It seems that everyone is fixated on the stock market or the job numbers. But to me the only number that matters right now is the trade deficit, not the budget deficit althought it is important as well. Between the trade deficit and interest payments on US government borrowing, dollars seem to be the major export commodity. So let's look at the numbers.
The GDP of the US in 2008 was roughly $14tr. The GDP of the "world" ( sum of the GDPs of the countries of the world) is roughly $60tr. Remember that this year 2010, the US debt is $14tr. That is roughly 100% of the GDP. In 2009, the interest payment was $189bn of which 50% goes into foreign hands.
http://en.wikipedia.org/wiki/List_of_countries_by_GDP_(nominal)
So here are the numbers regarding the federal budget. This is a little off as the income stream is from 2007, but assume that the numbers have not changed drastically in the following years. Although presumably with the increase in unemployment and lower profits, there will be some decrease in tax revenues.
US Income: about $2.7tr (in 2007 before refunds)
US Budget: $3.6tr (approx.)
$2.2tr mandatory
$1.4tr discretionary
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So again roughly, the US is about $1tr in the hole. Needs to borrow. And, of course, the current lender of choice is China. Let's see why.
Of the foreign debt, approx. $3.7tr, China and Japan hold about 45%, which is $1.66tr. But that is not the entire story, China held $2.4tr at the end of December 2009 in foreign reserves. This is obviously due to the trade imbalance between China and the US. Also the US is paying $189bn in interest payments, of which approx. $45bn is going to China. So what does it mean to hold more in IOUs than the entire amount of cash that the US has?
The US trade deficit with China in 2009 was $227bn. In 2008 the deficit was $268bn; $258bn, $234bn in 2007 and 2006 respectively. In fact you need to go all the way back to 1985 to get a semblance of parity. This is the reason that China has become the bank for the US. When the US government needs to borrow money, the place to go is China. And to reiterate, the reason that China is the lender of choice is because of all the stuff we have bought from China.
So the other unfortunate part to this, is that there is all that money that can't be taxed! The more money the US gives to China, the less amount of wealth there is in the US to be taxed.
http://www.census.gov/foreign-trade/balance/c5700.html
So what is the answer?
Clearly the US and the Obama administration have been trying to get China to raise the value of their currency. This would make imports more expensive and presumably make Chinese imports more expensive. People would spend less on Chinese products, and thus lowering the trade deficit.
Does China want to continue funding the US economy? In the following article, Kenneth Rogoff argues that the next move is for China.
"China needs to strengthen its social safety net and to deepen domestic capital markets before consumption can take off. But, with consumption accounting for 35% of national income (compared to 70% in the US!), there is vast room to grow."
http://www.project-syndicate.org/commentary/rogoff61/English
Far for me to disagree with Prof. Rogoff, but I will.
The US has a problem, and it is up to the US to solve it, not wait for external events to fix it. The problem is the consumption that Prof. Rogoff talks about. But more to the point it is consumption for cheap goods. We can call it the "Walmart Syndrome" or the US, the "Walmart Nation". Buy lots and buy it cheap. If fact make it so cheap, that US manufactures can't produce the goods because of all the federal and state "safety" nets that don't exist in China. There is certainly a moral question that we can explore in another blog.
Bottom line, the US needs to bring back manufacturing of goods that are currently imported at the cost of over $200bn annually. So as a nation, is it really cheaper to build goods overseas? Probably not. Lost jobs, and lost tax revenue both at the state and federal level. It just seems cheaper when you look at the price at Walmart, forgetting that is being subsidized by the US government with a BIG credit card.
Enough for now, more on jobs in a later blog.
Other Holders of Dollar Wealth
Just a quick prelude for another topic.
According to Forbes magazine, the combined wealth of the first 35 richest Americans is roughly $500bn. It is not difficult to calculate that 400 Americans have in excess of the total physical money supply of the US. Furthermore, 400 Americans control over 10% of all the cash in the US, this includes M0 through M3.
http://www.forbes.com/lists/2009/54/rich-list-09_The-400-Richest-Americans_Rank.html
If that is not bad enough, just a few "Tech Giants" hold $265bn. So while the unemployement rate hovers around 10% (or 18% effectively), American companies are sitting on a pile of cash.
http://247wallst.com/2009/11/12/tech-giants-now-hold-265-billion-cash-to-spend-hpq-coms-intc-amd-msft-csco-aapl-goog-orcl-java-qcom-emc-yhoo-dell-amzn-ebay-ont-brcd-jdsu-star-vmw/
...
Is seems to me that there is something wrong when China and a few individuals and corporations hold some much wealth while the US federal government struggles with finding money to pay for unemployment benefits.
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