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Earlier this
month the Labor Department reported that 227,000 new jobs were added to the
economy in February, marking the third consecutive month of positive jobs
growth. Many observers took the news as evidence that the recovery has taken
hold in earnest, helping send the S&P 500 index to the highest level in
nearly five years. However the very same day the Commerce Department reported
that, after surging for much of the last year, the U.S. trade deficit
increased to $52.6 billion for January, the largest monthly trade gap since
October 2008. This second data set should dampen enthusiasm for the first.
Before the
financial crisis banished the data to the back pages, America's growing trade
imbalances used to be a hot topic. From 2005 through mid-2008 those monthly
figures almost always topped $50 or $60 billion, setting a monthly record of
$67.3 billion in August 2006. But when the housing and credit markets
imploded, attention was focused elsewhere. In any event, the faltering
economy took a huge bite out of imports, pushing the trade deficit down 45%
in 2009. Even those people who were still paying attention to trade assumed
that the problem was solving itself.
However,
after reaching a monthly low of $35.7 billion in May of 2009, the trade
deficit began to grow again, expanding 31% in 2010 and 12% in 2011. While the
$52.6 billion deficit in January is still about 10% below the monthly average
seen in 2006-2008, if GDP continues to nominally expand, as many assume it
will, we may soon find ourselves in the exact same place in terms of trade
that we were in before the financial crisis began. That's not a good place to
be.
If the jobs
that we have created over the last few years had been productive, our trade
deficit would now be shrinking, not growing. But the opposite is happening.
These jobs are being created by the expenditure of borrowed money, and are
not helping to forge a newer more competitive economy. In the years before
the real estate crash, our economy created millions of jobs in construction,
mortgage finance and real estate sales. But as soon as the bubble burst,
those jobs disappeared. Today's jobs are similarly being built as a
consequence of another bubble, this time in government debt. And, likewise,
when this bubble bursts they too will vanish.
Throughout
much of the last decade I had continuously warned that the growing trade
deficit was an unmistakable sign that the U.S. was on an unsustainable path.
To me, monthly gaps of $60 billion simply meant that Americans were going
deeper into debt (to the tune of $2,400 per year, per citizen) in order to
buy products that we were no longer productive enough to make ourselves. I
pointed out that America had become an economic juggernaut in the 19th and
20th centuries on the back of our enormous trade surpluses, which allowed for
growing wealth, a stronger currency, and greater economic power abroad. This
is exactly what China is doing today. Deficits reverse these benefits. (To
learn how China is spending its surplus, see
the article in our latest newsletter.)
My critics
almost universally dismissed these concerns, typically saying that our trade
deficits resulted from our economic strength and that they were a natural
consequence of our status at the top of the global food chain. I pointed out
that even highly developed, technologically advanced economies still need to
pay for their imports with exports of equal value. Instead all that we were,
and are, exporting was debt and inflation.
The financial
crisis initiated a painful, but needed, process whereby Americans spent less
on imported products while manufacturing more products to send abroad. But
the countless government fiscal and monetary stimuli stopped this healing
process dead in its tracks. Government borrowing and spending redirected
capital back into the unproductive portions of our economy. Health care,
education, government, and retail have all expanded in the last few years.
But manufacturing has not grown at the pace needed to solve the trade
problem.
Job creation
at home has been like vegetation sprouting along the banks of rivers of
stimulus. These artificial channels may help temporarily, but they prevent
trees from taking root where they are needed most. Our economy has yet to
restructure itself in a healthy manner. The recession should have forced us
to address the problem of persistent and enormous trade deficits. We have
utterly failed to do this. So while the job numbers look good for now, the
pattern is ultimately unsustainable.
The last time
the monthly trade deficit was north of $50 billion, the official unemployment
rate was under 6% and our labor force was considerably larger. Should this
artificial recovery actually return millions of unemployed to service sector
employment, our monthly trade deficits could go much higher, perhaps
eclipsing the previous records of 2006. It is possible that the annual
deficits could top the $1 trillion mark, thereby joining the federal budget
deficit in 13-digit territory.
Also last
week, we got news that our fourth quarter current account deficit widened 15%
to just over $124 billion. The five hundred billion of annual red ink is
actually reduced by a $50 billion surplus in investment income (resulting
primarily from foreign holdings of low-yielding U.S. Treasuries and
mortgage-backed securities -- however, when interest rates eventually rise,
this surplus will quickly turn into a huge deficit). At anything close to a
historic average in employment and interest rates, today's structural
imbalances could produce annual current account deficits well north of $1
trillion. As higher interest rates would also swell the federal budget
deficit, it is worth asking ourselves how long the world will be willing to
finance our multi-trillion dollar deficits?
Back in the
late 1980s, when annual trade and budget deficits were but a small fraction
of today's levels, the markets were rightly concerned about America's ability
to sustain its twin deficits. This anxiety helped lead to the stock market
crash of 1987. More recently, large and persistent trade deficits were a
significant factor in building the imbalances that caused the U.S. economy to
implode in 2008. But in recent years, most Americans have lost their concern
with gaping trade deficits. I believe it will soon come back with a
vengeance.
Peter Schiff is CEO
of Euro Pacific Precious Metals, a gold and silver dealer selling reputable,
well-known bullion coins and bars at competitive prices. To learn more,
please visit www.europacmetals.com or call (888) GOLD-160.
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