That Giant Sucking Sound
 

February 7, 2008

To use a phrase coined by Ross Perot in the 1992 presidential campaign, there is a giant sucking sound of hundreds of billions of dollars ($817 billion trade deficit in 2006) leaving America for foreign countries every year. You may not hear it, but it's definitely there and will soon be impossible to ignore. Huge container ships from China, Japan and other countries, and trains from Mexico bring their products to America and, like a giant vacuum cleaner, suck America's wealth back to their countries. It's not the fault of foreign countries ...I place the blame squarely on the doorstep of American government. America is over-consuming imports via free trade economic policies to such an obscene level that the American government had to borrow $2 billion daily in 2006 just to finance trade. A lot of folks are benefiting from this over-consumption of imports, including Wall Street and consumers, but America has yet to pay the bill for this excess. Indeed, the bill gets larger every day.

Chances are, you know someone who has lost their job because of off-shoring (exporting jobs to Mexico, India, China, for example). And, if you're my age,  you probably remember when most TV's, electronics, automobiles, clothes, and most other products were made in America. Not so today. Don't think it matters how much imported products you consume? Well, if you're like most people, you probably missed these important quotes below that were buried in the media recently:

o "Analysts said that figure [investment income] turned negative because of the large amount of U.S. assets that have been transferred to foreign hands over the past three decades to pay for the imported cars, clothing and electronic goods American consumers love to buy. Investment flows turned negative by $7.3 billion from a surplus of $11.3 billion in 2005. It was the first time investment income has been negative on records going back to 1929." (source: AP/Toronto Star)
 
o "The [US trade] deficit for 2006 meant the US was borrowing more than $2bn daily to finance its trade gap." (source: BBC)
 
o "The main drag on [economic] growth is America's huge trade deficit, which chipped 0.8 percentage points from first quarter growth." (source: BBC)
 
o "He [Fed. Reserve Chmn Ben Bernanke] said the large US [trade] deficit to the rest of the world 'cannot persist indefinitely because the ability of the United States to make debt service payments and the willingness of foreigners to hold US assets in their portfolios are both limited. Adjustment must eventually take place, and the process of adjustment will have both real and financial consequences." (source: AFP)
 
o "The [international] angst about the United States [economy] belies the popular theory that Europe and Asia are not as dependent on the American economy as they once were, in part because they trade more with each other. The theory, known as decoupling, has been used to explain why economies like China and Germany have kept growing robustly, even as the United States has slowed." (source: NYTimes)
 
o "Trade deficits must be financed by foreigners investing in the U.S. economy or Americans borrowing money abroad. Direct investments in the United States provide only about a tenth of the needed funds, and Americans borrow about $50 billion each month. The total debt is about $6 trillion, and at five percent interest, the debt service comes to about $2000 per U.S. worker each year. High and rising trade deficits tax economic growth. Each dollar spent on imports, not matched by a dollar of exports, shifts workers into activities in non-trade competing industries like department stores and restaurants." (source: Prof. Peter Morici, Robert H. Smith School of Business, University of Maryland)

 


Illustration (above): 20 Years Of Persistent and Worsening Trade Deficits. Consuming Imports, Jobs Exported, Leaving
Debt For Future Generations. And, look at that trend line! An economic nosedive into a deep hole. This didn't just start,
it's been going on for 20 years while no one has done anything to stop it.
(source: U.S. Census Bureau, Foreign Trade Division)
 

Folks, with the trendline in the chart above, America will go broke. I'm not talking about too many government services ...that is primarily a redistribution of internal wealth. I'm talking about America consuming so many imports that it is having to borrow $2 billion a day and selling off too many assets to foreign owners and governments. This represents your dollars going overseas which the American government borrows most of it back to maintain the money supply (otherwise, there would be no money to spend!). This also represents your and your children's sovereignty and future going overseas. Ownership does matter ...especially when it's time for America to negotiate new and favorable trade agreements with its many creditors.

I have been writing about this subject for sixteen years. Beginning with unfair trade with Japan, then to NAFTA, and later sovereignty issues with GATT/WTO, and more recently, huge trade deficits with China (um, thanks Wal-Mart). In all of these cases, I predicted that these trade policies would put more people out of work than they employed and would cost America more money than it would make (trade deficit). All of this has come true and is a major reason (not the only one) why the American economy is so out of whack and the middle class and poor are poorer.

Much has been focused on the folly of sub-prime mortgage lending practices. What many people don't realize is that over half of the sub-prime mortgages that have been made to-date are second mortgages made on existing homes (source: consumeraffairs.com). Because the middle class and poor have been squeezed, they cashed out the equity in their homes. Once the adjustable rates kicked in from the refinanced loans, along with continued or worsening middle class economic stagnation, home owners couldn't make their payments.  

There hasn't been enough attention paid to how American economic policies have worked against the middle class and poor for the past generation or so. In fact, in February 2003, President Bush's chief economic advisor, Gregory Mankiw, called offshoring a good thing (source: Public Citizen, Sen. Chris Dodd). These and other economic policies have resulted in horrendous annual trade deficits and job losses that have pulled the economic rug out from under the middle class and poor, many of whom are sub-prime home owners. It is clear the middle class and poor have been squeezed by the global economy and shipping of American jobs to China, India, and elsewhere. How bankers, economists, and government policymakers could not foresee this as sub-prime loans were being made is a mystery.
 
When America consumes more imports than it exports (trade deficit), trade deficits must be financed by foreigners investing in the U.S. economy or Americans borrowing money abroad to maintain the money supply. Direct investments in the United States provide only about a tenth of the needed funds, and Americans borrow about $50 billion each month. Indeed, the BBC reported in early 2007 that America had to borrow $2 billion every day just to finance its trade deficit. America has suffered trade deficits beginning in 1976 and has worsened nearly every year to the point where most economists, including current and former Federal Reserve Chairmen, agree that it is no longer sustainable. How can America have overconsumed imported products for so long? Like everything else, consumption was charged to a global credit card. And guess what? Global creditors (China, Japan, others) are now beginning to have second thoughts about continuing to finance America's trade deficit, particularly as the value of the dollar falls through the floor.
 
The modern trade deficit started with Japan in the late 1970's. Following World War 2, American foreign policy allowed Japan to export to America without requiring it to open its home markets to American companies. This policy was enforced by the American government to ensure Japan rebuilt its economy to keep it from returning to imperialism. Consequently, Japanese companies operated (and still do) essentially from a sanctuary that lets them export into the American market with little, if any, external competition in its home market. Today, the annual trade deficit with Japan is $88 billion, nearly double the amount 16 years ago. Japan still enjoys special trading status with America and its companies still operate essentially from a sanctuary because it is (and has been for many years) a major creditor to America. This creditor/debtor relationship has placed America in a very weak position to negotiate with Japan to allow American companies reciprocal access to its markets. Like any other powerful special interest in Washington, Japan has its share of lobbyists who ensure its interests are protected, sometimes at the expense of American citizens' interests.
 
Much of the trade deficit with Japan is in automobiles and related parts. One of the myths I hear is American cars wouldn't sell in Japan because they are too big, they consume too much fuel, and are left-hand drive. That is probably true. But that line of thinking avoids the reality of what Ford (and other American companies) has done in Europe, Brazil, Australia, and other foreign locations.

Ford designs and builds its European cars in Europe ...they do that because it's the best way to design cars that will appeal most to local buyers. And, it works. In 2005, for example, Ford celebrated its 30th anniversary as Britain's most popular car brand. The Focus (the European Focus is very different from the American model) was the country's top selling car. Ford is also doing well in Germany (most trusted brand in Germany), Brazil, Australia and other countries. Until 2006, Japan was the world's 2nd largest automobile market. If there was a way Ford, GM, and Chrysler could design, build, and sell their cars in Japan, as they successfully do in other countries, they'd be in Japan because the business is there. I know Americans love Japanese products. Japanese products are excellent and high quality. There is no reason to deny that. But their products have been and still are essentially designed and produced in a political system that shields Japanese companies from external competition in their home markets and the external competitive cost pressures faced by nearly all American corporations. And, as the trade deficit data illustrates (see chart above), consumption of those products by American consumers has had, and still has, an insidious high price (see: youtube - FrontLine).
 
Dwarfing our trade deficit with Japan, however, is China. Following President Clinton's trade agreement with China in 1999, there was a mad rush by American multinational corporations to move their manufacturing to China. Reasons include: 1) Increased profits, 2) Lowered production costs to compete with Japanese companies who operate from their sanctuary, 3) Competition with other companies who are using low-wage labor. As with just about every foreign free trade agreement the American government signs, the American people are told that it will result in more jobs and exports. But, the jobs and exports never materialize anywhere close to compensating for the jobs lost and the trade deficit America has to finance. The reasons for the failure of American trade agreements are many, but they include official and unofficial barriers by foreign countries who want to discourage imports and grow their export-based economy. Many of these countries are trying to follow the post-WW2 Japanese economic and trade model (export to the U.S., restrict U.S. imports).
 
Why has this gone on for so long. Well, as I mentioned above, the American government is basically open to the highest bidder. It's called lobbying and K-street. Government officials leave government and then become lobbyists for American and foreign multinational corporations and foreign governments. There is an extreme conflict of interest in allowing this to occur but money does talk and there has been little sincere interest within government to adequately restrict lobbying. And, consumers love Japanese cars and electronics. But without the knowledge of how over-consumption of these products hurts them and the American economy, consumers over-consume and even defend their consumption to the detriment of the country and future generations who will ultimately have to pay for their over-consumption.
 
If I hear one more time that "markets work", I will roll my eyes. Some folks say "markets work" from their university classrooms. And, I suppose it's true if you accept the possibility of the American economy going bankrupt as an example of the market sorting out problems on its own and dragging everyone else down with it. But out in the real world, governments are always meddling in their economies (including the American government via lobbyists representing foreign and domestic interests) to help their exports. In such a real-world environment, it is defeatist for the American government to sit back, "let the markets work", and allow Japanese companies to export into the American market without requiring reciprocal access in the Japanese market. It is defeatist to allow China to restrict American imports and peg its Yuan to the dollar to make American imports too expensive. And, on and on. Most Americans aren't defeatist and the American government must begin representing the interests of its citizens and insist on reciprocal and fair market access in foreign countries as part of any trade agreement.

For too long, many government officials and American multinational corporations have focused on growth and business opportunities in developing countries (China, Mexico, India, for example) and neglected the American economy as if it no longer matters. This reminds me of Aesop's fable, The Dog and the Bone. This fable is about a dog carrying a bone over a bridge. Looking down into the water, the dog saw its own reflection, which looked to him like another dog carrying another bone. Wanting the other dog's bone as well as his own, the dog opened his mouth to bark at the "other" dog it saw, but in doing so, the dog dropped his own bone into the river, where it was gone for good. The sad, hungry dog learned the hard lesson that, by being greedy, one risks what one already has. As the roller-coaster rides in global financial markets prove, America still drives the world economy and when it sneezes, everyone else catches a cold. We must not allow greed and ignorance to destroy the golden goose that lays golden eggs for everyone.

America must produce more or American consumers will have to consume less and save. The math is simple.
 

 Note: As this was being written, Congress is preparing a $146-$157 billion economic stimulus plan that, by many accounts, won't do much to head off a recession. This will be more borrowed money, ironically, that will probably do more to prop up foreign economies (since we import so much)  instead of helping Americans keep their jobs. (source: Pittsburg Post-Gazette: The Private Sector - Too many imports could spoil stimulus plan)

Additional related information:

o Commentary: Losing Our Independence
o The Market Oracle: Unsustainable Trade Deficit Means Doomsday for the Greenback
o USAToday: Lobbyists find more ways to bond with lawmakers
o Vail Daily: Editorial: Economic bailout helps no one
o USAToday Editorial: Our view on sovereign wealth funds: When nations amass dollars, the fault lies in ourselves
o Supporting Youtube videos
o PBS FrontLine: Is Wal-Mart Good For America (see how Wal-Mart uses China for 80% profit margins on products)