Houston Democrats

"Exports of goods and services were virtually unchanged in June at $106.8 billion. Goods were virtually unchanged at $74.5 billion in June. Services were $32.4 billion in June, up from $32.3 billion in May.

Imports of goods and services increased to $165.6 billion in June from $162.2 billion in May. Goods were $138.5 billion in June, up from $135.3 billion in May, and services were $27.1 billion in June, up from $27.0 billion in May.

For goods, the deficit was $64.0 billion in June, up from $60.8 billion in May. For services, the surplus was $5.2 billion in June, down $0.1 billion from May.

The goods deficit with China increased from $15.8 billion in May to $17.6 billion in June. Exports increased $0.1 billion (primarily civilian aircraft) to $3.4 billion, while imports increased $1.9 billion (primarily apparel, computers, computer accessories, other household goods, and footwear) to $21.0 billion.

The goods deficit with Canada increased from $4.8 billion in May to $5.4 billion in June. Exports increased $0.3 billion (primarily civilian aircraft) to $18.6 billion, while imports increased $1.0 billion (primarily natural gas and trucks, buses, and special purpose vehicles) to $24.0 billion.

The goods deficit with Japan increased from $6.6 billion in May to $6.9 billion in June. Exports increased $0.9 billion (primarily civilian aircraft and other industrial machines) to $5.0 billion, while imports increased $1.3 billion (primarily passenger cars and parts and accessories of vehicles) to $12.0 billion."

In case you were busy with other things today, the US’ trade deficit is not going away.

The right has been trying to spin this in two ways. The first come from Secretary Snow, who claims this is a sign the US economy is growing faster than other economies and is therefore a sign of economic strength. The first part of Snow’s statement is true; the US economy is growing faster than most other economic regions. The problem is linking this strength to a deficit in trade is not sound economic thinking. If you are selling less overseas than you are buying overseas you have debt. That’s accounting 101.

The second way to spin this comes from Donald Luskin who writes for the National Review. Luskin is a classic Republican economist who looks only for numbers that make a Republican administration or policy look regardless of the soundness of underlying theory in his statements. According to his thinking there is no debt in a transaction where you buy more than you sell to a particular trading partner. How he comes up with that reasoning is beyond me and most other people who write about economics. However, the Republican talking heads love it because, well, it makes them look good. For those of you who would like a serious discussion of why this reasoning is flawed, please read AngryBear and Brad DeLong’s websites. Suffice it to say, using your own experience should illustrate the problem. Suppose you go to the store and continually purchase $20 more in groceries than you pay for. The store continually lends you money to perform this transaction. At some point, the store will want their money.

There is no way to make this number look good because it isn’t. Former Fed governor Paul Volcker put it best: “I don't know of any country that has managed to consume and invest 6 percent more than it produces for long. The United States is absorbing about 80 percent of the net flow of international capital.”

Volcker continues: On the present trajectory, the deficits and imbalances will increase. At some point, the sense of confidence in capital markets that today so benignly supports the flow of funds to the United States and the growing world economy could fade. Then some event, or combination of events, could come along to disturb markets, with damaging volatility in both exchange markets and interest rates.

It is the latter scenario that deeply concerns me. An event beyond our control shakes the international trading system’s confidence in the US. Then, all hell breaks lose as the inevitable higher US interest rates result, which in turn ripple through an economy based almost entirely on home building, buying and flipping. It won’t be pretty.

There is a saying from Lau Tzu: deal with the problem before it happens. This is sound advice, and advice the current administration does not take.

Volcker’s Comments

Trade Deficit Iinformation