Grandfather Economic Report series
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I am concerned about the economic & national security  future of our youth
- and their increased reliance on debt and foreign interests -

This is a mini-report about America's increasing dependence on international trade, its poor performance and reliance on savings from other nations instead of its own, causing accelerating debt and asset transfer in favor of foreign interests. Presented in an easy-to-understand format with data pictures, this report is a chapter of the Grandfather Economic Reports series showing various negative challenges facing families and their children, compared to prior generations.

INTERNATIONAL TRADE - NEGATIVE TRENDS EXPLODING !!

This chart measures the U.S. merchandise (goods, excluding military) trade balance each year since 1959. It shows previously the USA ran a balance of trade, meaning we were able to sell enough goods to other nations to pay for what we purchased from them.

America now runs massive deficits. If a country runs a trade deficit it is borrowing from the rest of the world so that it can spend in excess of its own production. This means the USA is less competitive than before. NOTE: The U.S. is setting record negative trade balances each year. Since 1992, deficits have exploded. Look at that trend !!

This chart shows 2006 trade performance in goods was a $836.1 billion trade deficit - - the largest negative trade balance in history, 300 billion worse than just 3 years ago. Look at this chart again. Dangerous trend!!!

How can this record deficit continue in light of a falling exchange rate? The answer is an easy one > America's private and government sectors are increasing debts at a faster rate, much faster than incomes, causing more consumption and imports than could be supported by incomes and negligible savings. In a nut-shell > America is living beyond its means - - way, way beyond!!

The manufacturing base shrinkage is a major negative regarding trade balance, and a major negative impact on U.S. economic independence and future living standards.

In the 12-months to February 2006 the U.S. had a total merchandise trade deficit of $789 billion, while Japan & Germany produced a cumulative trade surplus of $283 billion ($86+$196). That's a whopping $1.07 trillion worse relative trade performance for the U.S., in JUST ONE YEAR. In 2001, for the first time, China surpassed Japan as the country with the largest trade gap with the United States. America's deficit with China surged 95%, reaching $233 billion and 28% of total US trade deficits in 2006.

This vividly shows how America is living beyond its means - - by consuming more goods made by others than it produces to meet the needs of foreigners - - resulting in exploding debts in favor of foreigners, in addition to record high domestic debt ratios of household, business and the domestic financial sectors.

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).

USA CUMULATIVE TRADE DEFICITS - - past 19 years

The chart above showed the USA merchandise trade deficit for each year - - reaching an all-time record deficit in 2006 of $836 billion.

The left chart shows the USA cumulative merchandise trade deficit - - with all nations since 1985. (cumulative means adding all deficits)

The cumulative merchandise goods trade deficit was $6.6 Trillion during the last 21 years (since 1985). That means each American man, woman and child effectively borrowed $21,950 from producers in other nations, because we Americans consumed more goods from other nations than we produced and sold abroad. As a result, foreigners now own nearly $6 trillion more in US assets than in 1985.

Not shown on the chart is the cumulative goods trade deficit since 1976 - - totaling $7 trillion. Prior to that period America produced near continuing surpluses with the rest of the world allowing America to own more assets in foreign nations than they in ours. However, that net has eroded over recent years to an accelerating negative net worth.

Taking into account goods and services, and investment flows, which is called the current account - - "foreign-owned assets in the US totaled US$9.4 trillion in 2001 while US claims on the rest of the world amounted to US$7.2 trillion," according to the White House Council of Economic Advisers - - meaning a net $2.2 trillion deficit with other nations as of 2001. Adding to this negative the combined current account deficits of $1.64 trillion for 2002, 2003 and 2004 sums to nearly negative $4 trillion against the U.S. in favor of non-U.S. entities. Not only is the technology product sector in deficit, but the U.S. Department of Agriculture Economic Research Service estimates 2005 will be the first year in nearly 50 that America will not turn an agricultural trade surplus.

How can competitiveness be said to rise as the result of higher so-called "productivity" if at the same time the trade deficit explodes? What competitiveness?" It is clear that the so-called 'economic boom' of the 1990s was a false boom, because the economy was fueled primarily by increasing internal and foreign debt - - instead of by internal production, savings and competitiveness.
The above chart shows our growing lack of competitiveness as we increase foreign debt at a faster pace. The long-term performance of our currency is our fault  > negative trade balances fueled by massive domestic and international debts.

MANUFACTURING BASE DECLINE

How can America ever export enough goods to other nations to balance its negative balance of trade of soaring imports if it has a declining manufacturing base?

The left chart, from the Family Income Report chapter about stagnant income growth, shows the trend of the number of manufacturing workers as a percentage of all U.S. employees (non-agriculture) - - from 26% in 1960 to 10% in 2006, a 60% 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 12.1% in 2005 - also a 60% drop in the manufacturing share of GDP - and more of the remaining manufacturing base is foreign-owned than before.  (Bureau Economic Analysis table b-12, Economic Report of President, appendix table)

The number of manufacturing employees declined 18% from 2000 to 2006.

As America's manufacture of goods has become a much smaller share of the economy and of its work-force, the U.S. became 5 times more dependent on foreign imports - - consuming 17.5% of national income, up from but 3% in 1960s. The export ratio has not improved in 30 years, despite many devaluations of the dollar.

Note the down-sloping trend of this chart far pre-dates the opening of China as a major world manufacturer.
According to 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, 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." Of course Mr. Roach's statement assumes no inflation in the USA during the next 20 years, most unlikely considering U.S. inflation history.

Bottom-line > manufacturing base shrinkage is a major negative regarding America's trade balance, economic independence and future living standards, including national security.

DEBT-DRIVEN IMBALANCES

The chart at the top of this page showed America's trade deficits started soaring in the late 1970s to early 1980s. Today's deficits are increasing even faster.

Now look at the left chart, from the powerful chapter 'America's Total Debt Report.' It shows America's total debt (sum of all government debt and all private debt of households, business, and financial sectors) started to grow faster than growth of the economy's national income - - at about the same time (late 1970s to early 1980s) - - increasing even faster today.

What this says is that debt drives over-spending, over-consumption - - beyond incomes and savings. Therefore, excessive debt also drives imports - - faster and faster, driving soaring trade deficits.

This chart is a ratio chart - - a ratio of total debt in America to national income. If America's debt dependence were not growing faster than the economy during this period the chart's trend line would have remained horizontal. However, the debt ratio's trend line is straight up in the past 25 years, which means debt increased each and every year faster than growth of the economy. Much of that debt was promoted by Federal Reserve interest rate and government tax policies - - including more rapid debt growth lately fueled by record low interest rates.

To say soaring trade deficits were greatly influenced by soaring internal debt generation, which drove consumption beyond incomes and personal savings, would be an under-statement, for sure.

What are foreigners doing with that which we borrowed from them? Answer: they own increasing percentage of our businesses, stocks, bonds, real estate and government treasury bonds. Meaning > > Americans own less and less of their nation.