Wednesday, September 09, 2015

Another $40 Billion Left the Country in July


From the U.S. Commerce Department's September 2015 Report of the U.S. Monthly Trade Deficit (source)

by Gaius Publius

We Americans usually focus on the government's deficit with, mainly, its citizens, often called the "national deficit." This is an almost completely artificial number, since the government isn't a household, but the manufacturer of something most of us very much want — money. (Think of it this way; every dollar the government doesn't spend, every dollar it keeps in its back pocket, is a dollar that will never get into your back pocket, ever. Every dime the government doesn't spend is a dime you'll never see. Please think about the implications of that.)

But the trade deficit, the "balance of payments" deficit — the difference between the amount of money we actually give to foreigners, and the money we take from them — is real. If you were the United States, in July you handed a net $40 billion to foreign individuals and corporations. And you've been doing the same each month for the past year. Multiply that by 12 months and you're looking at roughly $500 billion (half a trillion) going out the door in a year.

Here's what that looks like over a longer period of time:

U.S. Balance of Payments, year after year, since 1950 (source)

That $40 billion that went out the door in July is actual money, it's actually gone, and it will only come back to the U.S. when the foreign entities who own it offer to buy your assets with it — your house, say, or all of the stock in Burger King — and you're so broke you're eager to sell it to them.

Dave Johnson, our go-to writer on trade, with the news:
The U.S. Census Bureau reported Thursday that the July goods and services trade deficit was an enormous, humongous $41.9 billion. This is down from a revised $45.2 billion in June.

This is an increase from May’s enormous, humongous $40.9 billion trade deficit.

We had the highest ever level of imports in autos and auto parts, at $30 billion.

The trade deficit with China was $31.57 billion. This is the highest monthly trade deficit of this year, and it was 75 percent of our July trade deficit.

The U.S. goods deficit with Japan was $5.7 billion, up from $5.2 billion in June.

The U.S. goods deficit with South Korea was $2.6 billion, up from $2.3 billion in June.

Note that these numbers do not reflect China’s big currency devaluation, which happened in August. Even without that, this trade deficit measures a terrible situation for American manufacturers and workers.
We're giving away the store, month after month, year after year. Eagerly, in the case of the wealthy, since a lot of that wealth comes back to them in the form of higher profit and CEO compensation. Or blindly, in the case of our middle class, since Tom Brady's problems are of greater interest, it seems, than their own. (I blame the men and women who own our media, but you may have other thoughts on that.)

How to Think About the Trade Deficit

The simplest way to think of the trade deficit, and why it's happening, is this. Imagine a man (usually it's a male we're talking about, though Carly Fiorina qualifies) whose company makes $100 million in revenue in a given year, who pays $30 million of that in non-CEO wages, and whose company, when it's all done, sees $20 million in profit.

From that $20 million, he takes a CEO salary of, say, $3 million in cash and other benefits, including stock options. His company's stock is a solid $10 per share, and has been for a while.

Then he figures it out. He closes all his U.S. factories, fires those workers, and outsources all of his manufacturing to "contractors" in Asia. Now, instead of paying $30 million in wages, he pays just $5 million in U.S. wages and $10 million to his manufacturing contractors, saving $15 million on what used to cost him $30 million. Nothing else has changed in this example, neither his sales nor his prices.

Since he doesn't drop his retail price, his profit swells from $20 million to $35 million on the same sales volume. With the extra money, he bumps his own pay from $3 million to $6 million. In the process the stock price jumps to $15 per share (because of the jump in profit), which further sweetens his own take, since his pile of company stock, part of his "executive compensation package," is now worth 50% more.

Next year he'll use company money to buy back a big pile of stock and take it off the market, making his personal stock pile (sorry) even more valuable. And he'll look for an even cheaper foreign "contractor" to manufacture his goods.

What Just Happened? Making CEOs Rich at Your Expense

Simply by changing his manufacturing base, the following occurred:
  • All of his U.S. manufacturing workers lost their jobs. 
  • $10 million that would have stayed in the U.S. (as U.S. wages) went to a foreign "contractor," thus adding to the trade deficit. 
  • The company pocketed $15 million in increased profit, which boosted its stock price.
  • Of that $15 million, the CEO pocketed an extra $3 million. 
  • The stock market is buoyed by stock buybacks and the need by CEOs to keep prices high.
Bottom line, the CEO sent $10 million overseas so he could skim $3 million from the savings. In essence this is a kickback scheme. Multiply that across the entire U.S. manufacturing (and part of the service) economy, and you'll see (a) why CEOs everywhere are handing U.S. money as fast as they can to foreign entities so they can pocket the skim, and (b) why this will never stop until someone makes it stop.

Want to watch it in real time? Watch the monthly trade deficit report. 

The Crumbling American Middle Class

In the meantime, all of those fired workers buy fewer and fewer goods even as foreign-produced goods become cheaper and cheaper. Or, to quote the decidedly right-leaning International Living, a magazine for libertarian expat-wannabes, the consumer action is rapidly moving abroad (Sept 2015, print only):
Want to Profit? Look Abroad

"The U.S. is no longer the consumer market it once was," writes Jeff D. Opdyke of "And that is all you need to know to find your future investment opportunities.

"McDonalds, for instance, has set its sights on high-growth markets outside the U.S. Across Asia/Pacific, the Middle East, and Africa MCD is planning to open 550 new restaurants, with 200 additional eateries slated for China alone.

"Though I am not a proponent of investing in multinationals, as an investor, you can see where you should look for opportunities by watching where companies like McDonald's are shifting their focus. Go there, and large profits await for you."
As analysts like Thom Hartmann have written (for example, in his excellent book The Crash of 2016), the American middle class is crumbling as we watch. If you want the reason, look no further than the trade deficit, the "balance of payments." Again, that money is gone, and will only come back when its new owners want to buy our assets, because frankly, that's mainly all we have left to sell them.


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At 11:16 AM, Blogger CNYOrange said...

As far as I can tell, great liberal economists like Paule Krugman don't seem concerned about the trade deficit. How would you respond to them?

At 5:42 PM, Anonymous Anonymous said...

The C-class is killing the real US economy, but you know what? The stockholders have permitted this happen, among other things by buying the BS about "maximizing shareholder value."

At 8:54 AM, Blogger nihil obstet said...

" that money is gone, and will only come back when its new owners want to buy our assets, because frankly, that's mainly all we have left to sell them."

Thus, the desperate need for trade agreements that apply "intellectual property" laws to virtually everything, and that allow companies to create "expected future profits" suits against governments. Having sold off everything tangible and exported actual skills/knowledge, we now must demand payment for our imaginary wealth.

At 11:11 AM, Blogger keith gargus said...

"great liberal economists like Paul Krugman" are OK with DEFICIT spending in certain circumstances. None of them like trade deficit. Get your facts right CNYOrange.

At 10:51 AM, Anonymous Anonymous said...

coupla things:

a) good piece which outlines our (US) economy's biggest fraud and nihilism; And good for including Dave Johnson's fine monthly pieces on it.

2) you omitted the greed of the 99% of americans who will gleefully cover their heads in imported paper bags in exchange for being charged a nickel less for their kids' flammable undies made by Malaysian slaves. Truth is, I'd wager that a supermajority of American consumers don't give a rat's tuchus about where shit is made nor how good it is as long as it's dirt cheap. Kind of a resonance with no jobs/wages and all.

iii) In a lot of cases, when the trading partner is, essentially, a government (china, Saudi), those T/Billions do come back... as government debt -- they tend to buy our Treasuries as very safe and liquid investments. Were this not so, our beloved imbecile government would have to print a trillion more per year, further reducing the fiat value of each dollar. Granted, eventually, when the paper comes due, they have to cover it with some kind of fiat money.

Note the point at which the blue in the second graph started diverging from the green... nafta... bill Clinton... sumbitch sold out workers and wages and the environment... and the friggin voters just keep electing more xxFTA-loving sumbitches since. Crap a million or 10 million jobs overseas... and no political penalty. despicable.


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