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US trade deficit sets another record

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Sandhusker

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U.S. Trade Deficit Hits All-Time High
Friday February 10, 11:08 am ET
By Martin Crutsinger, AP Economics Writer
America's Trade Deficit Hits All-Time High of $725.8 Billion in 2005 on Imports of Oil, Food


WASHINGTON (AP) -- The U.S. trade deficit soared to an all-time high of $725.8 billion in 2005, pushed upward by record imports of oil, food, cars and other consumer goods. The deficit with China hit an all-time high as did America's deficits with Japan, Europe, OPEC, Canada, Mexico and South and Central America.
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The Commerce Department reported Friday that the gap between what America sells abroad and what it imports rose to $725.8 billion last year, up by 17.5 percent from the previous record of $617.6 billion set in 2004.

It marked the fourth consecutive year that America's trade deficit has set a record as American consumers continued their seemingly insatiable demand for all things foreign from new cars to televisions and electronic goods.

The increased foreign competition has helped to keep the lid on prices in this country, but critics say the rising trade deficit is a major factor in the loss of nearly 3 million manufacturing jobs since mid-2000 as U.S. companies moved production overseas to lower-waged nations. Many economists believe those manufacturing jobs will never come back.

"Such a huge trade gap undercuts domestic manufacturing and destroys good U.S. jobs," said Richard Trumka, secretary-treasuer of labor's AFL-CIO. "America's gargantuan trade deficit is a weight around American workers' necks that is pulling them into a cycle of debt, bankruptcy and low-wage service jobs."

Sen. Byron Dorgan, D-N.D., said the new deficit figure showed that "our trade policy is an unbelievable failure that is selling out American jobs and weakening our economy."

Last year's deficit reflected the fact that imports rose by 12.9 percent to an all-time high of $2 trillion, swamping a 10.4 percent increase in exports, which reached a record high of $1.27 trillion.

For December, the trade deficit edged up a slight 1.5 percent to $65.7 billion, the third highest monthly figure on record.

Bush, in an effort to counter the growing anxiety over America's ability to compete with such rising economic powers as China and India, unveiled a new American Competitiveness Agenda in his State of the Union address to double government spending on basic research, extend tax breaks for company spending on research and hire thousands of new math and science teachers for the nation's high schools.

But critics contend that the trade deficit will keep growing unless the administration takes a harder line against unfair trade practices in low-wage countries such as China, a country they contend has gained a huge advantage over America by artificially depressing the value of its currency, which makes Chinese goods cheaper for American consumers and American products more expensive in China.

The U.S. trade deficit with China rose to a record $201.6 billion last year, the highest deficit ever recorded with any country and 24.5 percent above the previous record of $161.9 billion set in 2004. Part of that increase reflected a 42.6 percent increase in imports of Chinese clothing and textiles, which soared at the beginning of the year after the removal of global quotas.

American manufacturers, arguing that the U.S. textile and clothing industries were losing thousands of jobs, got the administration to negotiate a three-year agreement with China to reimpose quotas in a number of categories.

The United States also recorded record deficits with Japan at $82.7 billion. Until it was surpassed by China in 2000, Japan was the country that had the largest trade gap each year with the United States.

America's trade deficit set records with much of the rest of the world as well. Among those records was a $122.4 billion gap with the 25-nation European Union, a $92.7 billion deficit with the nations that belong to the Organization of Petroleum Exporting Countries, a $76.5 billion deficit with Canada and a $50.1 billion deficit with Mexico. Canada and Mexico are America's partners in the North American Free Trade Agreement. The deficit with the countries of South and Central America rose to a record $50.7 billion last year.

A huge 39.4 percent jump in petroleum imports, which rose to $251.6 billion, was a major factor contributing to last year's deficit increase. The price of those imports rose to an all-time high, reflecting tight global supplies. The United States was forced to import more oil in the fall after Hurricane Katrina caused widespread shutdowns of Gulf Coast production.

The rising trade deficits must be financed by increased borrowing from foreigners, who so far have been happy to sell us their products and hold U.S. dollars in payment which they invest in U.S. stock, bonds and other assets. The concern is that at some point foreigners will want to reduce their dollar holdings. If the change occurs at a rapid pace it could send the value of the dollar, U.S. stocks and bond prices all plunging.
 

Econ101

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This "free trade" is just giving the budget busting administation a free ride on irresponsible fiscal policy. We all benefit from lower prices but we are doing it at the expense of our children and grandchildren's tax liablility. It is like living high on a credit card. The more you spend, the better you feel your quality of life is. It gets you elected in the short term becuase the payments are not due until the future. No matter your kids and grandkids will have to pay for it---or maybe even you when they raise the retirement age.

This country is in for a real train wreck if they don't change things.
 

DiamondSCattleCo

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Do you think its truly free trade thats causing our troubles in North America, or is it the current social mindset? The keep up with the Jones attitudes. Just as an example, speaking for Canada, we lost several equipment manufacturers about 10 years ago. They didn't move out of town, they just closed up shop. Why? They couldn't maintain profitability because the union kept hammering them for higher and higher wages every 2 or 3 years. Wage hikes that were well in excess of inflation at that time.

Don't get me wrong, I think an employee should recieve a decent wage for a decent days work, but I also believe that unless the employee truly goes above and beyond, or is exceptional at what they do, they don't deserve anymore than a cost of living increase. If you want more, you have to work harder or smarter, not just show up and put in your time.

Just something to think about. I can't speak for the US, as I don't know what all the effects of free trade with Mexico were, but I see it happening often in Canada.

Rod
 

mwj

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DiamondSCattleCo said:
Do you think its truly free trade thats causing our troubles in North America, or is it the current social mindset? The keep up with the Jones attitudes. Just as an example, speaking for Canada, we lost several equipment manufacturers about 10 years ago. They didn't move out of town, they just closed up shop. Why? They couldn't maintain profitability because the union kept hammering them for higher and higher wages every 2 or 3 years. Wage hikes that were well in excess of inflation at that time.

Don't get me wrong, I think an employee should recieve a decent wage for a decent days work, but I also believe that unless the employee truly goes above and beyond, or is exceptional at what they do, they don't deserve anymore than a cost of living increase. If you want more, you have to work harder or smarter, not just show up and put in your time.

Just something to think about. I can't speak for the US, as I don't know what all the effects of free trade with Mexico were, but I see it happening often in Canada.

Rod

Rod I find it odd that many people just presume labor just writes there own checks :roll: If someone running a co. can not say no to unreasonable wage increases I think they should have to serve prison time :???: Do you think that some of the blame can be shared by the owners and poor buisness practices? If labor in Canada writes there own checks I should check into moving north :p
 

DiamondSCattleCo

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mwj said:
Rod I find it odd that many people just presume labor just writes there own checks :roll: If someone running a co. can not say no to unreasonable wage increases I think they should have to serve prison time :???: Do you think that some of the blame can be shared by the owners and poor buisness practices? If labor in Canada writes there own checks I should check into moving north :p

I'm not exactly sure what you're trying to say here MWJ. In Canada, if the union demands increased wages, and the company says no, then they strike. That may end up costing the company even more money than if they'd simply agreed to the larger wage increase in the first place. Thats how unions work.

And no need to roll your eyes at me MWJ. I was simply tossing something out for food for thought. As R2 says, the issue is far more complex than any one problem, but the anti-free traders need to also examine why the foreign good is so much cheaper than our North American good.

Rod
 

Sandhusker

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I'd say part of the problem is US consumers themselves - they are the ones doing the buying. They need to realize every purchase of a foreign item adds to the deficit, which sells a piece of this country.
 

RoperAB

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Well as far as free trade and surpluses with Canada goes.
Im under the impression that America needs our oil, natural gas, hydro and other raw resources.
Lately it seems like you dont want our beef which I really dont understand.
There isnt a whole lot that is manufactured up here anymore. What we buy on the store shelves, if its quality its American but most of the low cost stuff is from China etc.
I think low tech manufacturing jobs are a thing of the past.
 

agman

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Sandhusker said:
U.S. Trade Deficit Hits All-Time High
Friday February 10, 11:08 am ET
By Martin Crutsinger, AP Economics Writer
America's Trade Deficit Hits All-Time High of $725.8 Billion in 2005 on Imports of Oil, Food


WASHINGTON (AP) -- The U.S. trade deficit soared to an all-time high of $725.8 billion in 2005, pushed upward by record imports of oil, food, cars and other consumer goods. The deficit with China hit an all-time high as did America's deficits with Japan, Europe, OPEC, Canada, Mexico and South and Central America.
ADVERTISEMENT


The Commerce Department reported Friday that the gap between what America sells abroad and what it imports rose to $725.8 billion last year, up by 17.5 percent from the previous record of $617.6 billion set in 2004.

It marked the fourth consecutive year that America's trade deficit has set a record as American consumers continued their seemingly insatiable demand for all things foreign from new cars to televisions and electronic goods.

The increased foreign competition has helped to keep the lid on prices in this country, but critics say the rising trade deficit is a major factor in the loss of nearly 3 million manufacturing jobs since mid-2000 as U.S. companies moved production overseas to lower-waged nations. Many economists believe those manufacturing jobs will never come back.

"Such a huge trade gap undercuts domestic manufacturing and destroys good U.S. jobs," said Richard Trumka, secretary-treasuer of labor's AFL-CIO. "America's gargantuan trade deficit is a weight around American workers' necks that is pulling them into a cycle of debt, bankruptcy and low-wage service jobs."

Sen. Byron Dorgan, D-N.D., said the new deficit figure showed that "our trade policy is an unbelievable failure that is selling out American jobs and weakening our economy."

Last year's deficit reflected the fact that imports rose by 12.9 percent to an all-time high of $2 trillion, swamping a 10.4 percent increase in exports, which reached a record high of $1.27 trillion.

For December, the trade deficit edged up a slight 1.5 percent to $65.7 billion, the third highest monthly figure on record.

Bush, in an effort to counter the growing anxiety over America's ability to compete with such rising economic powers as China and India, unveiled a new American Competitiveness Agenda in his State of the Union address to double government spending on basic research, extend tax breaks for company spending on research and hire thousands of new math and science teachers for the nation's high schools.

But critics contend that the trade deficit will keep growing unless the administration takes a harder line against unfair trade practices in low-wage countries such as China, a country they contend has gained a huge advantage over America by artificially depressing the value of its currency, which makes Chinese goods cheaper for American consumers and American products more expensive in China.

The U.S. trade deficit with China rose to a record $201.6 billion last year, the highest deficit ever recorded with any country and 24.5 percent above the previous record of $161.9 billion set in 2004. Part of that increase reflected a 42.6 percent increase in imports of Chinese clothing and textiles, which soared at the beginning of the year after the removal of global quotas.

American manufacturers, arguing that the U.S. textile and clothing industries were losing thousands of jobs, got the administration to negotiate a three-year agreement with China to reimpose quotas in a number of categories.

The United States also recorded record deficits with Japan at $82.7 billion. Until it was surpassed by China in 2000, Japan was the country that had the largest trade gap each year with the United States.

America's trade deficit set records with much of the rest of the world as well. Among those records was a $122.4 billion gap with the 25-nation European Union, a $92.7 billion deficit with the nations that belong to the Organization of Petroleum Exporting Countries, a $76.5 billion deficit with Canada and a $50.1 billion deficit with Mexico. Canada and Mexico are America's partners in the North American Free Trade Agreement. The deficit with the countries of South and Central America rose to a record $50.7 billion last year.

A huge 39.4 percent jump in petroleum imports, which rose to $251.6 billion, was a major factor contributing to last year's deficit increase. The price of those imports rose to an all-time high, reflecting tight global supplies. The United States was forced to import more oil in the fall after Hurricane Katrina caused widespread shutdowns of Gulf Coast production.

The rising trade deficits must be financed by increased borrowing from foreigners, who so far have been happy to sell us their products and hold U.S. dollars in payment which they invest in U.S. stock, bonds and other assets. The concern is that at some point foreigners will want to reduce their dollar holdings. If the change occurs at a rapid pace it could send the value of the dollar, U.S. stocks and bond prices all plunging.

Sensationalism is seldom based on all the facts. Our trade deficit while large ranks only as the fifth largest on record, the last time I checked, when compared to the size of our economy. Larger trade deficits existed relative to the size of our economy before free-trade agreements were implemented. Show me one country, including China, that has a trade surplus that has an economy as strong measured by growth and creates more jobs, including high paying jobs, than the U.S. For your information China is growing at about 9% per annum but it is from a much smaller economic base so it is growing about $220 billion a year. The U.S is growing this massive economy at a 3.5% rate which equates to $441 billion in annual growth. The truth is shocking is it not? Economic growth and job creation have been higher in periods of trade deficits than during those few periods when we did not have a trade deficit.

Likewise the federal deficit while a record in absolute dollars is also well below previous levels when compared to the size of our economy. How many of you know the size of the U.S. economy? It is $12.6 trillion. By comparison China is $2.2 trillion.

A suggested reading is in last weeks Business Week regarding major problems in how U.S. deficits are accounted for. This accounting discrepancy is exacerbated as the U.S. moves to a more knowledge based economy. We live in the greatest economy in the world, the envy of the world, and all some can ever do is say something negative. Wake up and smell the roses.
 

Cal

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I think that this link goes pretty good with this topic. Try to ignore stevec, though, he's usually not all there.
http://ranchers.net/forum/viewtopic.php?t=7564
 

Econ101

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International trade is a complex thing. There are a lot of good things and potentially bad things that come with it. For instance, do you wish to buy a shirt because it is the lowest priced shirt (with acceptable quality) if that shirt is made with child labor?

In our economic system, we have a lot of costs that other systems do not have. China, for instance, has a lot of manufactoring jobs but a lot of 40 aged people that can no longer phisically work those jobs anymore. If china does not put them to work, they will have social unrest. We have a social security system to "catch" these workers when they retire starting at 65. We have a lot of environmental laws--China just had a benzene spill in a major river system. We did have things like that here in the U.S., until companies were made to pay for those environmental failures. China does not have all of those protections and that makes them cheaper.

The idea of trade is that each company can produce what they have a comparative advantage in. Right now, china has a comparative advantage in labor, and so does India. They can outcompete the U.S. when it comes to these items (so can mexico). When we trade with China, and it is under a totalitarian regime, we are helping that regime stay in power by employing their people. Hopefully, the standard of living of those chinese goes up and they all get paid more, and buy some of the things we make. Unfortunately, oil is one of those things as well as other scarce resources.

Canada is a much different animal. There are more similarities with the U.S. with Canada, England, most of Europe, Australia, etc. These countries have democratic govts. and for the most part, a less stratified social structure.

I have problems trading with countries that do not have a just and equitable social system (there are none that are perfect) and a system that allows very powerful to control the nation's resources. In Friday's Wall Street Journal there is an article on "Planned Economy, As China's Clout Grows, So Do Price Fixing Accusations". In the article they take the example of vitamin C (china has 85% of world production), saccharin, rayon, and magnesite(mineral used in making steel) where china has gained market share due to real low prices. They basically ran everyone else out of the markets. Next they formed alliances with all the companies that made these materials in an effort to use their market power to gain excess profits from the marketplace. They are now finding their way as anti-trust cases in the U.S.

The problem with "fair trade" is that every country is different with their laws and regulations. Canada, for instance, does not have a Packers and Stockyards Act. If it were enforeced (I am not saying the U.S. has a good record of enforcing it right now) on a NAFTA scale, the "salmon run" would never have happened or there would have been a lawsuit to correct the inequity of it. (Sorry SH, I have borrowed the term from rkaiser, but that is none of your busy body business). The Canadian divisions of Tyson and Cargill did not have to follow that law that protected producers, and hence they allegedly abused their supplies from Canada to help manipulate the price for U.S. producers.

When it comes to Brazil, Argentina, and S. America, there are issues that have to deal with real diseases that can have an enormous impact on U.S. or North American production.

Bottom line is that China, with its cheap labor and hence less expensive production, has had a deflationary affect on the U.S. economy. U.S. businesses have jumped from Mexico to Asia to take advantage of these lower costs of doing business. This deflationary pressure has allowed the current administration to overspend without paying the price in higher interest rates in the economy. Walmart's items went from mostly U. S. (I include Canada in this because our countries are so intertwined and similar) to mostly Asian made. We traded our manufactoring base to Chna for this deflationary benefit that allowed the current govt. to overspend and not pay the price for that overspending in the usual way of higher interest rates and a slower economy. It did have still have its costs. We lost the manufactoring and now China wants to use its marke power to extract excess profits with market power. We also owe china a lot of money because they financed our ovespending and now hold a large part of our national debt. In essence, China has loaned us money on our kid's credit card to finance deficit spending.

This doesn't sound a lot different from what our politicians have done with our social security trust fund. We are going to have huge problems with the baby boomers and their retirement.

I am all for free trade, but it must be fair trade. We currently are reaping the benefits of free trade but if you are going to trade with other countries, you have to make sure that they are playing by the rules and not using market power after they have monopolized a market and then use that monopoly to extract larger profits. (There is this thing called barriers to entry that can be also be used to manipulate the competition). It seems that some of our U.S. companies want to take advantage of the inequity of our rules and laws with respect to other countries and use these inequities in lou of real comparative advantages to beat their competition. That is the big worry in this beef industry.
 

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reader (the Second) said:
Thank you for an interesting discussion of the issue with globalization.

I said in another thread that this is a complex issue. I am interested from the national security and policy aspect what the impact of globalization is, since it may in fact change the face of the countries who benefit economically. So while in the short term it may seem bad for the U.S. and Canada, there may be benefits in the long term.

My biggest concern is that I want the benefits to trickle down to the people, and not an oligopololy elite. That didn't seem to happen with our NAFTA agreement and Mexico. If the benefits are going to an oligopoly or monopoly elite, we will just transfer the wealth created with trade to a global aristocracy that could do us all harm.
 

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Econ101 said:
The problem with "fair trade" is that every country is different with their laws and regulations. Canada, for instance, does not have a Packers and Stockyards Act. If it were enforeced (I am not saying the U.S. has a good record of enforcing it right now) on a NAFTA scale, the "salmon run" would never have happened or there would have been a lawsuit to correct the inequity of it. (Sorry SH, I have borrowed the term from rkaiser, but that is none of your busy body business). The Canadian divisions of Tyson and Cargill did not have to follow that law that protected producers, and hence they allegedly abused their supplies from Canada to help manipulate the price for U.S. producers.

Reply
As far as I know we now only have three packing companies in Canada. Well three in Alberta and AB pretty much is the beef industry in Canada.
Anyway all three of these packing outfits are American. They are all in collusion as far as prices go.
Years ago we had all kinds of local owned packers. The big American outfits ate em up like a Walmart does Mom and Pa businesses in a small town.
Anyway the big three had a monopoly on beef up here while that border was closed and they made a fortune off of it because they were the only ones who could sell in the US market since the border was closed to live cattle. But what are you talking about when you say Salmon run? I dont understand.
 

RoperAB

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reader (the Second Actually I am seeing Canadian shoes and clothes enter the US market. Especially shoes it appears.[/quote said:
LOL Could be. I just looked on my boots and they were made in Mexico.
 

Brad S

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Agman, I'm intellectually with you, but emotionally I worry about an avalanche of $ coming back worthless.

I heard the US savings rate is -3.3%.Agman, at what point do you consider crisis level in consumer debt?
 

Econ101

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RoperAB said:
Econ101 said:
The problem with "fair trade" is that every country is different with their laws and regulations. Canada, for instance, does not have a Packers and Stockyards Act. If it were enforeced (I am not saying the U.S. has a good record of enforcing it right now) on a NAFTA scale, the "salmon run" would never have happened or there would have been a lawsuit to correct the inequity of it. (Sorry SH, I have borrowed the term from rkaiser, but that is none of your busy body business). The Canadian divisions of Tyson and Cargill did not have to follow that law that protected producers, and hence they allegedly abused their supplies from Canada to help manipulate the price for U.S. producers.

Reply
As far as I know we now only have three packing companies in Canada. Well three in Alberta and AB pretty much is the beef industry in Canada.
Anyway all three of these packing outfits are American. They are all in collusion as far as prices go.
Years ago we had all kinds of local owned packers. The big American outfits ate em up like a Walmart does Mom and Pa businesses in a small town.
Anyway the big three had a monopoly on beef up here while that border was closed and they made a fortune off of it because they were the only ones who could sell in the US market since the border was closed to live cattle. But what are you talking about when you say Salmon run? I dont understand.

Brad S. : "PostPosted: Sun Feb 12, 2006 3:16 am Post subject: Reply with quote
Hey there professor econ, You made this statement: they run the local butchers out of business(many of whom were already cutting these cuts out), lay claim to the art of butchering based on checkoff funded programs.

Please explain how this "run out of business deal works? Is it magic and mystical or efficiency?"

Brad, why don't you read the above post to answer your question?

When companies get so large and diverse that they can run out all competitors in a sector, they can concentrate the industry with themselves and others who know they have to play the same game. They then control the market. As I said before, go read the article in the Wall Street Journal Fr. Feb. 10,2006 and see what china is doing with their market power.

Roper, the term "salmon run" was given (by rkaiser) to the situation where Tyson and Cargill were able to buy their beef supplies cheap (low
Canadian cattle supplies) due to the border being closed low cattle prices (BSEconomics) and the high prices that Cargill and Tyson were getting for the boxed beef in the U.S.

It is all part of the concentration game.
 

Sandhusker

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Agman, "Sensationalism is seldom based on all the facts. Our trade deficit while large......."

You're entitled to your opinion, Agman, but I don't belive you. It's so easy not to when I read so many other people who are greatly concerned about the deficit and say something MUST be done. Some of these people include Warren Buffet and Alan Greenspan. I'll take those guy's word over yours anyday.

Buffed said, "The US trade deficit is a bigger threat to the domestic economy than either the federal budget deficit or consumer debt and could lead to political turmoil."

Here, he is drawing a picture for all of us on the problem. Are you going to tell the second-richest man in the US, the "Oracle of Omaha" that he needs to stop being negetive and smell the roses?

Here's Mr. Buffett explaining why, for the first time in his 72 years, he's investing outside of the US.

"But as head of Berkshire Hathaway, I am in charge of investing its money in ways that make sense. And my reason for finally putting my money where my mouth has been so long is that our trade deficit has greatly worsened, to the point that our country's "net worth," so to speak, is now being transferred abroad at an alarming rate.

A perpetuation of this transfer will lead to major trouble. To understand why, take a wildly fanciful trip with me to two isolated, side-by-side islands of equal size, Squanderville and Thriftville. Land is the only capital asset on these islands, and their communities are primitive, needing only food and producing only food. Working eight hours a day, in fact, each inhabitant can produce enough food to sustain himself or herself. And for a long time that's how things go along. On each island everybody works the prescribed eight hours a day, which means that each society is self-sufficient.

Eventually, though, the industrious citizens of Thriftville decide to do some serious saving and investing, and they start to work 16 hours a day. In this mode they continue to live off the food they produce in eight hours of work but begin exporting an equal amount to their one and only trading outlet, Squanderville.

The citizens of Squanderville are ecstatic about this turn of events, since they can now live their lives free from toil but eat as well as ever. Oh, yes, there's a quid pro quo -- but to the Squanders, it seems harmless: All that the Thrifts want in exchange for their food is Squanderbonds (which are denominated, naturally, in Squanderbucks).

Over time Thriftville accumulates an enormous amount of these bonds, which at their core represent claim checks on the future output of Squanderville. A few pundits in Squanderville smell trouble coming. They foresee that for the Squanders both to eat and to pay off -- or simply service -- the debt they're piling up will eventually require them to work more than eight hours a day. But the residents of Squanderville are in no mood to listen to such doomsaying.

Meanwhile, the citizens of Thriftville begin to get nervous. Just how good, they ask, are the IOUs of a shiftless island? So the Thrifts change strategy: Though they continue to hold some bonds, they sell most of them to Squanderville residents for Squanderbucks and use the proceeds to buy Squanderville land. And eventually the Thrifts own all of Squanderville.

At that point, the Squanders are forced to deal with an ugly equation: They must now not only return to working eight hours a day in order to eat -- they have nothing left to trade -- but must also work additional hours to service their debt and pay Thriftville rent on the land so imprudently sold. In effect, Squanderville has been colonized by purchase rather than conquest.


It can be argued, of course, that the present value of the future production that Squanderville must forever ship to Thriftville only equates to the production Thriftville initially gave up and that therefore both have received a fair deal. But since one generation of Squanders gets the free ride and future generations pay in perpetuity for it, there are -- in economist talk -- some pretty dramatic "intergenerational inequities."

Let's think of it in terms of a family: Imagine that I, Warren Buffett, can get the suppliers of all that I consume in my lifetime to take Buffett family IOUs that are payable, in goods and services and with interest added, by my descendants. This scenario may be viewed as effecting an even trade between the Buffett family unit and its creditors. But the generations of Buffetts following me are not likely to applaud the deal (and, heaven forbid, may even attempt to welsh on it).

Think again about those islands: Sooner or later the Squanderville government, facing ever greater payments to service debt, would decide to embrace highly inflationary policies -- that is, issue more Squanderbucks to dilute the value of each. After all, the government would reason, those irritating Squanderbonds are simply claims on specific numbers of Squanderbucks, not on bucks of specific value. In short, making Squanderbucks less valuable would ease the island's fiscal pain.

That prospect is why I, were I a resident of Thriftville, would opt for direct ownership of Squanderville land rather than bonds of the island's government. Most governments find it much harder morally to seize foreign-owned property than they do to dilute the purchasing power of claim checks foreigners hold. Theft by stealth is preferred to theft by force.

So what does all this island hopping have to do with the U.S.? Simply put, after World War II and up until the early 1970s we operated in the industrious Thriftville style, regularly selling more abroad than we purchased. We concurrently invested our surplus abroad, with the result that our net investment -- that is, our holdings of foreign assets less foreign holdings of U.S. assets -- increased (under methodology, since revised, that the government was then using) from $37 billion in 1950 to $68 billion in 1970. In those days, to sum up, our country's "net worth," viewed in totality, consisted of all the wealth within our borders plus a modest portion of the wealth in the rest of the world.

Additionally, because the U.S. was in a net ownership position with respect to the rest of the world, we realized net investment income that, piled on top of our trade surplus, became a second source of investable funds. Our fiscal situation was thus similar to that of an individual who was both saving some of his salary and reinvesting the dividends from his existing nest egg.

In the late 1970s the trade situation reversed, producing deficits that initially ran about 1 percent of GDP. That was hardly serious, particularly because net investment income remained positive. Indeed, with the power of compound interest working for us, our net ownership balance hit its high in 1980 at $360 billion.

Since then, however, it's been all downhill, with the pace of decline rapidly accelerating in the past five years. Our annual trade deficit now exceeds 4 percent of GDP. Equally ominous, the rest of the world owns a staggering $2.5 trillion more of the U.S. than we own of other countries. Some of this $2.5 trillion is invested in claim checks -- U.S. bonds, both governmental and private -- and some in such assets as property and equity securities.

In effect, our country has been behaving like an extraordinarily rich family that possesses an immense farm. In order to consume 4 percent more than we produce -- that's the trade deficit -- we have, day by day, been both selling pieces of the farm and increasing the mortgage on what we still own.

To put the $2.5 trillion of net foreign ownership in perspective, contrast it with the $12 trillion value of publicly owned U.S. stocks or the equal amount of U.S. residential real estate or what I would estimate as a grand total of $50 trillion in national wealth. Those comparisons show that what's already been transferred abroad is meaningful -- in the area, for example, of 5 percent of our national wealth.

More important, however, is that foreign ownership of our assets will grow at about $500 billion per year at the present trade-deficit level, which means that the deficit will be adding about one percentage point annually to foreigners' net ownership of our national wealth. As that ownership grows, so will the annual net investment income flowing out of this country. That will leave us paying ever-increasing dividends and interest to the world rather than being a net receiver of them, as in the past. We have entered the world of negative compounding -- goodbye pleasure, hello pain.

We were taught in Economics 101 that countries could not for long sustain large, ever-growing trade deficits. At a point, so it was claimed, the spree of the consumption-happy nation would be braked by currency-rate adjustments and by the unwillingness of creditor countries to accept an endless flow of IOUs from the big spenders. And that's the way it has indeed worked for the rest of the world, as we can see by the abrupt shutoffs of credit that many profligate nations have suffered in recent decades.

The U.S., however, enjoys special status. In effect, we can behave today as we wish because our past financial behavior was so exemplary -- and because we are so rich. Neither our capacity nor our intention to pay is questioned, and we continue to have a mountain of desirable assets to trade for consumables. In other words, our national credit card allows us to charge truly breathtaking amounts. But that card's credit line is not limitless."
 

RoperAB

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Econ101 said:
Roper, the term "salmon run" was given (by rkaiser) to the situation where Tyson and Cargill were able to buy their beef supplies cheap (low
Canadian cattle supplies) due to the border being closed low cattle prices (BSEconomics) and the high prices that Cargill and Tyson were getting for the boxed beef in the U.S.

It is all part of the concentration game.

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Just to be clear, so nobody gets the wrong idea. The actual cow/calf little guy recieves nothing as far as subsidise go from the government.
During BSE there was an aid program but the producers did not bennifit from it because the packing companies who have a monopoly just cut there prices in the same amount of the government aid. So all the money just went to the packing companies.
As far as im concerned the big three have our polititions bought off to keep their monopoly. And whenever somebody"think CO/OP" tries to start a competative packing plant the big three will just operate at a loss for as long as it takes to put the new guy out of business.
Who gained by that border closure? The packing companies.
The whole thing was bull because there darn well wasnt anything wrong with our beef. Well except that we were being honest and actually testing for BSE. Plus as im sure you know there isnt really any such thing as a truly Canadian or American cow.
Im new to the forum so probable this was already discused. Sorry if im just saying what has already been said.
 

Sandhusker

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Agman, it appears former Fed Chief Greenspan needs to smell the roses as well.

Greenspan warns over US deficit
By Andrew Walker
BBC economics correspondent



Alan Greenspan has joined the chorus of warnings
US Federal Reserve chief Alan Greenspan has warned that the deficit in US trade with the rest of the world cannot be sustained indefinitely.
But Mr Greenspan, in a speech in Germany, could not say when or how the adjustment would take place.

The deficit in US international trade is large by any standards - more than $500bn over the last year, or more than 5% of the country's economy.

Many economists say it is unsustainable and adjustment could be painful.

But the deficit has been large for a decade and the adjustment has not happened.

Nonetheless, Mr Greenspan has joined the chorus of warnings.

He is not predicting certain catastrophe now or indeed at any stage in the future. But the implication is clear, that the inevitable adjustment might come in a disruptive form.

Cumulative deficits, which result in a marked decline of a country's net international investment position - as is occurring in the United States - raise more complex issues

He focused on the financing of the deficit. In essence, a trade deficit needs to be supported by foreigners investing in the US.

If they suddenly become reluctant to do so, the result in the financial markets could be either a sharp rise in interest rates or a fall in the dollar.
 

RoperAB

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I think a lot of your trade deficit has to do with your strong dollar. But on the other hand if the world didnt have faith in your economy yourdollar wouldnt be worth so much on international markets. Heck even Saddam Hussain was stock pilling American money.
About your debt. Isnt a large portion of it just borrowed out of your old age pension? In other words its not a foreign dept.
 

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