Last weekend, officials representing the seven most-powerful economies on Earth convened at a five-star beach resort just a few miles down the road from here.
They huddled behind closed doors.
They debated.
Then they released a document to the world — one page of waffle words making a feeble attempt to stop the U.S. dollar from falling. (See last week’s Martin on Monday.)
One week later and one thousand miles to the north, in Washington, D.C., another group of government officials also convened.
They also huddled behind closed doors.
And Friday morning, they also released a document to the world.
But this time, the officials were from the U.S. Department of Commerce. And this time, the document — U.S. International Trade in Goods and Services — was 48 shocking pages that are bound to drive the dollar into a new tailspin.
Consider these facts:
FACT #1:
THE WORST U.S. TRADE DEFICIT IN HISTORY
The gap between our imports and exports was $489.4 billion last year, the largest trade deficit of any country in any century.
This is separate from, and in addition to, the $521 billion BUDGET deficit announced by the White House just two weeks ago. (Martin on Monday of February 2.)
But its fundamental implications are similar: More DEBT.
Why?
It’s not rocket science: If we sell more to foreign countries, it’s our gain. If they sell more to us, it’s our loss.
And every time we lose, we have to borrow more from foreign investors to fill the gap, falling deeper into debt.
The New York Times on Saturday put it this way: To finance its trade deficits, the United States has been borrowing record amounts from foreign investors and banks. The risk is that foreign investors could balk at continuing to lend the money needed just to finance that deficit.
FACT #2.
WE OWE FOREIGNERS AT LEAST $4.6 TRILLION
The New York Times is right. But the truly big threat comes not when foreigners stop lending us new money. It comes when they decide they want some of their OLD money BACK.
Nor do they have to come begging. All they have to do is call their brokers and say SELL … and they can get their money back just as easily as you would redeem a bond or sell stocks in your portfolio.
The BIG problem: Their portfolios are absolutely loaded with U.S. bonds and stocks — $4.6 TRILLION worth! Even if they decide to sell just a small fraction of that total, they could drive our stock and bond markets into a tailspin.
FACT #3.
THE U.S. TRADE DEFICIT IS MORE DEEPLY INGRAINED THAN AT ANY TIME SINCE THE FOUNDING OF THE REPUBLIC.
Everyone’s talking about the U.S. trade deficits with China and India. But the fact is we have trade deficits with the overwhelming majority of our trading partners …
VENEZUELA: We imported over $17 billion worth of goods from Venezuela last year. In exchange, we exported only $2.8 billion worth. Our trade deficit alone was over FIVE times larger than the TOTAL value of the goods and services we exported to them.
I remember visiting Caracas when I was a teenager. Back then, almost all their consumer goods were imported from the United States, and their oil was cheap. No more!
GERMANY: They sold us over $68 billion worth of goods and services last year. In contrast, our exports to Germany were a meager $28.8 billion. No wonder Elisabeth and I couldn’t find one single item made in the USA when we visited last year!
ITALY: They sold us $25.4 billion worth … but we sold them only $10.5 billion worth.
SWEDEN: Even more lopsided — $11 billion to $3.2 billion. In other words, they’re doing more than triple the business in the U.S. compared to what we’re doing there. What a change from the 1980s when THEY were the ones in deep financial trouble.
DENMARK: Same pattern.
Can we at least compete in certain categories? Sure. We’re doing well with airplanes, certain chemicals, corn, cotton, meats, scrap metal, and many services. But look at these numbers …
CLOTHING: We sold a meager $4.9 billion in Made-In-USA clothing to foreign countries. How much did they sell to us? A whopping $68 BILLION — almost 14 times more.
AUTOS: Mexico now exports three times as much in autos and parts to the United States as we export to Mexico. With Brazil, our gap is even worse — four to one.
FOOTWEAR: We sold $495 million worth — not bad, until you realize that foreign countries sold us $15.6 BILLION worth. That’s 31.5 times more!
CRUDE OIL: We sold $155 million worth outside the United States. Meanwhile, we bought $101.7 BILLION in crude from overseas — 656 times more! Everyone knows we are primarily an oil-importing country. But 656 to one? That’s way out of bounds.
What about ADVANCED TECHNOLOGY? Isn’t that the ONE remaining area where the United States has an advantage?
Until 2001, yes. We had a trade surplus of almost $4.5 billion. But no more! In 2002, the red ink started to flow, and last year, our trade in advanced technology showed a DEFICIT of $27.4 billion!
FINANCIAL LAWS OF GRAVITY NOT
REPEALED FOR THE UNITED STATES
— U.S. Trade Deficit Review Commission
You’d think someone in Washington would be doing something about all this. But, alas, they’re not lifting a finger.
The politicians trying to push the trade deficit issue to the forefront (mostly Democrats) generally favor some form of trade protection, a dangerous approach.
Meanwhile, the politicians who oppose trade protection (mostly Republicans) do so by pooh-poohing the severity of the crisis and pushing the issue to the backburner, also a dangerous approach.
Result: Political paralysis and the greatest international scandal of our time.
Consider, for example, the November 2000 report to the President and Congress by the U.S. Trade Deficit Review Commission.
For 17 months, 12 Republicans and Democrats worked diligently to examine the deficits. They held 10 public hearings around the country. They took testimony from 138 witnesses.
Problem: They couldn’t agree on the trade deficit’s causes. They couldn’t agree on its consequences. They certainly couldn’t agree on a concerted action.
But regardless of your political affiliation, some of the report’s conclusions are largely irrefutable …
The deficit is a very significant threat facing the domestic economy because, unless checked, it could cause a currency or financial crisis that would result in a sharp decline in output and employment — possibly reigniting inflation …
History clearly shows that rising deficits do not correct themselves automatically or painlessly. Both rich and poor countries can be hit by financial crises. Mexico, Russia, and several countries in Asia and Latin America were hard hit by such crises between 1997 and 1999 …
Sweden experienced an especially severe crisis that began with current account problems in the 1980s. These peaked in 1993, when the current account deficit reached 3.6 percent of GDP. Interest rates were increased from 10.1 percent in 1988 to 18.4 percent in 1992 in an attempt to defend the kroner and reduce demand for imports. Output in Sweden declined by more than 5 percent between 1990 and 1993, and unemployment soared from 1.6 percent to 8.2 percent in the same period …
The United Kingdom also experienced both currency and current account crises in the early 1990s, and the facts were similar. The United Kingdom’s current account deficit reached 5 percent of GDP in 1990. Interest rates were increased from 9.7 percent in 1988 to 14.6 percent in 1990, in an attempt to reduce demand for imports and defend the currency. Unemployment rose from 6.3 percent in 1989 to 10.4 percent in 1993 …
Denmark experienced a similar trade and financial crisis between 1979 and 1983. The Danish current account deficit peaked at 4.1 percent of GDP in 1982. Denmark also increased interest rates by 4.3 percentage points between 1979 and 1982, in a failed attempt to defend its currency. As a result, unemployment nearly doubled, rising from 6.0 percent in 1979 to 11.4 percent in 1983 …
Some maintain that the United States is different from these countries because it can borrow in its own currency, which is also used around the world for currency reserves and for transaction purposes. However, these factors are more likely to simply postpone the ultimate day of reckoning.
The financial laws of gravity have not been repealed for the United States, though they may work differently.
If the current account is allowed to expand further before the United States trade balance begins to improve, then the resulting disruption to the domestic economy could be even larger than the recessions that hit the European countries discussed above.
These warnings were issued more than three years ago. And yet, like the many recent warnings about the federal budget deficit, they, too, fell on deaf ears.
The Pollyannas argued that America’s trade deficits were primarily the natural result of a strong American economy — nothing to really worry about.
The Pollyannas also said that the next recession, although undesirable, would naturally tame America’s appetite for imports … and naturally reduce the trade deficit.
But just one year later, in 2001, a recession came and it did nothing of the kind. Instead, the U.S. trade deficit just kept growing by leaps and bounds, recession or no recession.
And now, here we are …
… with a trade deficit that’s the worst in history, far worse than it was back in 2000 …
… with a budget deficit that’s also the worst in history, that didn’t even EXIST in 2000 …
… and with BOTH deficits worse than those of countries like Sweden and Denmark, which subsequently suffered devastating currency collapses, interest rate surges and economic plunges!
Is this the end of the world as we know it? No. Those countries survived, and later, even thrived. Ultimately, so will we.
But it won’t be easy. It will require some of the hardest economic sacrifices, plus some of the toughest labor our citizens and residents have experienced in decades.
In the interim, don’t let the stock market’s year-long rally lull you to sleep or lure you to risk. Get to safety.
Good luck and God bless!
Martin
Martin D. Weiss, Ph.D.
Editor, Safe Money Report
Chairman, Weiss Ratings, Inc.
