Authored by Antonius Aquinas, annotated by Acting-Man.com,
Glitches on the Road to MAGA
While the farcical Kavanaugh confirmation hearings dominated the news cycle for the past couple of weeks, little mention was made of a disturbing economic headline – the August US trade deficit. Despite all the bluster from the Trump Administration about “winning trade wars” and “trade wars are easy”, America’s trade imbalances for August were the highest ever and its deficit with its most contentious partner – China – reached an all-time high.
Bi-directional trade bazooka [PT]
Some highlights, or low lights, for the Trump Administration and the clueless economic nationalists were:
August imports of industrial supplies and materials ($49.7 billion) were the highest since December 2014 ($51.8 billion).
August imports of automobile vehicles, parts, and engines ($31.7 billion) were the highest on record.
August imports of other goods ($9.1 billion) were the highest on record.
August petroleum imports ($20.5 billion) were the highest since December 2014 ($23.6 billion).*
Despite a slowdown in overall Chinese export growth, the US – China trade deficit has continued to grow. But this is not a problem related to „free trade“ – it is related to credit expansion. [PT]
These numbers will probably mean that the Trump Administration will push for more and stiffer tariffs, although the President is set to meet with Chinese President Xi Jinping next month. Yet, if anything comes out of the meeting, it will have little impact on US trade imbalances or the economy overall.
Cause and Effect – A Productive Economy Needs Genuine Savings
President Trump does not have to meet with the Chinese President or, for that matter, any other head of state, for the cause of US trade problems emanate right where he currently resides – Washington, D.C.
The US trade deficit is the culmination of years of ruinous Congressional and Presidential polices of high taxes, onerous regulations, and deficit spending which have gutted the nation’s manufacturing base. The US simply does not produce goods like it used to and has been kept afloat by the dollar’s status as the world’s reserve currency. “King Dollar” has allowed America to consume without having to produce.
Instead of trying to strong-arm trading partners into better “deals,” the Trump Administration should be creating an environment for the re-industrialization of the American economy. The first step in such a policy must start with savings which is the key to economic growth.
Before production takes place, savings must be accumulated. The creation of goods takes place over time and savings provide the means for production – land, labor, capital – to be implemented. The more sophisticated goods require greater amounts of savings since they take longer to produce. Production, and thus, economic growth are intimately linked to savings.
Since savings are fundamental for economic growth, policies which encourage it should be advanced. Since the act of saving involves sacrifice, compensation for such behavior – “interest” – should not be tampered with or suppressed which will discourage saving.
The economy’s capital structure is determined by the amount of available savings. The signal informing the market of the state of this pool of real funding is the natural rate of interest, which expresses society-wide time preferences. If gross market rates are manipulated downward by artificial credit expansion ex nihilo, relative prices in the economy will be distorted and too many scarce resources will be allocated to the higher stages. A boom will set in, but it won’t be in accordance with actual consumer preferences – the balance between savings, production and consumption will be out of whack. Hence capital will be malinvested and many of the accounting profits reported during the boom will eventually be unmasked as capital consumption (for additional background see „The Production Structure“ and „Forced Saving“; furthermore, there is an excellent monograph by Fritz Machlup on capital consumption in post-WW1 Austria (PDF), which is particularly illuminating because it applies capital theory to a practical example, which makes it easier to understand the concept of capital consumption in particular). [PT]
The Federal Reserve’s policy since the financial crisis has been to artificially lower interest rates as it has tried to revive the economy by money printing and bank-credit expansion. The result has been the creation of massive asset bubbles, exploding federal deficits, and a debt–ridden economy.
While President Trump may prefer low interest rates, the exact opposite should be advocated. A free-market rate of interest (higher than current levels) would encourage savings, and while higher rates would pop asset bubbles, they are the necessary, albeit, painful fix to readjust the economy.
Once the bubbles are deflated, real economic growth can take place based on actual savings which will lead to capital formation and the creation of goods. America could start again to become productive and create goods to exchange with its trading partners. Such a transition, however, will not take place overnight, nor will it be pleasant.
The S&P 500 Index since 1982 and the evolution of total US credit market debt over the same time span. This is undoubtedly the mother of all bubbles. [PT]
Large Trade Imbalances are a Symptom of a More Profound Problem
Below market interest rates has enabled the federal government to engage in its profligate spending, much of which is done through borrowing. Instead of badgering the Chinese and others, President Trump should be attacking Congress to rein in spending. Of course, he is a major culprit in this area, having signed off on the latest massive budget which included insane increases to unproductive and destructive “defense” spending of some $700 billion which he lobbied for!
Trade deficits are a symptom of a bigger problem with the economy and are an excuse to deflect from dealing with real issues. Until the current “bubble economy” is deflated and savings and investment become the foundation of American economic life, trade deficits will continue and the ensuing trade wars may then escalate into actual shooting ones.
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