This update establishes a minimal lost opportunity cost of 24 trillion dollars in GDP not earned; and minimal loss of 12 trillion dollars in taxes and fees not collected, for the period of 1992-2016. Reason for the update is to provide an educational experience for the reader rather than an informational posting.
Note: Forward looking data referenced in the posting may continue to change over time.
Legislation and regulation rarely consider the consequences of the act, and are rarely in response to the cause of an issue.
Background: The U.S. congress and administration have, over the past twenty-four years, enacted a series of well intentioned, however, questionable efforts to improve the quality of life for citizens.
- Established trade relations that have resulted in passing control of U.S. international trade to the World Trade Organization (WTO).
- Deregulated banking to allow for more flexibility in finance, and supported the International Monetary Fund (IMF).
- Established a policy of increased home ownership through subprime lending.
What could possibly go wrong? It appears the combination of these activities may have been responsible for creating a false and unsustainable economy, resulting in the current international financial crises.
This blog entry is brief and serves as the foundation for understanding the cause and effect of many of the current problems in the economy, government and educational systems.
a.) The chart scale on the left is in 500 billion dollar increments. Years 1992-1998 indicate mild growth in the trade deficit.
b.) Exceptions during this later period are 2001 (9/11) and the world financial crises of 2009 which slowed global trade overall.
b.) Overall, years 1999-2014 indicate increasing growth in both imports and exports, with the exception of 2015-2016 indicating a slowing trend. However, the total accumulated trade deficit is increasing.
1. Decisions by congress and the administration during the 1992-2000 period set in place the status of Permanent Normal Trade Relations (PNTR) with China. This is a legal designation in the United States for free trade with a foreign nation. In the U.S. the name was changed from Most Favored Nation (MFN) to PNTR in 1998.
2. This action has resulted in an increasing trade deficit with china Updated 7/20/2018
Total import imbalance (imports exceeds exports) for the period is 9 trillion, 975 billion, 399 million dollars. U.S. International Trade in Goods and Services published by the U.S. Census Bureau.
Dr. Ben Bernanke previous chairman and a member of the Board of Governors of the Federal Reserve System stated, given current low interest rates, the Money Multiplier Effect (MMF)in the U.S. is running at the rate of 800% per year. Updated August 6, 2014.
If correct, this would indicate for every $100 deposited in a bank and loaned to a borrower, it will create $800 more dollars as it is passes between merchants, additional banks for loans and customers. In addition, at every transaction, taxes and fees are collected in the form of sales and income tax which are paid to city, state and the federal government.
Theoretically this is possible given the current interest rate established by The Federal Reserve, however, it is unlikely. Historically, a rate over 250% had been the norm during the period of 1990-1995. Beginning around 1995, a decline in the MMF occurred, culminating in a 100% and lower MMF since the recent financial collapse.
It should be noted that prior to 1975, the U.S. had a trade surplus. From that period thru 1990, a much higher MMF of +300% was experienced. As the U.S. began providing temporary MFN status to China in 1992 and on to permanent PNTR status, the MMF dropped considerably. This decline in MMF occurred in conjunction with the escalating trade deficit, loss of tax revenue and manufacturing jobs, and an overall high unemployment rate.
The theoretical MMF is derived through a process referred to as Fractional Reserve Banking.
1. Industrial capacity, utilization of manufacturing facilities during April of 2012 is estimated to be 79.2% of the current standing capacity. Keep in mind this is the percentage utilization of the current standing capacity. Historical utilization rates average around 85%. Standing capacity has continued to decline since 1975, the first year the U.S. experienced a trade deficit. Since then, maximum capacity has continued to erode with many manufacturing and service facilities moved to foreign markets.
Summary of the banking problem:
Currently, banks face unknown costs coupled with reduced purchasing power of retail customers, unknown costs for industrial customers, and an impending collapse of international financial markets. For government to insist that banks loan into this financial fiasco would be a repeat of government demanding banks loan into another sub-prime mess . . . which government did!
What is the central concern of government today . . . increasing banking regulation . . . what about the trade deficit which is the root cause of the problem? Oh, the U.S. no longer controls that . . . the WTO does . . . is the U.S. now a member of the EU? Is the center of U.S. government now the European Parliament?
Summary evaluation of the data:
Information in the chart and tables above has been available for several years, and what action was taken to stem the flow of wealth from the U.S. to emerging nations?
Economists and academics have been pushing for more exports to balance the trade deficit. Well, they are getting more exports, but the delta between imports and exports has been growing larger. You frequently hear a monthly deficit has narrowed. What about the total deficit? The U.S. has been exporting mostly capital equipment used to build infrastructure for producing products for export.
The U.S. imports most of the consumer products from one nation. What is that nations income level per capita? You would think that several years ago, economists and politicians would have gotten the message that the U.S. can’t match the imports because of the inability of potential . . . if you want to call them “potential” customers . . . to buy U.S. exports. Is it realistic to believe they will be buying imports or making their own? When will the concept of Balanced Trade be addressed?
Consider this: The $9,975,399 (that is 9 trillion, 975 billion and 399 million) at the case MMF of 250% would have exceeded over $24,938,498 . . . that’s 24 trillion and 975 billion more dollars of domestic spending, and $12,469,248 . . . that’s 12 trillion and 248 billion more dollars in taxes and a heck of a lot more jobs. But the truth is it would have been much higher than that given annual compounding. Keep in mind this is minimal and reflects a factor based on 1992-1995.
In short, imports are very likely more expensive than domestically produced goods and services given the need for government to pay for unemployment insurance, healthcare, food stamps, etc.
What do notables in economics have to say about trade deficits.
A series of links on “Balanced Trade” for your review:
What Washington and Wall Street did not see coming, many others did.