Worldwide Tour

* The deficit for November — $60.3 billion — was far larger than virtually anyone had expected.

* U.S. exports were DOWN $2.2 billion … while, at the same time, U.S. imports were UP $2 billion, a rare combination that was also largely unexpected.

* For the first 11 months of 2004, the cumulative deficit was a whopping $561.3 billion. Even if the numbers for December show an improvement, the total for the year will still exceed $600 billion — the worst for any country in the history of the planet.

This has potentially major consequences for investors. It could help drive up U.S. interest rates, push down the value of stocks and bonds, ultimately puncture the housing bubble, sabotage the already-feeble U.S. economic recovery, and potentially, even transform the path of American history.

But in the days that followed the announcement, the spin-meisters of Wall Street and Washington came out in droves, seeking to justify or pooh-pooh the obvious fiasco.

Some promised it would get better soon because the cheaper dollar would supposedly make it easier for the United States to sell its exports. They failed to mention, however, that the dollar has been getting cheaper for two years, but the trade deficit keeps getting worse. They also understated the fact that the dollar is NOT getting cheaper in comparison to the country with which we have the largest deficit of all — China ($114 billion through November).

Others tried to chastise Western Europe and Japan for not growing fast enough and not buying enough U.S. imports. But we have the same deficit problem all over the world, regardless of the pace of growth.

My main point: This is not a phenomenon that’s driven largely by overseas factors beyond our control. Nor is it a passing episode that we can simply ignore or easily overcome.

Quite to the contrary, the U.S. trade deficit stems mostly from a chronic, domestic illness that few of our leaders seem willing to face — a massive, unbridled American addiction to over-consumption.

We’re living too high on the hog — with borrowed money and on borrowed time.

We’re buying too much stuff.

We’re on a binge.

Independent economists agree that this budget-busting, dollar-ditching binge cannot be sustained. They tell anyone who will listen that it’s going to end in trouble or disaster. They just can’t pinpoint precisely when, and nor can I.

But I am relatively certain of one thing: If it ends soon, we WILL come out of it largely intact, despite severe near-term pain. If it ends later, I’m not so sure.

A Deficit Tour

A common symptom of insanity is the belief that “there’s nothing wrong with me — it’s everyone else in the world that’s crazy.”

Likewise, a telltale sign of near-pathological complacency is the idea that “the U.S. trade deficit is not our fault — it’s every other country that’s doing something wrong.”

But if we take a quick tour of the world, you’ll see that nothing could be further from the truth …

We start in India. Just a few years ago, who would have expected the second most populous country in the world — mostly mired in poverty and hamstrung by socialism — to emerge as a high-tech powerhouse of both goods AND services? Yet that’s precisely what has happened: Result: We’re in the red with India to the tune of $7.6 billion in the first 11 months of 2004.

The people in neighboring Bangladesh are especially revealing. They are the world’s most frequent victims of droughts, cyclones, water-borne diseases, ground water contamination, water shortages, soil degradation, deforestation, and severe overpopulation. Yet they have still managed to handily beat the U.S. in trade. Between January and November of last year, they’ve got a $1.7 billion surplus; we’ve got a $1.7 billion deficit.

On the other side of the world, in the Americas, you’ll also see a series of surprises. And no one is more surprised than me.

Except for the island nations, I have visited almost every country in Latin America. I know many of them intimately. And I can tell you flatly: The fact that they are beating the United States in the import/export game is a remarkable turn of events that must not be ignored.

I told you about Brazil two weeks ago. Now let me tell you about some of the other countries.

Thirty-five years ago, soon after Elisabeth and I were married, we decided to travel — by land — from our apartment in New York City to her parents’ home in the interior of São Paulo, using whatever transportation was available.

Our goal was twofold: To explore and survey the Americas (my primary area of specialization in college at the time) … AND … to give Elisabeth a chance to see her family after many months away from home.

Our planned route was through Mexico and Central America … south to Columbia’s Amazon port of Leticia … east down the Amazon River to the Atlantic port of Belem … south again on the Belem-Brasilia highway that cuts through the rainforest and central plateau … then an easy one-day bus ride to São Paulo.

The first half of the trip went according to plan, including a dusty train ride from Monterrey …

to Mexico City, where we stayed with friends of a friend …

on to Managua, which was just recovering from its devastating earthquake …

Reason: Throughout the region, poverty was tantamount to a permanent inability to produce goods efficiently; while wealth and power were defined in terms of one’s ability to buy expensive, prestigious goods from the United States.

Today, it’s the opposite. Our trade deficit with Mexico is huge — $37.5 billion just through November.

Even with Guatemala, Nicaragua, and Honduras (which competes with Haiti as the poorest country in the Americas), our trade deficits are very significant in proportion to their size — $603 million, $232 million and $412 million, respectively.

A Free Ride To South America

Back in 1971 (and still today) the jungle of Darien, between Eastern Panama and Northern Columbia, was barely passable and downright dangerous. Elisabeth wanted to try it, but I told her that, without a convoy of jeeps and an experienced guide, it would, at best, bring us many days of delay, and at worst, a real threat to our survival. So we sought alternate transportation.

We found it at Kobe Air Force Base, a regular refueling stop for military aircraft of various South American countries. On our second day at the base, a Chilean Air Force plane was stopping overnight on its way home from the United States. Its mission: A shopping spree in New York City for the wife and family of Chile’s minister of defense.

Elisabeth and I asked the captain for a ride, and he asked to see our passports. He said Elisabeth reminded him of his godmother when she was a young girl. The next day, to our delight, he told us the minister’s wife would welcome the two teenage-looking newlyweds as their guests on the next two legs of the journey — to Lima, Peru and Santiago, Chile.

Once on board, we couldn’t help noticing that most of the seats in the passenger area had been ripped out to accommodate the boxes of goodies being “imported” from the United States — electronics, camping equipment, and more.

It was obvious to me that, on top of its official trade deficit with the United States, Chile must have had an even bigger unofficial deficit of goods that custom officials never saw … or were paid off not to see. Today, in contrast, it’s the United States that has a trade deficit with Chile — over $858 million worth in the first 11 months of last year.

From Santiago, the snaking highway up the Andes to the mountain-peak border with Argentina was buried in snow. So the only alternate route was a freight train. But it was mostly empty, plowing up and down the steep Andean slope at a chronic loss, according to the station master who gave us a free pass for a ride in the caboose

The main reason: Bilateral trade between Chile and Argentina was mired in tariff disputes and overshadowed by the far more voluminous trade between each country and the giant economy to the North.

Ditto for Uruguay, which as we passed through, was paralyzed in a week-long state of siege while the army and secret police searched in vain for an American CIA agent kidnapped by the continent’s most infamous urban guerrillas, the Tupamaros.

Today, trade within Mercosur (or Mercosul), the common market which encompasses the nations of southern South America, threatens to overshadow imports from the United States, another factor that’s driving America’s trade with the region into a deficit.

We see a similar pattern on every continent on the planet.

In Asia, tsunami-stricken Indonesia and Sri Lanka have a combined surplus of over $8 billion with the United States in the first 11 months of 2004.

War-torn Iraq and politically-estranged Iran have a surplus of $3.7 billion.

Even far-away or underdeveloped island nations — such as Greenland, Fiji, Madagascar, the Maldives, and Papua New Guinea — have trade surpluses with the United States.

In the Gaza Strip, torn by the Intifada uprising, the daily conflicts with Israel, and the political turmoil under Arafat before his death, a trade surplus with America is the last thing you’d expect.

And what about Afghanistan? Outside of Kabul, warlords still rule. The country’s economy is in shambles. Even the Taliban are back in strength, striking strategic targets with impunity.

Yet, remarkably, both Gaza and Afghanistan had small trade surpluses with the United States last year, despite all the economic and political challenges they face.

Are all these countries doing something wrong? To correct the problem, must they all change their ways in some fashion? I think not.

The primary problem is right here in America with potentially dangerous consequences for us all.

Good luck and God bless!

Martin

Martin D. Weiss, Ph.D.
Editor, Safe Money Report
Chairman, Weiss Ratings, Inc.
martinonmonday@weissinc.com

Martin Weiss and “Martin on Monday” are non-partisan. Third-party ads do not necessarily represent their opinion and should not be interpreted as an endorsement.