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Generational Dynamics Web Log for 13-Jan-05
Sharp increase in trade deficit surprises economists

Web Log - January, 2005

Sharp increase in trade deficit surprises economists

Mainstream economists had expected the trade deficit to level off, and were surprised by the sharp 7.7% increase in November to $60.3 billion, announced yesterday.

Monthly trade deficit, 2002-present <font size=-2>(Source: WSJ)</font>

Monthly trade deficit, 2002-present (Source: WSJ)

As you can see from the adjoining graph, the monthly trade deficit rose substantially in 2002 through early 2004, but then appeared to be leveling off for several months, until the November up-spike.

On this web site, we've emphasized long term structural fundamentals in the economy, such as astronomically high public debt, and astronomically high stock valuations.

Mainstream economists downplay the importance of these problems because they consider the economy to be "self-correcting." In the case of the trade deficit, this should work as follows:

The high trade deficit causes the dollar to weaken, and other currencies to become stronger. This in fact has happened, as the value of the dollar against the euro has gone from 92 cents per euro just a few years ago to $1.32 per euro today.

If the dollar weakens, then European goods sold in America become more expensive, and American goods sold in Europe become cheaper.

Therefore, Europeans import and purchase more American goods, because they're cheaper, and Americans import and purchase fewer European goods, because they're more expensive.

Therefore, the trade deficit decreases, and the problem has corrected itself.

But this hasn't been working in today's economy. With the dollar falling so precipitously in the last few years, the trade deficit should be falling as well; instead, the above graph makes it clear that it's increasing. The only we can't tell for sure is whether the increase is linear or exponential, but either way it means the economy is not correcting himself.

From the point of view of Generational Dynamics, here's what's going on: During the 1930s Great Depression, most old businesses went bankrupt, and every new business was "lean and mean," with every employee required to pull his full weight.

In the intervening 70 years, these businesses have all been getting calcified with bureaucracies, older employees who are waiting around for retirement, middle aged employees whose job skills are obsolete, or whole departments or divisions producing products and services that people no longer want. Therefore, the average American business today is producing too many overpriced products that nobody really wants. The same calcification process has also happened with government agencies, universities, and all other organizations.

So the economy will "correct itself," but will do so by a major adjustment like the crash of 1929. This will force all the existing businesses into bankruptcy, and the cycle will repeat with the creation of new "lean and mean" businesses. Unfortunately, the side effects of massive homelessness and even starvation will also occur.

As I say all the time, Generational Dynamics tells us what our final destination is, but doesn't tell us how we'll get there, so we can only guess at the scenario. We know that we're headed for a major stock market collapse that will cause the stock market to lose 50-75% of its value, possibly in a single day. We don't know what will trigger that event, and we don't know whether the trigger will come tomorrow, next month, next year, or in a couple of years. We just know it's coming.

Since we don't know when it's coming, we have to be on guard every day. It's possible that this trade deficit surprise will cause the rapid adjustment, as international investors and foreign banks frantically race with each other to pull out of the stock market. I just want my readers to know that both the economy and the world security situation is much worse today than it was a year ago, and that unless things start to settle down again, you should be very wary. (13-Jan-05) Permanent Link
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Generational Dynamics Web Log for 13-Jan-05 Sharp increase in trade deficit surprises economists

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Generational Dynamics Web Log for 13-Jan-05
Sharp increase in trade deficit surprises economists