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The US Economy - Part I

Trade Deficits and Exchange Rates


The US is no longer an 'industrialised country' in the normal sense. It was once the world's leading industrial nation, but it has now been deindustrialising itself for decades, and industry is less than half that of most other countries. The US made a conscious decision to move from industry to services and information, because that was seen cleaner and more high-class.
  • The Structure of the US Economy Today:

  • On the supply side, 70% of the US economy is services. This includes financial services such as banks, insurance and investment companies, legal, accounting, consulting, and the more usual items like tourism, restaurants, etc.

    A huge part of the US service sector is financial services - in other words, perhaps half of the US economy consists not of production but simply of bookeeping entries. That's a poor recipe for a healthy economy.

    Only about 10% of the US economy is manufacturing, and most of that is arms and weapons, aircraft, autos and machinery, pharmaceuticals, petroleum and food products. There are almost no consumer goods made in the US. Simply put, the US doesn't manufacture anything anymore.

    And on the demand side, 70% of the US economy depends on consumer demand - on people shopping and spending money. Only about 20% is from corporate investment.

    Some of this consumer demand will be spent on services, but much (or most) will go toward consumer goods. So, when Americans go to the mall to shop, what will they buy? Stinger missiles? A new Boeing 737? In fact, virtually all the goods in US shops are imported. In a country that no longer manufactures anything, all those consumption goods must be imported, and that will always result in a huge trade deficit. It cannot be any other way.

  • Let's Put it in More Simple Terms

  • The US economy today consists of about 10% of the population sitting in little dark corners, designing and making ever deadlier weapons to kill more people faster. Another maybe 40%, mostly bankers, are sitting in other little dark corners, making bookkeeping entries and telling everyone that is the same as real production and real GNP growth. And the remaining 50% are all busy doing each others' dry cleaning.

    Based on the above, what is the source of US exports? And how can the US not have a huge trade deficit with almost every country?

    The last time the US had a small trade surplus was in 1975, just after it reneged on the Bretton Woods Agreement and took the world off the Gold Standard, destroying the international financial agreements that had persisted since the Second World War.

    By that time, the expansion of credit had begun to fuel the new consumer-led economy and the trade deficits began to emerge - and have continued ever since. And these trade deficits are not only with China. During the past 35 years, the US has consistently had trade deficits with more than 60 countries, long before China began exporting anything. today, 2011, the total is almost 100 countries.

    Is it the considered opinion of the US government (and brilliant economists like Paul Krugman) that all those countries have been cheating on their currency values for almost 40 years?

    To make matters worse, the US economy is fuelled to an exaggerated extent by credit. That means Americans not only don't save any money but that they spend today's money and also tomorrow's money and next year's money. Consumer demand is therefore exaggerated and artificial, and the US (both government and consumers) is living beyond its means. It is borrowing from the future to spend today.

    In simple terms, this means Americans are consistently buying more than they are selling to other countries. It means that the world, including China, produces many things that the US wants to buy, but the US is consistently producing fewer goods that the rest of the world wants to buy.

    This is the source of the trade deficits. It has nothing to do with the value of the Chinese RMB. In the almost 35 intervening years every country's currency has been up and down, often many times, but the US trade deficits (with all countries) have persisted through all of that.

    The US cannot increase its exports unless it sells more arms and weapons, or commercial aircraft. It can try to increase exports of services, but that isn't so easy as the Americans thought. You can export some professional services like consulting and insurance, and tourism is a useful export. But you cannot export restaurants and dry cleaning. The scope for US exports is quite limited.
    The US Credit Binge

    The US economy is fuelled to a high extent by credit, especially consumer credit, and the US savings rate has been at zero or negative for quite some time. This means Americans are spending not only today's money, but also tomorrow's money and next year's money. Borrowing money for tomorrow's investment can be a wise decision; borrowing for today's consumption may lead to disaster.

    During the recent subprime financial disaster, Americans were using their homes like ATMs. As their houses increased in value, Amerians would iincrease the mortgages on those homes - and spend the money. As their homes increased in value again, the process was repeated. Housing prices collapsed when the housing bubble burst, and more than 25% of all Americans owed the bank more money than the value of the house; many owed the bank two times the value of their homes.

    One of the fundamental problems with the US economy is that both the US government, and its population are living beyond their means, borrowing money for consumption, spending tomorrow's money today with little apparent thought of how to repay. Given that so much of the US economy is fueled by credit, the US is not only living beyond its means, but its 'standard of living' is artificially high; my personal guess is 30% too high. This cannot likely be sustained; a major correction may be inevitable.

    The US wants other countries to adopt their model - to stop saving, to push consumer spending, to overflow with liquidity, to use consumer credit to a much greater degree. If this were to happen, the trade deficits might decrease, but Canadians, Japanese and Chinese will not do that.

    Since the US is the only country that follows this model, the best solution is that they increase savings, reduce liquidity and consumer credit to dampen demand, and live within their means. But that's not likely to happen either, in part because it might mean an economic contraction that could reduce the living standard significantly.
    The Gods of Marketing Intervene

    The US was once like Canada, more fiscally responsible, and where thrift (saving) was valued, where you didn't borrow for consumption, low-quality throwaway goods and products were avoided, and the trade balance was normal.

    Then, in the 1950s, the Americans discovered marketing, and the advertising agencies were there to help them create "The American Dream". It began with Layaway plans, then moved to 'Pay as you Go', 'No money Down', 'Buy Now, Pay Later', and other easy credit schemes.

    The dawning of TV displayed beautiful people enjoying their new car, fridge, TV, clothing, vacations, furniture, and not having to pay for them today. The marketers hired psychologists to create a tactical plan to CHANGE AMERICAN VALUES (away from saving and toward spending), and they succeeded beyond their wildest dreams.

    US marketers conceived and created a 'throw-away' society, where appearance was more important than substance, where quality was sacrificed for fashion. As an example, the US automakers changed the total appearance of their models each year, with advertising campaigns that made people ashamed of driving last year's car.

    America evolved into a 'shop-until-you-drop' throwaway economy, based on easy credit and excess liquidity. In a few decades, Americans went from 'thrift' to 'spendthrift'.
    The US Decides to De-Industrialise

    During this same period, the US began to de-industrialise itself. Manufacturing jobs (blue collar) were seen as dirty and low-paying, while jobs in the service sector were clean, 'white-collar' jobs. So began a huge push to development of the service sector, and then to the highest category of service - the 'information' sector.

    The US took pride in abandoning manufacturing to others, where it would exist at the top of the mountain by controlling and selling (high-class) information while others would be confined to selling (low-class) manufactured goods. This is partly why the US no longer produces consumer goods for export. But those services, and all that information weren't so easy to export. And here we have the recipe for decades of intractable structural trade deficits.
  • An American made this comment on an Economist article:

  • "I'm not sure if you guys are aware of this but an economy based on services is actually the hallmark of an advanced market. Chinese companies may make the worlds IPODs but it is Apple that designed it. That means the majority of the profit goes to...you guessed it Apple. Anyone can copy a blueprint and build it...its the intellectual property that seperates the winners from the losers. America's legal and higher education system are built to capitalize on this fact far more effectievely than any other country can or will be able to for the forseeable future. Its called the post-industrial age for a reason."

  • And this was my response:

  • That's the kind of thinking that led the US to de-industrialise in the first place.  Making things is low-class and you get your hands dirty so let's just design things and get patents because that's clean work and more high-class, and we'll become rich by collecting royalties forever.

    Well, you've been doing it for 40 years now.  How is it working so far?  If you showing everybody how to do it right, why is it the US economy that's on the verge of default?  If your theory is what separates the winners from the losers, how come you're the losers?