Monday, June 18, 2012

Dysfunctional US/China Trade Imbalance Dangerous to Both Nations

Even if the U.S. government somehow managed to balance its massive budget deficit, it would still have a huge trade deficit to grapple with. And that trade deficit may be an even tougher problem to solve.

For decades, the U.S. has consumed more than it has produced, imported more than it has exported, and borrowed more than it has saved. The trade deficit is the unfortunate result of all that imbalance. And then there's the problem of China's suppression of its currency, the yuan, which makes a bad situation even worse.

The U.S. trade deficit rose to $558 billion last year, up 11.6 percent from 2010 and the largest imbalance since 2008. As demand fell during the Great Recession, imports also fell, trimming the trade deficit. But the deficit has once again resumed its upward trajectory, which is bad news for the U.S.

Exports add to GDP, while imports reduce it. That's why it's critical for the U.S. to increase exports and decrease its reliance on cheap consumer imports. Simply put, a trade deficit creates a drag on the economy.

Though U.S. exports have increased over the past couple of years, the problem is that imports continue to outpace exports. This means that billions of dollars continue to flow out of the United States on a monthly basis. And the problem is worsening.

The U.S. current account trade deficit grew to its widest imbalance in three years during the first quarter, jumping 15.7 percent to $137.3 billion. That was up from $118.7 billion in the final three months of last year, according to the Commerce Department.

The current account is the broadest measure of trade. It tracks the sale of merchandise and services between nations as well as investment flows. Economists expect the deficit to keep rising in 2012 due to the European debt crisis, which will result in a decline of U.S. exports to the region.

The flood of imports into the U.S. is displacing American workers and costing us jobs. In short, we're buying tons of foreign goods instead of making them here at home.

According to a 2011 Economic Policy Institute report, the growth in the U.S. trade deficit with China displaced 2.8 million U.S. jobs between 2001 and 2010 alone.

The U.S. had a particularly massive (and record) $295.5 billion trade deficit with China in 2011, its largest with any individual country. This means that China accounted for more than half (53 percent) of the total U.S. trade deficit.

The Chinese currency, the yuan, has long been artificially suppressed by the Chinese government, keeping it from rising to a higher natural value.

China has undervalued the yuan in relation to the dollar for years to keep its products artificially inexpensive in the U.S., while discouraging U.S. exports into China.

This controversial currency policy is contributing to high unemployment in the U.S. A stronger dollar in relation to the yuan makes U.S. goods costlier and less competitive in China, undermining U.S. exports.

For the trade deficit to become more balanced, the Chinese must end the yuan's dollar peg. Short of that, Americans will have to save more and spend less, while the Chinese will have to do exactly the opposite. That combination appears highly unlikely in the foreseeable future.

A Chinese currency revaluation would raise the cost of Chinese goods sold by U.S. retailers to U.S. consumers. Higher prices would be a shock to millions of Walmart shoppers. But that would ultimately be a good thing for the U.S. economy.

The U.S. hands the Chinese billions of dollars every month in exchange for its cheap products. The Chinese are then forced to buy our Treasury debt with all those green backs. In essence, they are involuntarily compelled to lend us their excess dollar reserves. After all, what good are dollars to the Chinese? They don't use them in China.

Though the Chinese can purchase oil and other dollar-denominated assets on global markets, they are still left with a huge surplus of dollars.

Even with Treasury rates at historically low yields, the Chinese have little choice but to continue buying U.S. debt. That makes China's trade surplus with the U.S. a double-edged sword.

At current historically-low yields, Treasuries don't even keep up with the rate of inflation. Combined with the fact that the U.S. is so interminably in debt, Treasuries cannot possibly look like a smart buy to the Chinese.

China is already saturated with U.S. debt, which doubled between 2007 and 2010. In fact, in September 2008 China surpassed Japan to become the number one holder of U.S. government debt. Consequently, the Chinese previously signaled that they will begin reducing some of their U.S. holdings.

However, quite the opposite has happened. China's U.S. Treasury holdings increased $1.5 billion in April, rising to $1.15 trillion in total. China now holds one-quarter of all outstanding U.S. debt.

Last year, it was discovered that China was buying more U.S. debt than it was disclosing. It is now known that beginning in 2009, China was regularly doing deals that had the effect of hiding billions of dollars of purchases in each Treasury auction.

Where else is China going to put all those billions of export dollars each and every month?

As long as the Chinese continue flooding the U.S. market with exports, their only alternative to Treasuries would be the purchase of hard U.S. assets, such as land, golf courses, resorts and huge commercial properties — the sort of thing that Japan was doing in the 1980s.

That would surely set off quite the political firestorm here in the U.S.

In the meantime, China's monthly exchange of export dollars for Treasuries allows the U.S. government to continue its deficit spending. Whether willing or unwilling, China has become the U.S. government's buyer of last resort, further complicating an already complicated relationship.

The U.S. and China are engaged in a simpatico partnership: China's export-driven economy is heavily reliant on the U.S. Meanwhile, America's consumption and debt-based economy and government are equally reliant on China.

Both countries have become dysfunctionally dependent on the other, to the point of mutual detriment.

Monday, June 11, 2012

Monetary and Fiscal Policy Have Hit the Wall

By now, even the casual observer has surely heard the news; numerous signs indicate that the U.S. economy is again slowing.

For example:

• The productivity of U.S. workers and businesses dropped 0.9% in the first three months of the year.

• U.S. factory orders have declined for two consecutive months, dropping 0.6% in April and 2.1% in March, according to the Commerce Department.

• State and local government spending fell a revised 2.5% in the first quarter, more than double the initial estimate of a 1.2% decline.

• Though the U.S. trade deficit narrowed in April, a drop in exports was outpaced by an even larger decline in imports. The decline in both sides of the equation is a signal that global demand is slipping. Of greatest concern, imports fell despite an increase in the volume and price of oil imports.

• While it was initially reported that the US economy grew at a 2.2% annual rate in the first quarter, the Commerce Department has revised that figure down to 1.9%.

Yet, of greatest concern, things may actually be getting even worse.

After adding more than 500,000 jobs in the first two months of this year, the economy has added a mere 289,000 in the past three months, not even enough to keep up with the nation’s growing working-age population, much less lower the unemployment rate.

One of the Federal Reserve's three mandates is to achieve and maintain maximum employment (the others are stable prices and moderate long-term interest rates). Clearly, the Fed is failing to achieve maximum employment. But after all of its rather historic undertakings, the question is, what more can the Fed possibly do?

The central bank has pumped $2.3 trillion into the financial system since 2008, slashed short-term interest rates to near zero, held them there since December 2008, and made the unprecedented promise to keep them that low “at least through late 2014.”

Yet, despite the Fed's best efforts, the economy is sputtering. It seems that monetary policy has finally found its limits. This is the best it can do.

How about fiscal policy?

The federal deficit for fiscal 2008 was a record $459 billion, more than double the previous year’s figure. Then, in the midst of the financial crisis that year, the government tapped a $700 billion Treasury fund to buy toxic mortgage-related securities.

In fiscal 2009, the deficit was $1.4 trillion. That was followed by $1.3 trillion deficits in both 2010 and in 2011. And this fiscal year, the government will run a $1.2 trillion deficit.

All of this spending was intended to keep the economy afloat after the financial collapse and the Great Recession, which began in December 2007.

Despite these massive monetary and fiscal interventions, the economy is slowing, stagnating, and perhaps even shrinking.

As Martin Wolf wrote in the Financial Times, "The fact that unprecedented monetary policies and huge fiscal deficits have not induced strong recoveries shows how powerful the forces depressing economies have been."

The U.S. economy and monetary systems are predicated on debt. All money is loaned into existence, making debt inevitable. In essence, money is debt. And without an expansion of debt, the economy cannot grow. Debt (or credit) is the economy's life blood.

However, we seem to have finally found the limits of debt expansion.

Total U.S. household debt reached a whopping $13.8 trillion by 2008. By the end of 2009, total household debt was nine times what it was in 1981 — rising twice as fast as disposable income in the same period. For decades, Americans were spending money they didn't have by taking on ever-increasing amounts of debt.

However, the Great Recession put the brakes on previous levels of debt expansion. Fed data shows that by the end of 2011, household debt was down to $13.2 trillion. Yet, total disposable income was just $10.7 trillion.

Household net worth—the difference between the value of assets and liabilities—was $58.5 trillion at the end of 2011, after having fallen close to 3/4 percent, the first annual decrease since 2008.

Though household net worth has fallen, debt is again rising — albeit more slowly than in the past.

Since the recession ended in June 2009, total U.S. debt has risen at the slowest pace since the Fed began keeping records in the early 1950s. While this can be viewed positively, total debt has nonetheless risen. It's just rising more slowly now.

In the 11 quarters since the recession officially ended, total domestic debt has risen by $702 billion, or 1.4%, compared to the 28% increase in the previous 11 quarters.

However, though debt has declined due to the deleveraging of families, banks, non-financial businesses and state and local governments, debt is still exceptionally high by any measure.

Total debt has fallen from 373% of GDP to 336%. But that is still stunningly high. Though total debt is going in the right direction, a debt level that enormous is, nonetheless, really bad news.

U.S. household debt has fallen to 84% of GDP from a peak of 98%. Non-financial corporate debt has fallen to 77% from a peak of 83%. Financial sector debt has dropped from 123% of GDP to 89%.

However, public debt has risen to 89% from 56%. That's because the government has been stepping to fill the spending gap, thereby averting another depression. But that's a double-edged sword.

As a result of consumer retrenchment (due to unemployment and the housing collapse), government spending is the only thing presently under-girding the economy. The problem is that this is creating continual trillion dollar deficits.

However, if the government reduces spending to balance its budget, that action will have a negative effect on GDP. In past recoveries, the growth of the private sector has overcome that negative effect. But the private sector isn't truly recovering and it cannot recover unless consumers recover. It's all a big, vicious cycle.

The deficit certainly needs to be cut. But cutting the deficit too fast could also throw the country into an even deeper recession. Deficit reduction will also reduce GDP. That means the government will collect less taxes, which makes the deficits worse, which means the government has to make more cuts than planned, which means lower tax receipts, and so on and so on.

The key takeaway from all of this is that after historic levels of deficit spending by the federal government, coupled with equally historic levels of Federal Reserve interventions on the money supply and interest rates, an economy grappling with the specter of recession (or worse) is the best our fiscal and monetary 'masters' can do.

Whatever the eventual outcomes of all these massive interventions — and they will surely turn quite negative at some future point — it is clear that they have at least prevented another full blown depression — at least to this point.

How long we can continue to avoid that outcome is anyone's guess. But one thing is certain; there are limits to trillion dollar deficits, near-zero interest rates and massive increases to the monetary base by creating money out of nothing.

Such interventions are clearly finite. And when they end, the blowback will be harsh and it will be heavy.

Thursday, June 07, 2012

Symptom of the Economic Crash: One in Seven Americans Now Receiving Food Aid

The number of Americans receiving food aid stood at 46.5 million as of December. This means that more than one out of seven Americans is currently getting food stamps. That figure is a historic high, though the U.S. population of 313 million is substantially larger today than in past decades.

The surge in food stamp recipients has largely been a consequence of the Great Recession, which technically began in December 2007. That year, 1.4 million people were added to the ranks of food stamp recipients, while 4.4 million were added in 2008, triple the 2007 figure.

During George W. Bush's presidency, the number of recipients rose by nearly 14.7 million. And during the Obama years, an additional 14.2 million have been added. Yes, the Great Recession and its lingering after effects have been quite brutal to millions upon millions of Americans.

It should come as little surprise, then, that the number of Americans receiving food aid is essentially identical to the number living in poverty. An Indiana University study finds that 46 million Americans are living below the poverty line – up 27 percent since start of recession. Most worrisome, the report warns that the ranks of the impoverished will continue to rise.

It is very telling that so many of our fellow citizens require assistance to meet some of their most fundamental needs. The U.S. is the richest country on the planet after all. This is supposed to be a nation of equal opportunity, but clearly that isn't so. It's tough for people to pull themselves up by their boot straps when they can't even afford boots.

Food aid exemplifies the classic "safety net" program. Generally, those with incomes at or below 130% of the official poverty level, and savings of $2,000 or less, may receive food aid. The income level is currently just under $29,000 a year for a family of four.

Typically, able-bodied adults without dependents can collect food stamps for only three months out of any three-year period. However, according to USDA, 46 states have been able to continue the longer benefit period under special waivers granted because of high unemployment.

Another reason for the rise in food stamp recipients has been the public outreach efforts of the states. According to the USDA, only 54 percent of those whose income was low enough to qualify actually signed up in 2002. But by fiscal 2009 the number had risen to 72 percent.

That's because states increased outreach to low-income households, simplified the program and streamlined the application process, making it easier for eligible individuals to apply for and receive food stamp benefits. It's worth noting that more than a quarter of those who are in fact eligible for the program still aren't enrolled, meaning the numbers could still rise further.

Much of the former stigma associated with food assistance has been removed since the program discontinued the use of paper food stamps. Instead, plastic debit cards, known as "Electronic Benefit Transfer" or EBT cards, are now in use. These cards look pretty much like an ordinary credit card when used in a supermarket checkout line.

The change from paper to plastic has also caused the fraud rate in the program to plunge to just 1%, says the Government Accountability Office. Critically, food stamp dollars can only be used to buy food — not cigarettes, alcohol or even cleaning supplies, for example.

The demographics of those in the food program are quite revealing.

According to the USDA, as of 2010, nearly half (47%) of beneficiaries were children under age 18, and 8% were age 60 or older. Interestingly, 41% of recipients lived in a household with earnings from a job — the so-called "working poor." In fact, working families actually outnumber unemployed families in the program.

Among recipients, 36% were white (non-Hispanic), 22% were African American (non-Hispanic) and 10% were Hispanic. Because participants are not required to state their race or ethnic background, 18.9% are listed as "race unknown."

The average household received a monthly benefit of $287 in 2010, or an average of $9.25 per day. Clearly, these folks aren't eating steak.

To qualify, a single person needs to earn less than $14,000 annually. For a family of four, it's less than $29,000 annually. That's just above the threshold for two single persons.

Last year, 85% of the households receiving food stamps lived below the federal standard for poverty. So, the food stamp program, now officially known as SNAP (Supplemental Nutrition Assistance Program), is doing what is was designed to; providing assistance to the poor.

The problem is that the ranks of the poor have been exploding.

The federal poverty level has a very conservative definition and is set according to the number of persons in a family. The government's official 2012 designations for poverty are as follows:

1 person: $11,170
2 persons: $15,130
3 persons: $19,090
4 persons; $23,050

For a family of four, $23K doesn't go very far. Clearly, millions of additional American families are just above that threshold and are also living in poverty, though they are not officially recognized as such by the government.

Though the program has become increasingly politicized, large numbers of "red state" residents are also beneficiaries. Mississippi (red) reported the largest share of its population relying on food stamps, more than 21%. One in five residents in New Mexico (blue), Oregon (blue), and Tennessee (red) were also food-stamp recipients.

As of 2011, the ten states with the highest percentage of population using food stamps were (in ascending order): South Carolina (red), Maine (blue), West Virginia (purple), Kentucky (red), Louisiana (red), Michigan (blue), New Mexico, Tennessee, Oregon and Mississippi.

As a recent New York Times piece detailed, even Americans who vigorously oppose the whole idea of government “handouts” receive benefits of one kind or another.

Over the past four years, food stamp spending has doubled to $106 billion. That equals 0.028% of the $3.796 trillion federal budget for fiscal 2012. Clearly, spending on the food aid program amounts to a miniscule portion of the overall budget. Food stamps are not a budget buster and they are not tipping the fiscal balance.

What is putting the budget in the red is a lack of jobs — especially good, full-time jobs — that allow people to substantively contribute to the federal income tax base.

Remarkably, the latest census data shows that nearly one in two of the U.S.'s 313 million citizens are now officially classified as having a low income or living in poverty. One in five families earns less than $15,000 a year.

The growth of the poor can be traced to a lack of jobs and, more specifically, a lack of well-paying jobs. Even before the Great Recession took hold, the American middle class had already been in long-term decline. Worker's paychecks have been stagnant for decades.

According to Census figures, the $47,715 median annual income earned by a male, full-time, year-round worker in 2010 was less than the $49,065 a male earned in 1973, adjusted for inflation.

This means that median incomes have actually gone backward over the previous four decades. That's simply stunning.

The median paycheck (half made more, half less) fell again in 2010, down 1.2 percent to $26,364. That works out to $507 a week, the lowest level, after adjusting for inflation, since 1999.

Meanwhile, inflation was 27% from 2000 to 2010. That's a hidden tax on all Americans, young and old, and it impacts the poor most acutely.

Given all these factors, it's easy to reconcile Indiana University's projection that the ranks of the impoverished will continue to rise.

The rising number of impoverished Americans, as well as those needing food assistance, are signs of an economy that is very sick and very weak. The evidence is all around us.

Friday, June 01, 2012

Unemployment a Symptom of a Bad Economy; The Bad Economy a Symptom of High Unemployment

Today we learned that the U.S. economy created just 69,000 non-farm jobs in May, the smallest gain in a year. While it came as a surprise to many, it shouldn't have.

If you're unemployed and looking work, you surely know just how competitive the employment search is. Last year, there were almost seven applicants for every job opening in the U.S., a ratio that is double the historical norm.

The unemployment problem is so dire that just 75.7 percent of Americans between the ages of 25 and 54 have jobs, a full 5 percent less than before the recession, according to the Washington Post.

But joblessness had already been a growing problem long before the Great Recession took hold. In fact, job creation has been slowing for decades.

According to the Economic Cycle Research Institute, during periods of American economic expansion in the 1950s, ’60s and ’70s, the number of private-sector jobs increased at about 3.5 percent a year. But during expansions in the 1980s and ’90s, jobs grew just 2.4 percent annually. And during the last decade, job growth fell to 0.9 percent annually. While the number of new workers entering the workforce swelled during that period, just 1.7 million new jobs were generated.

The trouble stubbornly persists.

Fewer Americans between the ages of 25 and 54 have jobs than at any point in the 23 years before the recession, according to government data cited by the Washington Post.

It's been widely noted by labor experts that the longer a person is unemployed, the more their job skills erode — to say nothing of their confidence and self-esteem. Because so many people in their prime working years are currently unemployed, many of them long term, it will have lasting effects on the economy as a whole.

There are vast numbers of people who are not productive or contributing to the tax base. That is a major drag on the economy. Worst of all, millions of job seekers have become so despondent after lengthy job searches, that they have simply given up looking for work. These people are no longer counted as unemployed, hence the falling unemployment figure over the past year.

The labor force participation rate (the percentage of the working-age population either working or looking for work) was 63.8 percent in May, its lowest level in 30 years, according to the Labor Department.

A record 88.4 million people are considered "not in the labor force," according to the Bureau of Labor Statistics (BLS). That's a stunning figure.

The bursting of the housing bubble led to lower demand and less consumption, followed by mass layoffs and a severe recession. The economic expansion of the previous 30 years had been fueled by debt. But that fuel is now spent, literally and figuratively.

From 2003 to 2007, Americans extracted $2.2 trillion from their properties in the form of home equity loans and cash-out refinancing — about 20 percent of which went to fund personal spending. Those days are long gone. Fake equity led to fake demand. As a nation, we were fooling ourselves. People were never as rich as they thought they were. The economy was a house of cards and now it's fallen down.

This isn't a problem with a political solution. It matters not who wins the election in November. The unemployment problem and our vast economic troubles will persist no mater who is in the White House. Don't kid yourself by thinking otherwise.

Everyone is searching for a cure, a way to fix all that is broken. The only way back to the past is to re-inflate the bubble and expand our massive debts even further. But that didn't work out so well the first time around. It's how we got into this mess in the first place.

The problem isn't a matter of excess regulation or taxes being too high. Those are simple political arguments, but they aren't solutions to a national hangover from a massive debt binge.

Since the previously low unemployment rate and private sector consumption were driven by unsustainable debt-expansion, and were therefore entirely misleading, perhaps we need to reconcile ourselves to era of less — less consumption, less demand, less economic growth and less prosperity. Maybe that's not such a bad thing. Did buying all that "stuff" makes us happier as a nation? I don't think so.

America is presently confronting a new reality, and it is a really painful one.

The U.S. still has nearly 5 million fewer jobs than when the recession began in December 2007. Job losses in the recession were the deepest since the Great Depression.

More than 5 million people have been unemployed for 27 weeks or more, and the average length of unemployment is more than 39 weeks, according to the BLS.

However, the labor market continues to add low wage jobs at places like retailers and temporary services, the likes of which don't typically provide benefits. But there are already too many low paying jobs — the kind that thwart demand and consumption, while preventing the economy and the tax base from growing nearly enough.

Among OECD (developed/industrialized) countries, the U.S. had the highest share of employees toiling away at low-wage work in 2009, according to OECD data. One in four U.S. employees were low-wage workers that year, according to the OECD. That is 20 percent higher than in the number-two country, the United Kingdom. Low-wage work is defined as earning less than two-thirds of the country's median hourly wage.

This is why the middle class has been shrinking for decades. How can the economy get ahead with so many people in low wage jobs? These folks don't have nearly enough disposable income to propel the economy or lift the tax base and help the government cease its chronic deficits.

The number of employees working in low-wage jobs has been rising since 1979, according to to John Schmitt, senior economist at the Center for Economic and Policy Research. And low-wage workers are better educated than ever. The percentage of low-wage workers with at least some college education has spiked 71 percent since 1979 to 43.2 percent of all low-wage workers, according to Schmitt's analysis.

In May, the average length of the work week fell to 34.4 hours. Employers often give workers less than 40 hours a week to avoid providing them with benefits, or the possibility of overtime.

Even after widespread layoffs, U.S. companies have been able to get their remaining workers to do more with less. Fear of losing one's job is quite a motivator. Worker productivity has been booming in recent years. Output per hour in American manufacturing has increased by 13% in the past five years and 21% in the five years before that.

Despite that impressive increase in productivity, wages for many manufacturing workers are not keeping up with inflation. Consumer prices increased by 7% in the three year span between 2009 and 2011. That is putting a squeeze on workers' incomes and spending, which, in turn, hurts retailers and the broader economy.

Neither the long term or short term employment trends look promising.

The number of new jobs created in April was slashed to 77,000 from an original estimate of 115,000. Job growth in March was revised down to 143,000 from 154,000.

This means the three-month average for job growth is just 96,000 jobs per month. That's not enough to keep unemployment from rising. As it stands, the job market is already in a very deep hole.

It's important to remember that even if the economy simply kept up with population growth by adding 125,000 jobs each month (for a total of 1.5 million new jobs this year), it still wouldn't help the millions of Americans who are already unemployed or under-employed, meaning they can only find part-time work. It would only help the new entrants into the labor force, such as high school and college graduates.

When you add the 8.1 million persons employed part time for economic reasons (sometimes referred to as involuntary part-time workers) to the 12.7 million persons the government officially recognizes as unemployed (the U-3 figure), you find that nearly 21 million Americans are under-employed. And this ignores all the millions who have simply dropped out of the labor force altogether.

What we are now witnessing is the outcome of America's long term decline. It doesn't matter which indicators you look at: the automation and off-shoring of jobs that have led to long term unemployment problems; an aging, non-productive population that draws from the government but no longer pays taxes; a massive trade deficit fueled by a reliance on foreign oil and cheap goods; a massive federal debt and persistent deficits; an exponentially growing money supply that is fueling inflation; a housing bust with no true signs of recovery, etc.

People fear the potential, if not likelihood, of a double-dip recession. But that doesn't need to occur for the nation to remain mired in its economic malaise. The country could just muddle along at a 2 percent annual growth rate, which would not allow for nearly enough job creation. Growth must be at least 2.5 percent just to even keep up with annual population growth.

Historically, from 1947 until 2012, the United States GDP growth rate averaged 3.3 percent. For perspective, the U.S. hasn't grown at that rate since 2004 and prior to that, 2000.

Once again, the trends are not good.

What we're now faced with is a chicken and egg conundrum.

Employers won't hire until the economy improves. In essence, the unemployment problem is a symptom of the poor economy.

On the other hand, the economy won't sustainably improve until hiring increases to the point that the 21 million unemployed and under-employed Americans have jobs, and are measurably contributing to the tax base and the nation's gross domestic product.

That's quite a conundrum. Which comes first?