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Foreign Trade & International Debt Report
- Main Report - (with 16 pictures)
by Michael Hodges (email) - July 2011
- a chapter of the Grandfather Economic Reports -

I am concerned about the economic future of our youth

This is a mini-report about the increasing dependence on international trade and our poor performance, presented in an easy-to-understand format with pictures.
This report is a chapter of the Grandfather Economic Reports series, of certain negative economic conditions facing families and their children compared to prior generations.

more dollars fllying awayQuick Links: Questions & Items - - Trade Dependence - - Goods Imports - - Trade Balance annually - - Trade Balance cumulative - - Deficit with China - - Current Account - - Govt. Debt to Foreigners - - International Reserves - - Net Asset Trend - - Global Trade Ratio - - Manufacturing and other reasons - - Why Deficits Matter?- - Uncharted Dangerous Territory - - Trade Deficit by Nation - - Major foreign holders Treasury debt - - Aging Population - - Hi tech and National Security - - Energy threat - - What to Do

First, a repeat of several opening items on this Trade Report's summary page - - to allow them to sink-in, and then to 16 dramatic tell-all pictures.

QUESTIONS:

Do our children & grandchildren deserve to be placed in a reduced international position, with less independence from foreign interests, than we inherited from our parents and grandparents? Would that make us proud? Are their future living standards and national security threatened by an economy that is more dependent on domestic and foreign debt, and on consuming more than we produce, with less foreign reserves backing up each citizen than other nations?

ITEMS:

TRADE DEPENDENCE OF US ECONOMY - - up, up and away !!
28% of our economy depends on foreign trade
4 times higher than before - - with trend straight-up !!

Trade trend When we speak of competing in a global economy,
this chart shows how much more dependent are we on foreign trade,
than ever before. In fact, nearly 4 times more dependent on others.

The left chart shows the trend of the sum of imports & exports of goods (excl. military), as a share of our economy (national income measure). [services trade is a minor number and is left out of this plot and military transactions distort the data]. Combined trade in 2010 was $3.2 trillion ($1.3 trillion exports, $1.9 trillion imports).

This chart shows combined exports + imports zoomed from 8% of the economy in the 1960s, to 28% of net national income in 2010. Note the upward zoom is nearly straight up, meaning U.S. foreign dependence is accelerating.

With more trade dependence one should next ask > Are we paying our way? Answer: - NO !! We are going deeper into debt.

As America's economy depends more on trade it is more and more at the mercy of others than prior generations - - which implies serious economic and national security issues looking forward.

The next chart breaks down the above chart into its import and export components.

export vs import trendNotice imports (red curve) of goods - - zooming higher, as a share of our economy,
from 3% to 17% of the economy (as measured by national income),
and, therefore, our economy depends on imports produced by others 6 times more than before - - and still pointing straight up. 2010 goods imports totaled $1.94 trillion. Note rising import ratio in 2004-10 despite major decline of the U.S. dollar's exchange rate.

(America, with less than 5% of the world's population, consumed nearly 20% of world imports in 2000, according to Morgan Stanley Economist Joe Quinlan - - meaning much of the rest of the world over-depends on America's debt-driven over-consumption of goods produced by others).

Now look at exports (black curve) of goods. After rising 2.5 times faster than national income in the 22 years prior to 1980, proving America's competitiveness, the export ratio came to a screeching halt - - now oscillating 10% of nat. income. 2010 goods exports totaled $1.29 trillion.

U.S. exports have not had an upward impact on our economy's national income for 30 years, proving U.S.-produced goods are less competitive and less of interest to foreigners than before - - and/or we are too busy consuming to produce. A comparison > high cost Germany's export ratio of 35% of GDP is many times higher than America's ratio.

Notice the widening gap between the two curves - - that's the exploding trade deficit, as we import faster and faster than exporting to others. Prior to the 1970s there was a net balance in our favor (exports higher than imports), but not any longer.

NOTE: Exports lagged imports despite the reduction in the international value of the dollar between the 1970s and mid 1990s (and 2001-2004) which reduced our wages relative to others. So, a weaker dollar does not guarantee a trade surplus - - perhaps the opposite, as imports become more expensive. This suggests that if the U.S. dollar should fall in its international value the U.S. will not become more competitive - - which further suggests the reason is both our declining manufacturing base (chart below) as well as the fact we do not produce (or want to produce) enough goods to meet our needs, let alone produce sufficient goods desired by others.

This is clear evidence that we are competing less well than before, and trends are in the wrong direction by far. Perhaps Americans are too interested in consumption and piling up debt and in speculation, instead of production and savings - - too interested in financial paper instead of producing goods. This chart shows exports at about 11% of the US economy. This compares to exports being about one-third of the Euro-region's economy, indicative of that region's relative manufacturing base strength compared to the US.

goods-pct-gdp.gif (2820 bytes)BECAUSE AMERICA PRODUCES LESS and LESS of Needed GOODS,
the PENETRATION of IMPORTS INCREASED 7x to make-up the short-fall as America becomes less and less self-sufficient.

The left chart looks at imports of goods, as a percentage of total goods in our GDP. America's Gross Domestic Product (GDP) is made up of 3 components: goods, services and structures. Here we look at the goods portion of GDP, and the percentage of same represented by imports.
1. In 2007, goods imports represented 46% of all the goods used in the U.S. (up from 29% 10 years ago)
2. That's 7 times higher than the 6% import ratio in 1959.

This means > > whereas in 1959 the U.S. produced 94% of the goods it needed (just 6% were imported),
TODAY we produce just 54% of our needs for goods (importing 46%). This chart demonstrates that import penetration increased - - dramatically.

data note: in 2007, total GDP was $13.8 trillion. Of this, its goods portion was $4.1 trillion, or 31% of total GDP. The non-goods portion of GDP was 69% of total GDP (58% for services, balance for structures). In that year, goods imports were $1.9 trillion, or 46% of total GDP goods - - as shown in the chart. - source: Dept. of Commerce (BEA), table B-8, etc. of the 2007 Economic report of President.

Percent of consumer good purhcases that are importedConsumer goods are more and more fueled by imports, not local production.

Imports make up 17% of all consumer goods bought in the US, or $407 billion in 1998, up from only 5.4%, or $19.2 billion, in 1970.

Since the above chart shows imports soaring after 1998 we can assume the consumer goods ratio is now higher.

In any case, this chart shows we are more than 3 times more import-dependent for consumer goods than before.

This shows much of U.S. imports are not for investment purposes to help earn national income into the future, but for consumption purposes which are gone forever. (data source: Time Magazine, 11 Oct. 1999, page 54)

Because of this U.S. global dependence on the production of others, not only is this generation less independent than before but our dependence is so great and growing so rapidly that we must more than ever start producing the best quality high school education in the world, instead of lower education quality than prior generations relative to foreign nations -

(as shown > International Education Report and the International Math & Science Report)

- which place our younger generation at greater risk than ever before. Further, we must assure private sector regulatory compliance costs to meet mandated federal and state & local government regulations are less than our major competitors instead of increasing (see the Regulation Report and its trend graphics).

"TWO-THIRDS OF AMERICANS ARE NOT PREPARED FOR THE GLOBAL ECONOMY."

"Like it or not, there are a billion talented workers coming on board the global economy who will do the most sophisticated software jobs amidst lousy environmental conditions in Indonesia, India or China. That's a reality we have to deal with. I hope we can keep our social safety net largely intact and still compete with a billion new workers. But I've got to tell you. I find myself intellectually on the side of the prime minister of Malaysia when he says 'you've had yours. Now it's our turn to have ours.'

Their view is: 'If we choose to have a slightly dirtier environment while we grow better jobs that's our choice and it's none of your business. The G-7 will go to Halifax and pretend that they're in charge of something because that's what we pay them to do. They ain't. And they are less in charge than they have ever been. I find myself inalterably opposed to anybody who stands before this group and says government can have much control over the global economy." Tom Peters, writer and international business consultant, and advisor to former V.P.  Gore

INTERNATIONAL TRADE - NEGATIVE TRENDS LOOMING LARGER

total merchandise trade trendThis chart measures the U.S. merchandise (goods, excluding military) trade balance since 1959. Up until the mid 1970s a positive balance of trade was realized, which demonstrated a past ability to remain sufficiently competitive in goods to cover our import needs, no matter what they were.

NOTE: The U.S. is setting record negative trade balances each year since 1992 - - recently exploding.

About mid 1970 trends turned against the U.S. as imports grew faster than exports.

This is same period when median family incomes stopped growing, and more women left the home to produce another income.  Devaluation of the dollar followed. (see the Exchange Report with charts on long-term trends of the dollar)

It can be seen that the pattern since the mid 1970's brings into focus the basic question above - - America's lack of competitiveness world-wide. The chart shows the year 2008 recorded near record of $821 billion deficit - a new all-time record - and $265 billion worse than 2003. The slower economy in 2009-2010 caused imports to decline a bit, causing the above blip.
trade-deficit-cummulative.gifUSA CUMULATIVE TRADE DEFICITS - - past 21 years

The chart above showed the USA merchandise trade deficit for each year -

- reaching $647 billion in 2010.

The left chart shows the USA cumulative merchandise trade deficit

- - with all nations since 1985. (cumulative means adding all deficits)

This cumulative total deficit since 1985 reached $8.9 Trillion by 2010 year end.

AND - that's a huge transfer of U.S. wealth ownership.

USA cummulative trade deficit with ChinaNext is a comparative chart of USA deficits with one nation, China, which, in 2000 surpassed Japan as the number-1 source of U.S. trade deficits.

The left chart plots the USA merchandise trade deficit with China from 1985 to present.

The black line represents the USA annual deficit with China, which reached $256 billion in 2007 - - 149% worse than 2002 and accounting for 31% of the total USA merchandise trade deficit.

The red line is the cumulative (sum) of trade deficits with China since 1985 - - reaching a huge cumulative total of $1.6 Trillion up to 2007.

Many ponder the strategic implications of soaring USA trade deficits with China in recent years, since China is thereby receiving dollars to help build its economic power, while also expanding and modernizing its military forces. Additionally, as reported in the Energy Report, China is now a major oil importer competing with the U.S. for diminished world oil reserves. Meanwhile, China's foreign exchange reserves increased to $1.04 trillion in 2006 (15 times more than the mere $69 billion of U.S. reserves) and were up 250% from $292 billion in 2002. This China chart prepared with Census Bureau data from link # 9, international section of the links page).

Whenever there is a month that our exports rise, how often we hear politicians bragging about how many more jobs that created on 'their watch'. But, they purposefully do not tell you the whole story, which for that month would have meant a net job loss - - because imports increased faster than exports. Job creation must be considered in net of exports vs. imports, and without devaluing the currency paid our workers - - and with regard to longer term trends. The negatives in the above chart indicate we are continually running a net job LOSS.

"Even the supposed robust information technology sector is running a $2 Billion a month net trade deficit; exports are rising, but imports are up even more strongly due to computer components and a significant number of finished products from overseas," said Richard O'Brien, Hewlett-Packard corporate economist, in the National Assoc. of Business Economists News, November 1996. (author note- by 1999 this technology deficit climbed 2.5 times).

current account deficit by year$8.4 TRILLION INTERNATIONAL DEBT BUILD-UP in CURRENT ACCOUNT - including $698 billion in 2008 alone

The previous chart shows trends of our balance of payment deficits in merchandise (goods) trade. The left chart gives the complete picture. It sums all components of goods, services, investment flows, etc. Nothing is left out. Its called the Current Account Balance.

As we purchase more from foreign nations than they from us, and as their investment income from the US grows faster on what they own here than ours invested in their nations, we owe them the difference - - and this chart shows we are in record deep negative territory.
This chart shows in 200 the USA current account debt to foreign interests increased another $698 billion, near another new all-time record, which also means an added $2,3102 in foreign claims on the future national income of each man, woman and child.

The left chart shows 48 years of yearly current account trends, with negative trends against the U.S. over the past 20 years - - and plummeted in the 1990s and early 2000s.

In 1997 the U.S. current account had a deficit of $128 billion, which was the same amount spent on our total Medicare program.
In 2010 the current account deficit was $561 billion ($2 billion red ink per day), 6 times greater than 1997 and > 2.6 times larger than our Medicare program and about the amount paid for all military programs, and 26% more than the $586 billion cost of Social Security.

The situation is potentially more serious than ever before. America is also running an increasing deficit in investment income which will cause America's current account deficit to widen indefinitely even if a weaker dollar stabilizes the trade deficit. Charts below show the deteriorating U.S. net investment status.

Will such performance increase or decrease 'protectionism' in the U.S.? Would such sooner or later seriously weaken the U.S. dollar and perhaps soon negatively impact its reserve status vs. the Yen and Euro - -while re-establishing the historic path of the long-term downward trend of the international value of the dollar per the chart in the Exchange Rate Report?

CUMULATIVE CURRENT ACCOUNT DEFICITS

Cummulative deficit Current AccountThe left chart is a plot of the cumulative current account deficits- - meaning the sum of annual deficits since 1974.

This cumulative deficit was $8.4 Trillion in 2010 - - which is $27,815 per man, woman and child in America.

This means foreign interest have picked-up U.S. assets and mortgages on assets totaling $8.4 trillion.

Stated more simply - - our children owe foreigners $8.4 trillion which we citizens consumed in the last 20+ years in excess to that which we produced ourselves.

The current account deficit represents money the U.S. has to borrow from overseas to finance spending and investment not covered by domestic savings.

The U.S. is now the World's largest debtor nation, compared to being the largest creditor in my generation - which means foreigners now own increasingly more U.S. assets than Americans own overseas.

If not reversed, this trend looking forward spells dangerous challenges to the U.S. dollar, as the 'king' of world reserve currencies - and to American living standards.

Said Dr. Allan Greenspan, Federal Reserve Chairman: "We cannot depend on imported capital, that is, a current account deficit, to offset low domestic saving indefinitely. As the G-10 study indicates, even though globalization has led to large capital flows across national boundaries, domestic investment has remained highly dependent on domestic saving. This is likely to continue to be the case."

(also see below comments on uncharted territory warnings by Dr. Lindsey and Dr. Thurow)

trend foreign ownership of our debtGUESS WHAT FOREIGNERS ARE DOING WITH SOME OF THAT MONEY

WHO DO WE OWE THE DEBT TO? How about a lot to foreign interests?

Guess what foreigners do with all that cash they earn from our international trade deficits, since they don't want the goods we produce? In addition to that used to purchase US companies and liens against firms, they use some of it to buy up liens against our national government, by purchasing outstanding Treasury bonds and notes - - which we issue as debt securities to cover our internal debt, which was caused by excessive federal government spending.

The chart at the left shows that foreign parties now control 49% ($3.1 trillion) of all our outstanding federal government debt paper owed the 'public', meaning we owe 49% of the public-outstanding private debt payments and pay-off to foreign interests - - not to U.S. parties. And this $3.1 Trillion does not even include the added amounts foreigners own of our federal agency debt, such as GNMAs, and other such government-like debt, nor their holdings of corporate and finance sector debt. (see the full Federal Govt. Debt Report).

This chart means the average American citizen owes $10,265   in federal debt to foreign interests, because of our nation's excessive federal spending and our consuming more from the rest of the world than we produce. A family of 4 owes more than $41,060  in this regard, of which 18% is owed to Chinese investors - - because Japan is running a large trade surplus (not a deficit, as in the U.S.A. - - and, Japanese are big savers, not with negative personal savings rates in negative territory as American households. (Imagine whispering to your new born baby that he or she is responsible for $7,438 in federal debt and interest payments to children of other nations.)

Note the rapidly rising trend in the past several years, as foreign holdings zoomed upward since 1992.

We are the world's largest DEBTOR NATION, becoming more so each day, and should not be surprised that others are financing our consumptive spending binge, and we owe them back. But, how long will they continue to do so? Suppose they stop financing us. How would we pay for our imports then, or for our excessive government and consumer consumptive spending - - instead of producing and saving more? NOW - - Take a look at the above chart again, and note foreign share in 2002 dropped - - indicating OPEC and Europe have cut back their share as they observe soaring US trade deficits which could impact the value of the US dollar they were holding.

Foreigners now own more and more of America - - about "$8 trillion of U.S. financial assets, including 13% of all stocks and 24% of corporate bonds", according to Bridgewater Associates. According to the above chart, they also own 44% of all Treasury bonds. Additionally, they own real estate and factories.

We should not be mad at foreign interests. We are the ones consuming beyond our own production, creating unprecedented debts and trade deficits PLUS excessive federal spending. We are in deep trouble. (Below is a table of Major foreign holders of federal government debt)

Trend of Reserves - USA and JapanFOREIGN RESERVES - USA STAGNATES - - OTHERS GROW

Foreign reserves are equivalent to a nation's liquid international savings account, being assets it can freely spend for foreign goods and properties. (keep in mind that said reserves do not take into account international debts). Bottom-line: the more foreign reserves a nation has, compared to others, the better.

This chart shows foreign reserves each year for the past 55 years. Note how the USA stagnated since 1992, with zero growth - - as Japan's reserves soared, AND later China's exploded upward.

Note this chart's data is in International Monetary Fund special drawing right units (SDRs). The chart data points for 2007 are: China 969,056 SDRs, Japan 603,794 SDRs and USA 95% less at  a mere 46,820 SDRs. (2007 IMF exchange rate was $1.58 per SDR)

Just look at the international reserve trend of China and Japan, compared to the U.S.

Restated in dollars, the 2007 SDR data points are equivalent to China $1.5 Trillion, Japan $954 billion and USA just $74 billion.

Together, China and Japan own 40% ($2.5 trillion) of total World international reserves ($6.3 trillion). The U.S. share is just 1%.

Additionally, the USA has tremendous international debts exceeding $10 trillion to more than cancel out its mere $69 billion in international reserves, whereas Japan has zilch international debt.

"Asian central banks currently hold about $2.2 trillion, or 80% of the world’s official foreign exchange reserves.  As of year-end 2003, BIS data reveal that dollar-denominated assets made up about 70% of these reserves. Japan and China account for over half Asia's total foreign exchange reserves," per Morgan Stanley chief economist Stephen Roach on Sept. 28, 2004.

Do U.S. businesses face a level playing field regarding its regulatory compliance costs?

This grandfather wants to see the U.S. line on this chart climbing straight up, and passing all others - - instead of stagnating while others soar.

Additional deficit cause may be attributed to more effective import blocking practices of other nations, as they better utilize WTO loop holes.

reserves per person per nationINTERNATIONAL RESERVES PER PERSON

Another way to look at reserves for different nations is on a per capita basis - - meaning how much international reserves does each nation have backing up each of its citizens.

As a grandfather, I would prefer the U.S. had more foreign reserves per child than any other nation - - not less!

This chart compares international reserves per person for 5 nations, from tiny Switzerland (pop 7.4 million) to huge China (pop. 1.3 billion citizens).

It reveals a dramatic picture - - as of February 2007.

It shows, from left to right >
1. USA with a mere $224.26 in international reserves per citizen, compared to >
2. China with $788 per person (despite its huge population)
3. Germany with $1,382 per person,
4. Japan with $7,011 per citizen,
5. and even tiny Switzerland with $8,689 reserves per person.

Japan has 31 times more reserves for each of its citizens than does the U.S.

Not only is the U.S. significantly lagging other nations in reserves per person, but also it is the largest debtor nation in the world with an external debt exceeding $12.5 Trillion and continuing record trade deficits.

(data is from the International Monetary Fund (incl. gold) and US Economic Report of President to Congress, 2/07, table B-111)

A SOBERING VIEW: posted 20 September 1997 in newsgroup alt.politics.economics, by Wayne Crimi in response to Michael Hodges' posting question of: "Bottom-line: we consume more than we produce, and this cannot continue forever - - especially now that Europe is moving to a single currency."

Response: >>"I agree. In my view the recent strength of the dollar is related to some very special cyclical circumstances. Both Japan and much of Europe have been experiencing weak economies relative to the U.S. The large interest rate differential has attracted capital to the U.S as a result. In addition foreign central banks, until this spring, have been amassing billions of dollars of U.S. treasuries which also helped support the dollar. They accumulated about 100 billion a year for 2 years. There is also uncertainty related to the Euro. Net last year foreigners lent us 405 billion.

Over time the accumulation of U.S. treasuries via our current account/trade deficit will pose serious problems for the U.S. The associated interest payments compounding over time + the trade deficit will make it very difficult to get things under control. This could have very serious implications for the dollar and the economic health of the U.S. This inflow of capital is also a primary reason for the stock market explosion in the last 2 years. (unsustainable). The U.S. personal savings rate is now the lowest ever. With our trade/current account deficit money financing our debt via foreigners, Americans have been free to consume more and use their meager savings to buy just stocks instead of financing our expansion.

When the cyclical portion of this reverses (Japan strong, U.S. weak) we will see a slowdown of these inflows. It will require higher rates to continue attracting this money or to generate it domestically. Stocks which have been propped up by all this will return to more normal values. (much lower)

In my view this is all going to end very, very badly. The trade deficit has been a problem for 15 years. We are now a very large debtor nation. If we don't do something , we will live here, but others will have claims on the assets and incomes. This translates into control over the politics.<<"

Another related item: on 18 Sept. William Hummel posted in sci.econ that "as of 30 June 1997 our monetary base was $455 billion, of which $408 billion is in currency (reserve notes) - and, two-thirds of our currency is in foreign hands." That two-thirds figure is a scary statement. And that was 7 years ago.

WHO IS WRITING THE RULES FOR TOMORROW'S WORLD TRADING SYSTEM - the U.S. or others?

In 'The Future of Capitalism,' 1996, author and M.I.T. economics professor Lester Thurow wrote:

"The rules for the new world order are being written in Brussels. The Common Market is now the world's largest market, and those who control the conditions of entry into the largest market have always written the rules for world trade. England did so in the 19th century, replaced by the U.S. in the 20th century. To some extent the European Union will write the rules for world trade simply because it is the only international group in the rules-writing business. It will write rules for those inside the EU and tell those outside how they can gain entry. Whatever it writes for outsiders will be copied by others as their rules governing outsiders."

This statement shows our young generation face a major challenge regarding 'who is in command of world trade,' compared to prior generations.

See also The EURO - about the new European single currency

net US invest. statusDETERIORATING U.S. INTERNATIONAL NET INVESTMENT STATUS

This is a dramatic chart, a chart of America's exploding negative NET WORTH.

This chart plots the sum of all the assets we Americans own abroad, plus all our gold and foreign currency, and then subtracts the higher value of foreign-owned assets in the U.S. - - called the U.S. International Investment Position at the end of each year shown.

This shows a significant negative trend against the U.S., compared to a balanced status just 15 years ago.

In 2007, the net international investment balance was a $2.6 trillion deficit, as shown on the chart - the worse in history. (President's Economic Report to congress 2/2007, table b-107). Adding 2007's current account deficit of $698 billion increases negative net worth to over $4 trillion as of beginning 2008.

Why are we allowing this negative status and trend to be passed on to the next generation?
Where is the plan to correct the on-going international debt build-up and asset transfer due to negative trade performance?

Leave it to my children & grandchildren?

Japan has rising net assets, while US has increasing liabilitiesNET FOREIGN ASSET POSITIONS % GDP - U.S. VS. JAPAN

Net Asset is a measure of the difference between a nation's foreign assets and its foreign liabilities. One good way to compare nations and their relative trends in net assets is to compare the value of same as ratio to the size of their respective economies (GDP). This chart does that.

The left chart's red line shows the U.S. has a rapidly declining position, and is strongly in the red with a rapid deteriorating trend - - with net liabilities of about 20% of GDP (or, minus $1.6 trillion). (by 2003 this ratio soared to 45% of GDP for the U.S.) The U.S., the world's largest debtor nation is becoming bigger debtor each year. Also note from the chart that America's red ink, as a percentage of its economy size (GDP), doubled during the 1990s.

The left chart also shows Japan's net foreign assets (black line) are strongly in the black and growing upward rapidly in a positive manner, reaching 31% of GDP in 1998 - - about $1.2 trillion in value. Japan, therefore, is a huge creditor nation - which increased its net position relative to GDP in the 1990s by three times.

Some might say that in the 1990s America had a strong economy, but this chart shows such was not internally driven by asset creation but driven by expanded international indebtedness. In addition to this driving force of increased international borrowing, the America's Total Debt Report includes dramatic graphics documenting the record internal debt created in the U.S. during this period - - also an all-time record high.

The divergent trends shown in this chart are most dramatic

This further erodes the standard of living of the U.S. worker.

One main factor may be our sliding educational system vs. that of our major trading partners, especially when it is reported that the U.S. spends a higher percentage of its national income for education than others.

This may also be coupled with our propensity to spend larger portions of our economy on consumptive goods and social expenses, and less on productivity enhancement infrastructure and competitive investments.

And, as seen in the Grandfather International Education Report, foreign nations are several times more intense in using both their universities and ours to develop a higher percentage of math, science and engineering graduates. There are reports that 57% of the new PhD's in math from our universities, and approximate half our science, engineering & math graduates, are foreign students.

The next generation may pay quite a price for our negligence.

global-trade-ratio.gif (4251 bytes)WORLD GROWTH DEPENDENT MORE UPON GLOBAL TRADE

The following chart shows that world GDP growth has become two times more dependent on global trade during the recent past, while those trade deficit charts above show the U.S. is becoming less and less productive/competitive regarding U.S.-produced products.

About this chart : "By our estimates global trade in goods and services now amounts to 25% of world GDP, up dramatically from the 19% share just ten years ago and an 11% portion in 1970. Over the past 17 years, 1987 to 2003, surging global trade has accounted for fully 33% of the cumulative increase in world GDP. By contrast, over the 1974-86 period, trade accounted for about 17% of the cumulative increase in world GDP. In other words, since the late 1980s there has been a virtual doubling of the role that trade has played in driving the global GDP growth dynamic. There can be no greater testament to the power of globalization.

A new and powerful global labor arbitrage has led to accelerating transfer of high-wage jobs from the developed world to lower-wage workforces in the developing world. Enabled by the Internet and the maturation of vast offshore outsourcing platforms in goods and services alike, labor has become more “fungible” than ever. In a world without pricing leverage, the unrelenting push for cost control gives a sudden urgency to this cross-border arbitrage. The outcome is a new and potentially lasting bias toward jobless recoveries in the high-wage developed world."

(Morgan Stanley Global Economic Forum, 11/24/03, Stephen Roach, chief economist http://www.morganstanley.com/GEFdata/digests/20031124-mon.html#anchor0

It is clear the U.S. must implement policies that reverse its decreasing interest to the world regarding products and services it produces of interest to others.

mfg-worker.gif (4034 bytes)Causes of Trade Deficit = manufacturing decline plus rising oil imports
PLUS > soaring debts all sectors pushing consumption (incl. imports) beyond incomes.

The left chart shows the trend of the number of manufacturing workers as a percentage of all U.S. employees (non-agriculture) - - from 26% in 1960 to 9.7% in 2007, a 62% drop in the manufacturing ratio.

On a GDP basis the trend is the same negative > the U.S. manufacturing base declined from 30.4% of GDP in 1953 (when we had a trade surplus) to 11.7% in 2006 - also a 61% drop in the manufacturing share of GDP - and more is foreign-owned than before.  (Bureau Economic Analysis table b-12, Economic Report of President, appendix table)

As shown by the merchandise trade chart above, whereas in 1960 U.S. goods manufacturing produced a $5 billion trade surplus - - 2006 merchandise trade had a $836 billion deficit. A powerful negative swing.

As America's production of goods has become a much smaller share of the economy the export share of national income stagnates and declines and the import share soars.

Bottom-line > manufacturing base shrinkage is a major negative regarding trade balance, and a major negative impact on U.S. economic and national security independence and future living standards.

Note that the down-sloping trend of this chart far pre-dates the opening of China as a major world manufacturer.
According to the Chinese Statistical Yearbook and economist Steve Roach of Morgan Stanley (4/05), the average Chinese manufacturing worker made 12,496 yuan in 2003, which translates into about US$29 per week. By contrast, average weekly earnings of US manufacturing workers amounted to $636 per week in 2003. With Chinese manufacturing wage levels only 4.5% of their US counterpart, my back-of-the envelope calculations suggest it would take about 20 years of sustained 15% annualized Chinese wage inflation to close half the wage gap with the US. Don’t kid yourself. Even with Chinese wage inflation, the economics of the labor arbitrage between the US and China remain compelling for as far as the eye can see.

Loss of price competitiveness has even affected high-technology goods, with resulting large deficits in those industries as well. Examples include office equipment and automatic data processing equipment (a 1999 deficit of $36 billion) and telecommunications equipment (a 1999 deficit of $23 billion). Source -Trade Deficit Commission.

There are zillions of items on which America depends on foreigners to supply. Most know America is dependent on foreigners for 60% of its oil. However, few realize that America is 100% dependent on foreigners (British and French) for flu vaccines needed by senior citizens. A nation that will not produce its own flu vaccines is not a very smart nation.

Some try to blame the US manufacturing base decline on an artificially high foreign exchange rate of the US dollar, which they say negatively impacts US producer costs on an international basis. While this may be correct now and then, the Exchange Rate Report's long-term trend chart proves the dollar's exchange rate has declined significantly over the same period as the above chart's manufacturing decline. Additionally, this International Trade Report's current account and mercantile trade trend charts clearly show large deficits even though the exchange rate fell. And, as shown in that report, for decades Germany, Japan, and even tiny Switzerland have maintained significantly stronger currency exchange rates vs. the dollar, while realizing continuing trade surpluses. So, the exchange rate excuse is just that > an excuse !!

"The deficit continues to be driven by poor U.S. performance and the rapidly rising tide of interest and dividend payments to foreigners who hold an ever increasing share of the American economic pie. Longer term, we run the risk of giving up more control of the economy." Michael Fenollosa, economist at John Hancock Financial Services to International Herald Tribune, 3/97.

Therefore, the trade deficit is significantly influenced by the following:

  1. Debt-based consumption - soaring trade deficits due to stagnation of exports despite reduced dollar exchange rate - and soaring import ratios, much driven by debt - - which in turn is much influenced by Federal Reserve manipulated interest rates. Certainly the lowest interest rates in decades as set by the Federal Reserve has much to do with fostering more debt to support more consumption which in turn includes more imports. With the highest debt ratios in history for most sectors, interest rates should also follow to record highs - - but cannot if manipulated.
  2. Manufacturing decline - - as covered above.
  3. Soaring debts all sectors and record debt ratios, further promoted by record low interest rates to make debt 'more fun' - - accelerates consuming beyond national production and savings, as shown in America's Total Debt Report, causes more imports than would be the case.
  4. Soaring oil imports - - As shown in the Energy Report, America's oil production has declined to record lows with declining reserves, and as consumption climbs the consumption-to-production gap climbed to 71%, with soaring imports making up the difference.
  5. Regulatory Compliance Costs - -  see this graphic report for other insights. Obviously the more the US, with perhaps the highest regulatory cost % national income in the world, must compete with nations with much, much less regulatory impact on producers, the worse the relative potential manufacturing and trade performance.
  6. Government Spending 43% share of the economy, including the federal social spending ratio which has increased dramatically during the same period as declining manufacturing ratios. Additionally, the number of state & local government employee continues to increase faster than general population growth - - and most of those employees have better health coverage paid by tax payers than taxpayers have for themselves.
  7. Some might add to the list - - Lawyers per capita in USA highest in the world, by far. Data shows one can rank nations and find that those with the highest number of lawyers per capita also have the worse international trade performance. While America has the highest density of lawyers it also has the greatest current account (foreign trade competitiveness) deficit ratio to GDP. Japan with the fewest lawyers per capita has the world's highest trade surplus. Current account data  2003 shown here is in the same order as lawyers per capita for these nations: USA 5% GDP deficit,  Britain 2.1% GDP deficit, France 1.3% surplus, Japan 3% surplus.  See Lawyer Report with graphic comparing USA lawyers per capita with other nations.
  8. Additional deficit causes may be attributed to more coordinated and effective import blocking practices of other nations, whereas they better use and/or control WTO loop holes and local regulations than does the U.S.
    For example, it has been reported that WTO rules permit many major trading countries to rebate value-added taxes on their exports and impose these taxes on imports. The United States is much more dependent on corporate and personal income taxes to finance government than other countries, and WTO rules prohibit the United States from making similar border tax adjustment for income taxes on exports and imports. The average standard value-added tax in the European Union is 19%. When rebated on exports and applied to imports, these adjustments provide a 19% subsidy on EU products sold in US markets and a 19% import tariff on US products sold in EU markets. China offers similar benefits to its manufacturers. If this is the case, the U.S. Congress should re-balance this type of 'playing field' immediately regarding tax rebates and also reconsider its membership in the WTO.

Instead of debasing the US dollar while promoting policies to drive debt records in all sectors,
the US must take action >

One should not try to get around attending to the above actions by playing games  > such as calling for a 'level playing field' > defined as commanding that all other nations must change their culture and economy so as to also have US debt ratios, US regulatory compliance cost burdens, US record low saving ratios, US manufacturing ratios, US government spending ratios, or US lawyers per capita. The US must clean its own house - - and stop blaming others or playing ostrich.

Readers are invited to submit their recommended additions to this priority list, together with data backup - by email.

DOES IT MATTER - - THESE DEFICITS??

THESE TRADE DEFICITS SPELL DANGER - - Uncharted Territory

"It is unlikely we could forever borrow 4% of GDP from the rest of the world.
We have never been that overextended before. Something has to give."

On April 30, 2001, White House Economic Advisor Dr. Lawrence Lindsey, speaking at the annual convention of the Society of American Business Editors and Writers, said: ""I do think it is important that we all keep this in mind: we have had 20 years of expansion - 18 actually, going on 19. And it has been an extraordinary period. But that does not mean that everything is AOK. And I think that it is important to keep in mind what I think are three imbalances. They actually all come up to one imbalance. And let me sum it up with these statistics. Last year the private sector spent $700 billion more than it earned after taxes. (repeating) The private sector spent $700 billion more than it earned after-tax. Now that is 7% of GDP. We have never been there before. We are making up that 7% essentially from two sources. The public sector ran a 3% of GDP, roughly, surplus. And we took in 4% of GDP by borrowing from abroad. But in terms of being overextended, we have never been that overextended before. There is a lot of confusion between the health of the government's books and the health of America's books - they are not the same thing. The public sector ran a healthy surplus…taking a record share from the private sector. The private sector is running a record deficit. (see America's Total Debt Report) We are in uncharted territory. We don't know how this is going to work out. But it is unlikely that we could forever borrow 4% of GDP from the rest of the world. Or more precisely if you look at trends, we are borrowing increasing amounts from the rest of the world. Imagine going to your banker and saying "we thank you very much for the $280 (billion) you lent us in 1999, and the $400 (billion) you lent us in 2000, and it looks like this year it is going to come in about $520. We are going to need $650 in additional cash in '02, probably $800 in '03." Getting the picture? This is otherwise known as "evergreen" financing. And it won't work. At some point, it is going to have to be adjusted. I remember stories from the '80s. Many of you are probably too young. But our personal savings rate - that we moaned as being far too low - averaged 9.1% of GDP. Last year savings were in negative territory. The first quarter of this year savings was minus 1%, the lowest since 1933. Similarly, if you combine personal savings with gross private savings minus gross private spending, we were short last year 5.4% of GDP. That is also a record. Unprecedented. It has to be adjusted. Something has got to give here…"

"The United States' net indebtedness to the rest of the world is approximately $3 trillion or 30% of US GDP. It increased by approximately $500 billion, or 5% of GDP, last year (2002) and it will increase by a similar amount again this year (2003) and the year after and every year into the future until a sharp fall in the value of the dollar against the currencies of all its major trading partners puts an end to the gapping US current account deficit or until the United States is so heavily indebted to the rest of the world that it becomes incapable of servicing the interest on its multi-trillion dollar debt." This report includes an excellent summary of what happens to the dollar earnings of foreign interests from the US current account deficit. (Richard Duncan, May 2003 - http://www.financeasia.com/articles/E867AEB6-642E-11D7-81FA0090277E174B.cfm).

Author note > as seen in the above charts, the U.S. cumulative indebtedness (transfer of wealth in the form of assets sold and debt owed) with the rest of the world increased to about $5 trillion by year end 2004.

Here's more supporting evidence: the U.S. Trade Deficit Commission - Dec. 2000. Enlightened reading, showing all commissioners, from both parties, are deeply concerned that not only is the trade deficit not sustainable but that it carries a great deal of danger to the nation and living standards. No real solutions are proposed with any consensus.

A WARNING: M.I.T. economist Lester Thurow, ('The Future of Capitalism' pg. 17, 1996): "There is one rule of international economics, it is that no country can run a large trade deficit forever. Trade deficits need to be financed and it is impossible to borrow enough to keep up with compound interest. Yet all world trade, especially the Pacific Rim, depends upon most of this world being able to run trade surpluses with the U.S. that will allow them to pay their trade deficits with Japan. When lending to America stops, and it will stop, what happens to current world trade flows?"

About the past several years, one writer reported: "If the US enjoys higher "productivity" why has the trade deficit doubled during the last two years? In an economy that is mostly based on "services", how can higher "productivity" generate the funds that will be needed to repay the debts, which financed a trade deficit that consists mostly of "goods"? Will 10 million Japanese and 20 million Chinese come every year to tour the US? How can competitiveness rise as the result of higher "productivity" if at the same time the trade deficit doubles? What competitiveness? Of burger flippers and Internet service providers?"

Some claim productivity has increased in recent years which increases U.S. international competitiveness, yet the Productivity Report shows not only is productivity lower than prior generations but all of the so-called recent increases can be attributed to two factors: changing measurement criteria for inflation and GDP and the fact that even then nearly all of the so-called increase was in a very narrow part of the economy. Some say 'inflation is dead' which also increases U.S. competitiveness, but the Inflation Report shows today's inflation is much higher than prior generations, despite government changing measurement criteria for the past several years to make it appear more benign. It can be seen that the pattern since the mid 1970's brings into focus the basic question above - - America's lack of competitiveness world-wide - - increasingly so each year. This indicates the U.S. has become less competitive, despite claims of recent improved productivity (mostly realized only by a narrow part of the economy and primarily by revising how they measure productivity and inflation).

Despite all these 'improvements' - -
the above chart shows our growing lack of competitiveness as we increase foreign debt at a faster pace.

USA TRADE DEFICIT BY NATION (nations comprising 90% of total USA deficit)

2007 USA Deficit
(in billions of dollars)		 2005 USA Deficit
(in billions of dollars)		 2005 % total
USA deficit
China                     $256 $202 27%
European Union            $122 16%
OPEC        $93 12%
Japan  $83 $83 11%
Canada  $65 $77 10%
South/Central America $51 7%
Mexico                        $74 $50 7%
Germany $45

sum above

 $678 90%

MAJOR FOREIGN HOLDERS OF TREASURY SECURITIES

You have seen the Above Trend Chart of Govt. Debt to Foreigners
Here is a listing of the major foreign holders of that debt as of date shown.

 (in billions of dollars) Dec 2007 Dec 2006 Dec 2005 Jan 2005
Japan                        581 623 685 701.6
Mainland China                        478 397 257 194.5
United Kingdom                      157 239 234 163
Caribbean Banking Centers2/        117 68 111 92.5
Korea                                 39 70 67 67.7
OPEC                                 138 101 67 64.7
Taiwan                                63 71 59.2
Germany                             42 53 67 57.1
Hong Kong                              51 54 44 52.9
Switzerland                           39 27 37 50
Canada                                 18 48 63 43.4
Mexico                                35 34 38 41.1
Luxembourg                             70 39 40 29.3
Singapore                             40 31 27 27.6
Ireland                               19 18 11 21
Belgium                                13 17 18 16.5
Israel                                 16 11 16
Thailand                               27 17 13 15.8
Italy                                 14 14 18 14.9
India                                  15 14 13 13.9
Turkey                               26 22 16 12.8
Spain                                  ? ? 12.2
Brazil                                 130 52 27 12.2
Sweden                                14 17 19 11.6
Australia                             ? ? 9.7
France                                 11 30 27 9.2
Netherlands                            15 18 11 8.7
Poland 13 14 13 ?
All Other                            154 146 141
Grand Totals                        $2353.8 $2,223.5 $2,176.5 $1,960.3

2/ Includes Bahamas, Bermuda, Cayman Islands, Netherlands Antilles, and Panama
Department of the Treasury/Federal Reserve Board - 2/15/2007
http://www.treas.gov/tic/mfh.txt

National Security and Hi Tech Jobs
America's declining share of IT and communications equipment

As you read the following think about implications regarding hi tech jobs and national security. Obviously if the USA is less and less successful regarding providing the highest hi tech products, IT and communications equipment, such spells ominous implications for the future. Consider the following:

Morgan Stanley economist Steve Roach, Sept. 2006, reported an excellent analysis by Catherine Mann of the Institute for International Economics that illustrates the rapidly shifting market shares in global exports of two of the world’s newest and most rapidly growing product lines -- information technology hardware and communications equipment (see Mann’s, Accelerating the Globalization of America, IIE, 2006). "In both cases, China has come from virtually nowhere as recently as 1990 to attain positions of global dominance in 2004. The gains in market share have been especially dramatic since 2000, when China still ranked #13 in global market share in IT and #5 in communications equipment. A scant four years later and China was #1 in the world in export shares of both of these key product lines. 

Of course, the flip side of China’s rapid ascendancy has been the equally swift decline in global leadership of the former titans -- especially Japan and the United States. For IT products, Japan went from a #1 position of 20.4% of all global exports in 1990 to #5 with just a 7.9% share in 2004. Meanwhile, US market shares in IT exports went from 19.3% in 1990 to 11.0% in 2004. A similar decline is evident in communications equipment. Japan went from an overwhelmingly dominant position with 26.7% market share in 1990 to #5 with just a 6.9% share of global exports in 2004. US market share in global communications exports was essentially cut in half over the same period -- from 13.9% and a #2 position in 1990 to a 7.0% share and a #4 position in 2004. Interestingly enough, Germany has held its own in both of these two leading-edge export businesses; its 6.9% share in global IT exports in 2004 is only fractionally below that prevailing in 1990, whereas its share of global communications equipment actually inched up from 7.4% in 1990 to 8.9% in 2004."

Note how Germany actually increased its share of world exports regarding IT and communications equipment - - DESPITE being one of the world's highest paid labor forces -   together with having a strong (not declining) currency (the Euro). This is just another of many examples proving that hoping a declining exchange rate will help the U.S. is a bogus hope.

This article also lends weight to the argument that the U.S. is less and less able to compete in the hi tech arena, since the U.S. continues to come in near last on international math and science exams - - as reported in the International Math and Science Test Report.

ENERGY FOREIGN DEPENDENCE INCREASING

Energy-dependence - The Energy Report chapter graphically shows declining oil production to 50-year lows, but now we have 123 million more people than then - - with soaring consumption, declining reserves and zooming imports to cover our 70% production-consumption deficit. The U.S. has become more dependent on imported foreign oil and gas than ever before - - which has both economic and national security implications.

WHAT TO DO?
It has been said that there are only three ways in which negative trade balances can be restored: (1) the deficit-incurring country (USA) must cease excessive credit (debt) expansion which sucks in imports faster than incomes warrant and allow interest rates to climb to reverse debt ratios, (2) other countries must inflate their economies to over-price their own production so as to suck up more U.S. exports, (3) the deficit country (USA) must allow its currency to depreciate to drive up prices.

What's happening? Answer (1) USA increases debt even faster (see America's Total Debt Report), while (2) crying for other countries to inflate away their currency and grow their imports from America, and (3) allowing depreciation of the US dollar (see Foreign Exchange Report), causing a loss of international buying power of every US wage earner and holder of dollars - to the tune of negative 40% against the Euro in recent years.

One should not accept leaders hiding-out by calling for a 'level playing field', demanding (as if they have a right to demand) that all non-Americans change their nations to also have huge, soaring debt ratios, near zero savings rates and a declining manufacturing base like America's, with U.S. regulatory compliance cost burden ratios, or even the number of U.S. lawyers per capita. The US must clean its own house. These are covered in the full Trade Report - - link below.

What should happen to those powers-to-be who promote and allow degradation of our currency, our international net worth, and foreign reserves per capita (the international buying power of its citizens) - - and what should happen to those who promote tax and interest rate policies which drive debt and consumption instead of production and savings  - - or about those who make America's future living standards and national security more and more dependent and beholden to non-Americans?????

Is that the proper legacy to pass along to our children and grandchildren? This author thinks NOT !!

For additional information and charts concerning the international situation, go to the Grandfather International Education Report and the Grandfather Foreign Exchange Report

Is a contributing factor the fact that our private sector's relative share of the economy has dropped for so many years, due to government size expansion faster than economic growth? We have seen the chart before in the Grandfather Government Spending Reports

Once total government spending increased above 30% of national income (late 1960s) the U.S. ceased to realize balanced trade results, and thereafter exploded to massive trade deficits - - regardless of whether the international value of the U.S. dollar was weak or stronger. This suggests total government (federal + state/local) spending must be reduced by one-forth from its current levels - - as well as reducing regulatory compliance costs impacting our shrinking manufacturing base.

ACTION OPPORTUNITY

We should be decreasing America's Total Debt ratios (both government and private sector debt), and the government spending dependence of our economy. As Europe moves to a more centralized, bureaucratic government via the European Union, the U.S. response should be in the opposite direction - - to our relative strength of the past - - a smaller and smaller share of our economy dependent on government spending and debt.

Our government dependence and our private plus government debt-dependence has loomed so large, leading many to believe that only government and debt and manipulated interest rates can solve America's serious imbalances looking forward. Many government bureaucrats actually believe they can solve our trade imbalances, but such gets worse. First, their actions resulted in a decline of the U.S. dollar (in other words, by giving all workers an effective cut in pay (in international buying power terms), and still trade balances deteriorated. Then came negotiated trade restraints, called voluntary and 'level playing field' creators. Deficits worsened, just shifting momentarily from say Japan to China. Now its on to NAFTA expansion and the World Trade Organization, as a mechanism to which our bureaucrats can file complaints with other bureaucrats - - still believing bureaucrats have all answers. They are wrong in all cases.

Of course bureaucrats and politicians never contemplate doing that which will resolve all such problems. The SOLUTION: reducing the government spending share of our economy and private and government debt ratios, together with regulatory compliance cost ratio reduction - - to free-up the private sector - - coupled with tax rate reductions and free-market (instead of manipulated) interest rates to encourage savings and reduce incentive for debt. There is no other proper course, that is if in fact we care about making our nation more competitive, more free and improve our legacy to the next generation.

CHALLENGES OF THE FUTURE

OUR AGING POPULATION AND RELATIVE EDUCATION QUALITY

One area eating at our nation's competitiveness is government-operated pension and medical programs for seniors, and the looming time bomb of demographics of a rapid increase in the population of seniors. Trend graphics of the USA vs. other major industrial nations showing comparative government spending ratios and the accelerating burden of seniors is in the International Comparison Report . The nation that best responds to this challenge may gain a future comparative advantage. Color graphics showing trends today vs. prior generations for USA-only are in the Social Security Report.

Another challenging area relative to future competitiveness in an increasing technological-oriented world is the poor relative performance of USA education quality vs. other nations: see the International Education Report and the latest Report on International Math & Science Exams showing USA students in control of last place. The full Education Report on all quality/spending issues is in the Master Education Report.

EXCHANGE RATES, INFLATION and REGULATORY COMPLIANCE COSTS

Long-term exchange rate trends of major industrial nations are in the Exchange Rate Report. And, although the Inflation Report shows today's USA inflation rate is lower than in the past, it is even lower in other major industrial nations - - giving them a comparative advantage. The recent lower inflation rate experienced at home is not necessarily caused by local actions but more from falling commodity prices - which will not continue forever. The USA will have to strive for lower inflation rates than its major competitors.

The cost of government-mandated regulatory costs compared to the past can impact trade competitiveness. See the Regulation Cost Report, for color graphics.

NATIONAL SECURITY

Increased reliance on foreign trade for all goods, including more consumer goods, plus energy raises questions regarding national security, especially since our nation's relative manufacturing base is so much smaller and government's share of the economy is so much larger - - compared to the economic capacity America had to effectively meet the great surprise of a 2-front global war called World War II.

QUESTION:

What thoughts come to your mind ? Are you convinced that our youth face real economic challenges in the international competition arena compared to many years ago that must be eliminated ? Are you proud of the situation we are passing on to them?

ACTION, or NO ACTION ?

Exchange information with Michael Hodges via E-mail

Constructive input and links are welcome.

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