Wednesday, July 11, 2012

Huge Trade Deficits Unsustainable

It was reported yesterday that the U.S. trade deficit fell 3.8% in May to $48.7 billion largely because of lower oil imports. While a minor improvement America can not continue down this path at the same time it runs a huge government deficit as well.

This is part of  a revised  post I wrote on March 7th,
                                                 Record Imports Are A "Unsustainable" Problem
Many people that comment on Japans huge government deficit and debt fail to realize that for years Japan has offset that with large trade surpluses. This allows its citizens to buy bonds and allows Japan to control its destiny, this is unlike America that barrows from China to fuel its spending. The presidents spokesman was on Meet The Press a week ago and said, "The time for austerity is not today" he went on "we should look at cutting the budget as a long term goal but not today." As always, it is a case of kick the can down the road.

The idea that America needs to get through this rough patch before tightening the government purse strings has resulted in massive deficits. A country cannot run both a huge government fiscal deficit and also a massive trade deficit, this is unsustainable. For the whole of 2011, the US trade gap rose 11.6% to $558 billion, the highest since 2008. The economically important deficit with China for the year jumped to a record high $295 billion. Some blame China and the exchange rate that China sets for its currency against the dollar, the Senate, controlled by the Democrats, recently passed legislation to try to force China to raise the value of its currency.

But let us get to the crux of the problem, you cannot go on year after year spending more then you earn. When coupled with huge government budget deficits the trade deficits weaken the dollar and drive America in direction of bankruptcy. Let me say it again "this is unsustainable."  It is a myth that we can "export" our way out of this mess, a myth spread by politicians preaching the "no pain" method of solving a problem. The simple answer is that Americans must begin to accept reality and cut back their purchases of foreign goods. A common claim is that if the dollar goes down that helps US exports so it is a good thing, but remember this is a double edged sword, a lower dollar means imports will cost more.

As long as the US dollar is the international reserve currency, the US can just export dollars to import things. While this remains true there is no pressure for the US physical exports to equal their imports, but if the dollar falls from grace, then the US will not just be able to export dollars, and real exports and imports will have to come into balance. Successful leaders give the public reason to believe that they have a long-term program to bring a better tomorrow. America must begin to plan a way out of our explosive deficits and our hesitant and jobless recovery by reducing uncertainty and encouraging real and sustainable growth.

Footnote; People who think we will be able to create many new jobs and export our way out of this mess should read the post below,

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