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

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Generational Dynamics Web Log for 13-Feb-06
US trade deficit continued exponential increase in 2005

Web Log - February, 2006

US trade deficit continued exponential increase in 2005

The trade deficit reached the fourth record high in four consecutive years.

The article in the New York Times has a headline that reads, "U.S. Trade Deficit Sets Record, With China and Oil the Causes."

Well, those are interesting causes.

Oil can't really be the cause, because it doesn't explain why the trade deficit has been going up for years, including years when oil was much cheaper.

Blaming China is interesting, because that makes it China's fault that we're spending so much money on Chinese goods. I guess the Times has completely bought into Fed Chairman Ben Bernanke's claim that America's debt is caused by a "global savings glut." If only those darn other countries would stop their profligate habits of saving so much money, America wouldn't be so much in debt.

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

Imports and exports (Source: Dept. of Commerce)

The adjoining diagram from the Bureau of Economic Research press release shows what's been going on. America's imports have been increasing at about 12% per year, while exports have been growing at a smaller 10% per year. So the trade deficit, which equals the exports minus the imports, continues to grow exponentially.

From the point of view of Generational Dynamics, it doesn't make sense to blame the trade deficit on "oil" or "China." Generational Dynamics is the study of changes in behaviors and attitudes of large masses of people as generations change. The trade deficit has been growing exponentially because it's been growing exponentially for decades.

Household cash and liabilities, 1945 to present <font size=-2>(Source: Contrary Investor)</font>

Household cash and liabilities, 1945 to present (Source: Contrary Investor)

The adjoining graph shows what's happening quite vividly.

People who lived through or grew up during the Great Depression of the 1930s spent their entire lives in fear of it happening again. They spent their lives as careful, risk-averse people who were determined never to risk bankruptcy, homelessness and starvation again, as happened so widely during the 1930s. For that reason, they carefully saved money, and they made sure that they were never seriously in debt. That's why "Household cash" (blue line in the above graph) was always greater than "Household liabilities" (red line).

By the 1990s, the people in the last generation that had grown up during the Great Depression all disappeared (retired or died) all at once. The Baby Boomer generation that took charge had no fear of bankruptcy, homelessness and starvation, because they'd never seen it with their own eyes, and so the large masses of people became, on the average, much more risk-seeking than risk-averse. Thus, household liabilities began to exceed household cash in the late 1990s.

That was exactly the time that the stock market bubble occurred, and for the same reason. The generational change that caused households to go into debt also caused investors to make much riskier investments. The stock market today is still overpriced by a factor of over 220%, making it highly vulnerable to a panic.

Today, household debt is increasing exponentially, just like the national trade deficit. These trends cannot now be stopped, until a major worldwide financial crisis forces them to stop.

As I've been saying since 2002, Generational Dynamics predicts that America is entering a new 1930s style Great Depression, with a stock market crash to the Dow 3000-4000 range by the 2007 time frame. I certainly have no reason to change this prediction now, especially with public debt and the trade deficit continuing to grow uncontrollably and exponentially, so it may happen a lot sooner than expected. (13-Feb-06) Permanent Link
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Generational Dynamics Web Log for 13-Feb-06 US trade deficit continued exponential increase in 2005

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Generational Dynamics Web Log for 13-Feb-06
US trade deficit continued exponential increase in 2005