods double in 2007, many of the world's central banks will encourage the appreciation of their own currencies in order to contain imported inflation. This process has already begun with several large central banks beginning to shift reserves out of dollars and US Treasury securities.

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The dollar's swoon appears inevitable in the coming months. As the value of the dollar drops, US asset markets will also swoon. Against this background, precious-metal prices will head sharply higher as investors increasingly diversify out of dollar assets backed by weakening profit outlooks and falling real yields.

Jephraim P Gundzik is president of Condor Advisers. Condor Advisers provides investment risk analysis to individuals and ins utions worldwide. For more information, please visit www.condoradvisers.com

[1369]

From today's WSJ

Politicians are typically late in picking up trends, so it will be interesting to see how long it takes Washington to acknowledge the big story in the Fiscal 2008 budget that President Bush unveiled yesterday: To wit, with a little spending restraint, Congress could balance the budget in no time.

You wouldn't know this from all the garment-rending yesterday in response to Mr. Bush's proposal to spend the not-so-meager sum of $2.9 trillion. Our favorite agonist is Kent Conrad, the Senate Budget Committee Chairman, and he didn't disappoint. "The President's budget is filled with debt and deception, disconnected from reality, and continues to move America in the wrong direction," said the Senator who was himself blocked from sneaking nearly $5 billion in "emergency" farm spending into a military construction bill in the final days of the last Congress. The North Dakotan needs to keep shouting disaster in a crowded political theater so he can justify his desire for a big tax increase.





The news Mr. Conrad won't broadcast is that over the past three years the federal deficit has shrunk by 58%. The Congressional Budget Office--not the White House--is estimating that the current year's deficit (for fiscal 2007) will fall to $172 billion. That's not bad given continuing Katrina relief spending, $30 billion for homeland security, and a couple hundred billion or so to fight the war on terror.
The White House is projecting that its new budget will eliminate the deficit by 2012 assuming Mr. Bush's tax cuts are extended after 2010. We don't put much stock in future budget forecasts because they depend on so many variables. But even CBO predicts the deficit should remain near or below 1% of GDP for the rest of the Bush Presidency. That's well below the 40-year average of 2.4% of GDP.

This also means that the federal debt burden will continue to fall. Alarmists point to the $1.4 trillion rise in total federal debt from 2003-2006, but that amount is dwarfed by the $14 trillion in new household wealth created over the same period. And for all the international scolding of an allegedly profligate America, U.S. federal debt as a share of GDP is falling again (see the top chart nearby). At 37% in 2006 and heading south, the U.S. figure compares to 52% in Germany, 43% in France, and 79% in Japan. Once again rising total "debt" is a scare word used to justify higher taxes.

The real game to watch isn't debt or deficits but spending. Here, too, Mr. Bush has an improved track record in his second term. From 2001-2005, outlays ballooned by $609 billion, or 33%, and Mr. Bush never did veto a spending bill. By contrast, on current pace his second term outlays will grow by 21%--hardly tightfisted, but a third slower.

The other news you won't often hear concerns the soaring tax revenues in the wake of the 2003 supply-side tax cuts. Tax collections have risen by $757 billion, among the largest revenue gushers in history. Receipts, especially from high-income individuals and corporations, have been growing for some two years at nearly twice the rate of spending, which explains the falling deficit. Economic growth is always the key to eliminating red ink, which is why keeping this 63-month expansion rolling needs to be the main domestic priority. This requires making those lower 2003 tax rates permanent, rather than letting them expire in 2010 and socking the economy with the biggest tax increase in history.

The more immediate budget brawl between Mr. Bush and Democrats will be how to divide that mere $2.9 trillion between guns and butter. Mr. Bush wants $245 billion more for Iraq and Afghanistan for 2007 and 2008. His overall Pentagon request of $606 billion in 2008 has been lambasted by Speaker Nancy Pelosi as a "huge number" and Democrats are moaning that their cherished social programs will suffer.

In fact, Mr. Bush's request would only bring defense outlays to 4.2% of GDP, or about 20% of total federal spending. That compares to 4.7% of GDP even under Jimmy Carter, and 6.2% of GDP in 1986 at the peak of the Reagan defense buildup (see bottom chart). Budgets are about setting priorities, and if Democrats agree that defeating terrorism is vital they will put it ahead of funding the National Endowment for the Arts.

Or how about capping subsidies to farmers with incomes above $200,000? Senator Conrad could lead by example in accepting that White House proposal, and in return zero out Mr. Bush's $200 million political sop for state and local police.





All in all, the fiscal news is so good that the tax hike lobby has had to do a bait-and-switch and fret about the "long-term." Somehow this wasn't a priority when Democrats and Republicans alike were trying to kill Social Security reform in 2005. But all of a sudden penury is said to be right around the corner. Well, Congress could always reform those programs, but don't hold your breath. Mr. Bush is proposing a very modest $96 billion reduction in the growth of Medicare and other en lements over five years, and Democrats are already outraged.
The best news in yesterday's budget may be that Mr. Bush seems to be rediscovering some fiscal nerve. His proposals won't raise taxes, while using the power of the market to combat problems in health care, and putting a tight leash on domestic discretionary programs. Defense gets the bulk of spending increases, as it should in a time of war. Maybe we'll finally get a debate over national spending priorities.

[BradLohaus]

^Balancing the budget won't eliminate the trade deficit. The last time we had a budget surplus, at the end of the technology bubble when tax revenues were high, was during the same period that the trade deficit was really starting to explode:

http://en.wikipedia.org/wiki/Image:USTrade1991-2005.png

That was when the dollar was stronger. That was one reason why the trade deficit exploded during this period:
1.) Strong dollar in the late 90's
2.) Free trade movement
3.) Huge wage differentials between the U.S. and developing, export-oriented countries
4.) Many of those exporting countries keeping their currencies weak against the dollar

Even though the dollar is relatively weaker now #'s 2-4 still remain. A balanced budget would relieve some of the pressure on the dollar, which would obviously not do anything to slow down the trade deficit. It's going to take the international community moving away from the dollar to correct the trade imbalance. As I said before: 1.) This must happen eventually 2.) The oil-for-dollars arrangement and the heat in the ME keep this from happening now 3.) The Fed has kept interest rates low to keep the American consumer borrowing to create the dollar-denominated investment vehicles that the foreign exporters need to invest their dollars in to protect their wealth and their currency situation with respect to the dollar. Once the investment opportunities in the U.S. dry up for the foreign exporters they will be forced to move away from the dollar, which will weaken the dollar and strengthen their own currencies, which will correct the U.S. trade imbalance.

[BradLohaus]

I went back and read the article at the beginning of this thread. This statement at the end of the John Stossel article:

Adam Smith was right when he wrote, "Nothing, however, can be more absurd than this whole doctrine of the balance of trade."

The definition of money when Adam Smith made that statement compared to what money is today is very, very different. When gold was used in international trade then trade imbalances were temporary, so Smith's statment made sense. The reason they were temporary was because the money supply was fixed by the amount of gold in the world. When one country ran a trade deficit with another country the deficit country would experience a loss in its gold reserves, while the surplus country's gold reserves increased by that same amount. The decrease in the money supply in the deficit country lowered prices, including wage rates, while the increase in the money supply of the surplus country increased prices. The deficit country would now buy less from the surplus country becuase of the price increase, while the surplus country would now but more from the deficit country because of the price decrease. This corrected the trade imbalance. However, people would sometimes panic over trade imbalances while these adjustments were taking place.

Using any statement from Adam Smith to justify free trade or the trade deficit today is very misleading. The same is true for David Ricardo and his theory of comparative advantage. They would probably both think that we are insane because of what we use for money, and for the current international trade situation which that money has caused.

[BradLohaus]

Buchanan wrote another article today about the effects of the trade deficit.


Auto Graveyard
by Patrick J. Buchanan

Posted: 02/16/2007
On Valentine's Day, Chrysler sent a bouquet to its North American workers. Eleven thousand manufacturing jobs will be eliminated in the next 24 months -- 9,000 in the states and 2,000 in Canada -- and 2,000 white collar workers will be let go, permanently.

The SUV assembly plant in Newark, Del., will be closed. The Warren, Mich., truck plant and South St. Louis assembly plant will each lose one of their two shifts. Earlier, Ford posted the largest loss of any company in history, $12.7 billion, breaking GM's record $10.6 billion loss in 2005.

Toyota, having swept by Chrysler and Ford, is challenging GM for first in sales in the U.S. market. When we were growing up, U.S. automakers had the entire U.S. market to themselves and dominated the world market.

How is Japan succeeding?

First, the Japanese make fine cars. Second, Japan manipulates its currency to keep it cheap against the dollar, to keep the price of Japanese autos below comparable U.S. models. Third, Tokyo maintains a lock on its home market by imposing a value added tax on auto imports from America, and rebating that tax on autos and parts exported to America. This double-subsidy can give a Japanese car a 15 percent price advantage over a Ford or GM car in both markets.

Fourth, Japanese auto companies setting up plants here are free of "legacy costs" of pensions and health insurance for retired U.S. workers. For Japanese companies have almost no retired American workers. Legacy costs at GM, Ford and Chrysler must be factored into the price of every car.

Finally, there is the venerable practice of "transfer pricing." Japanese auto parts manufacturers overcharge U.S subsidiaries for parts. This cuts the profits of their U.S subsidiaries and thus reduces their U.S. corporate taxes. Profits are repatriated, virtually untaxed, to Japan.

Thus is Japan capturing America's auto market and bringing down the great companies that built the machines of war which brought down Japan's empire. Revenge is a dish best eaten cold.

To stay compe ive in their own home market, U.S. manufacturers are closing down plants, laying off American workers and building their cars outside the United States.

The day before Chrysler's announcement, the Census Bureau trade figures were released. Charles MacMillion of MBG Information Services had them broken down before they hit the wires.

In 2006, the United States ran a deficit in traded goods of $836 billion, a fifth-straight world record. For manufactured goods, the U.S. trade deficit reached $536 billion, worsening from the 2005 record of $504 billion. Under President Bush, 3 million U.S. manufacturing jobs have disappeared -- one in every six.

To understand what is happening to Chrysler, Ford and GM, one need only glance at the trade figures in the auto sector. The United States ran a trade deficit in trucks, autos and auto parts of $144.7 billion.

If America continues on this course, where we have run up $4 trillion in trade deficits in manufactured goods since Bill Clinton took office, the end is predictable.

An eventual collapse of the dollar, making us a poorer nation. The shuttering of every U.S. factory that makes traded goods. A constant hemorrhaging of manufacturing jobs, now down to 10 percent of our labor force. An end of America's pre-eminence as the world's foremost industrial and technological power. An end to the Second American Century, as the Asian Century begins.

Everything some have been warning about for decades -- huge trade deficits, a falling dollar, de-industrialization, a rising dependence on foreigners for the vital necessities of our national life, diminished freedom of action concomitant with that dependency -- has come to pass.

The world is witnessing the passing of the United States as the greatest industrial power and the most self-sufficient republic the world had ever seen. Yet, no one acts. Why?

Ideology is one reason. Free-trade fanatics are like those devout Christians who will not undergo surgery, even if their malady is killing them. Second, there are the obtuse who simply cannot see that our "trade partners" have found a way around the rules and are skinning us alive.

Third, to gain and hold high office, candidates of both parties depend on the contributions of a monied elite, whose salaries, bonuses, stock options and golden parachutes depend on a rising share price, which means constantly cutting costs by moving production out of United States and getting rid of high-wage American workers.

There are rewards for economic treason.

Look for the Democrats to find a way to give Bush -- despite the astonishing record of trade failures do ented above -- fast-track authority to negotiate still more such trade deals. Who takes the king's shilling becomes the king's man.

[boutons_]

I thought you right-winger were all for trusting the the corps to rape their employees and customers and the environment without govt regulations, amoral seeking of profits no matter what the cost?

Depends on whose ox is getting gored, right?

Wall Street loves it when a non-financial corp lays off 10s of 1000s of workers, but they scream like when the their own financial corps lay off workers.

===================

February 16, 2007

Op-Ed Columnist

Will Russia Bet on Its People or Its Oil Wells?

By THOMAS L. FRIEDMAN

In a high-rise building with a view of Lenin’s Tomb, the U.S. aerospace giant Boeing is designing key parts of its new 787 Dreamliner, using hundreds of Russian aerospace engineers. Yes, President Putin may be talking cold-war tough, but down the street from the Kremlin, America’s crown jewel industrial company is using Russia’s crown jewel brainpower to design its next crown jewel jetliner.

Boeing’s Moscow Design Center, which employs 1,400 Russian engineers (earning less than their U.S. counterparts) on various projects, symbolizes Russia’s unique potential: Russia is that rare country that not only has a treasure trove of natural resources — oil, gas and mines — but also has a treasure trove of human talent: engineers, mathematicians and other valuable minds.

Most nations with highly developed human talent — like Singapore or Taiwan — have few natural resources, and those that are rich in natural resources — Venezuela or Sudan — tend not to develop their people’s talents. The exceptions, like Norway, which is rich in both human and natural resources, usually built their democratic ins utions before they got rich on oil, so the money was well spent.

The meta-question with Russia today is this: Will it become more like Norway, a democracy enriched by oil, or more like Venezuela, a democracy subverted by oil? Is the Boeing center Russia’s future or its exception?

You see signs of both trends. On the positive side, Russia has been smarter than most petro-states. It has set up a rainy day fund and tucked away $100 billion from its oil and gas windfall. Direct foreign investment in Russia hit $30 billion last year, according to The Economist, and not all of it goes to the oil and gas sector anymore.

And then there’s Boeing. Its impressive Moscow center operates two shifts of engineers: 7 a.m. until 3 p.m., and 3 p.m. until 11 p.m. — which is shortly before the workday begins in the United States. A Russian Boeing engineer might be designing part of the 787’s nose during his day, and then initials and stores his work in the computer. A U.S. Boeing engineer, working on an identical computer, then picks it up during her day and engineers it some more. With regular teleconferences, it’s as if they are in one virtual 24-hour office.

“There is no paper at all,” said Sergei Korolev, the deputy head of Boeing Moscow. “We do the presentations electronically and have online sessions with Wichita and Seattle, and everyone looks at the same part and talks about it. Our center is the reason people are not emigrating.”

But Russia has a unique legacy in aerospace from Soviet days, so the educational centers and talent were in place for Boeing to tap. What Russia still glaringly lacks is an ecosystem of secure property rights, venture capitalists and homegrown innovators, and universities and business schools churning out idea-entrepreneurs. “Made in Russia” will never be a global brand as long as research spending by Russian companies remains among the lowest in the world.

The Moscow Times recently reported that only two Russian colleges — Moscow State and St. Petersburg State — are listed among the world’s top 500 universities. When you walk down the streets in Bangalore, India’s high-tech capital, it feels as if there’s a computer school or English-language school on every street. You walk in Moscow, and it feels as if there is a new shoe store or beauty salon on every street.

A former top aide to President Putin remarked to me that Russia had a huge interest in building a postindustrial knowledge economy, not an energy-intensive industrial one, so it can export most of its oil and gas, not consume them at home. But that would take a big investment in education, which is not being done.

Noting that Russia today spends far less of its G.D.P. on higher education than Europe or America, Sergei Guriyev, rector of Russia’s New Economic School, wrote in The Moscow Times, “Russians simply are not prepared to pay the taxes that would be necessary to finance science and education at Soviet-era levels, and no incentives have been created to attract more private funding.”

So here’s my prediction: You tell me the price of oil, and I’ll tell you what kind of Russia you’ll have. If the price stays at $60 a barrel, it’s going to be more like Venezuela, because its leaders will have plenty of money to indulge their worst instincts, with too few checks and balances. If the price falls to $30, it will be more like Norway. If the price falls to $15 a barrel, it could become more like America — with just enough money to provide a social safety net for its older generation, but with too little money to avoid developing the leaders and ins utions to nurture the brainpower of its younger generation.

=================

Paraphrasing St. Ronnie:

"I'm here from a globalizing US corp and ready to anything and anybody who gets in my way of more profits."

[BradLohaus]

I thought you right-winger were all for trusting the the corps to rape their employees and customers and the environment without govt regulations, amoral seeking of profits no matter what the cost?

Depends on whose ox is getting gored, right?

Wall Street loves it when a non-financial corp lays off 10s of 1000s of workers, but they scream like when the their own financial corps lay off workers.

Paraphrasing St. Ronnie:

"I'm here from a globalizing US corp and ready to anything and anybody who gets in my way of more profits."

I don't think this is really a left vs. right issue anymore. Bill Clinton and Robert Rubin were as good of friends as anybody to the financial world when they used taxpayer money to bail out the banks in the 90's. Every recent president has played for the same team once they got to the top. Having the right say "Clinton did this" and the left say "Bush did that" doesn't really help. The real setup is the corporate/banking elite vs. everybody else. They have all the money and all the power and they back the big horses of both parties.

Also, Tom Friedman is an idiot. He has said that he favors all free-trade bills and doesn't even read or study them at all before he goes around talking them up. He talks up globalization all the time. He supports the things that the workers as much as anybody.