	Generational Dynamics
	Forecasting America's Destiny ... and the World's

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Generational Dynamics Web Log for 13-Apr-05
US trade deficit hits new monthly record high

Web Log - April, 2005

US trade deficit hits new monthly record high

Meanwhile, former Fed Chairman Paul Volcker is predicting a financial crisis

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

Trade deficit, 2002-present. (Source: WSJ)

For a long time now, analysts have been hopefully predicting that the trade deficit would fall.

Instead of falling, the trade deficit had a fresh monthly high in February, $61.0 billion. Indeed, it continues to grow exponentially, as shown by the adjoining graph.

The new high was achieved because of the increased volume of clothing imports from China, and because of the increase in the price of oil.

Imports and exports <font size=-2>(Source: Dept. of Commerce)</font>

Imports and exports (Source: Dept. of Commerce)

A more detailed picture is shown by examining the components in the adjacent graph, taken from the full US Dept. of Commerce report (PDF file).

The trade deficit is computed by subtracting the amount of our exports to other countries from the amount of our imports from other countries. As this graph shows, the amount of imports keeps rising, while the amount of exports has leveled off.

Is there any reason to believe that either of two trends will change? I sure don't know of any reason.

In fact, a report from the Bloomberg service today says that several analysts are reducing their forecasts for the American economy.

The leveling off of exports is especially ominous, because it shows that the American economy is not making goods that people want to buy. This reinforces the analysis from Generational Dynamics that the American economy as a whole is becoming increasing inefficient, as the new businesses created during the 1930s Great Depression have been getting increasing bureaucratic and inflexible in the intervening decades.

I've been pointing out frequently that Fed Chairman Alan Greenspan has sounded increasingly alarmed in the past year. As Fed Chairman, Greenspan has to be very careful about what he says, so his statements of concern have to be taken seriously.

However, now we have an opinion from Paul Volcker, the man who was Fed Chairman from 1979 to 1987, and whom Alan Greenspan replaced.

In an April 8 editorial in the Washington Post, Volcker says that "[current] circumstances seem to me as dangerous and intractable as any I can remember, and I can remember quite a lot."

Having been born in 1927, Volcker remembers the Great Depression of the 1930s, so Volcker must have been referring to that period.

Volcker points out a number of imbalances -- the housing bubble, high personal debt and disappearance of savings are examples. He indicates that these imbalances could be resolved if there were a national will to do so. But, "[what] really concerns me is that there seems to be so little willingness or capacity to do much about it."

That's exactly the kind of public attitude that Generational Dynamics predicts. During the 1950s-1980s, when all our nation's leaders had lived through the starvation, homelessness, unemployment and devastation of the Great Depression, there was a strong national determination to be fiscally sound, so that the Depression would not repeat itself.

Paul Volcker himself was part of such an effort. During the 1970s, inflation grew rapidly and appeared to be spiraling completely out of control. Paul Volcker was appointed Fed Chairman and he immediately raised interest rates and cooperated with Congress to control inflation. The program was successful.

But today there's no similar willingness to resolve our current economic crisis, according to Volcker. He suggests several policies, and says:

"But can we, with any degree of confidence today, look forward to any one of these policies being put in place any time soon, much less a combination of all? The answer is no. So I think we are skating on increasingly thin ice. On the present trajectory, the deficits and imbalances will increase."

and he concludes:

"I don't know whether change will come with a bang or a whimper, whether sooner or later. But as things stand, it is more likely than not that it will be financial crises rather than policy foresight that will force the change."

There can be little doubt of this.

American consumers are buying more and more clothing manufactured in China. Even though gasoline prices have almost doubled in the last year, gasoline demand in US is 2% higher than it was a year ago, and jet fuel demand is 11% higher. There are no signs that the American consumer is cutting back on using credit cards and home equity to purchase everything under the sun.

So there is no national will to bring about a change, and the current trend lines seem to be reaching a crisis point fairly quickly. Things have been getting steadily worse for many months now, and there's nothing on the horizon suggesting a change. (13-Apr-05) Permanent Link
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Generational Dynamics Web Log for 13-Apr-05 US trade deficit hits new monthly record high

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Generational Dynamics Web Log for 13-Apr-05
US trade deficit hits new monthly record high