Current account deficit hits record (Trade Deficit)

CNN/Money ^ | June 19, 2003 | Reuters

[Willie Green]

Gap in broadest trade measure grows 6% to $136.1B, but comes in below estimates; dollar gains.

WASHINGTON (Reuters) - The U.S. current account deficit rose nearly 6 percent in the first quarter of 2003 to a record $136.1 billion, the government said Thursday.

[Willie Green]

TRADE DEFICIT: Formally termed a balance of trade deficit, a condition in which a nation's imports are greater than exports. In other words, a country is buying more stuff for foreigners than foreigners are buying from domestic producers. A trade deficit is usually thought to be bad for a country. For this reason, some countries seek to reduce their trade deficit by--

1. establishing trade barriers on imports,
   
2. reducing the exchange rate (termed devaluation) such that exports are less expensive and imports more expensive, or
   
3. invading foreign countries with sizable armies.

Here are the facts:

Gross Domestic Product (GDP), the measure of the USA's output of goods and services, is calculated by the Commerce Department's Bureau of Economic Analysis using the following items:

• Personal consumption expenditures: Personal consumption expenditures are far and away the largest and tends to be the most stable of the four expenditures, averaging about 65-70% of gross domestic product.
• Gross private domestic investment: Expenditures on capital goods to be used for productive activities in the domestic economy that are undertaken by the business sector during a given time period. Gross private domestic investment tends to be the least stable of the four expenditures, averaging between 12-18% of gross domestic product.
• NET EXPORTS OF GOODS AND SERVICES Net exports of goods and services is the smallest of the four expenditures, averaging around 2% of gross domestic product. Unlike the other expenditures, net exports of goods and services can be either positive or negative. They are positive when exports are greater than imports (Trade Surplus) and negative when exports are less than imports (Trade Deficit). In recent years, net exports of goods and services have been negative.
• Government consumption expenditures and gross investment measures government purchases undertaken by the government sector. Government consumption expenditures and gross investment averages between 15-20% of gross domestic product. This percentage tends to be ebb and flow a little with the political winds.

The BEA News Release for FIRST QUARTER 2003 provides us with the following current data for these items. (Seasonally adjusted at annual rates)

Gross domestic product (GDP)............................. $10,697.7 billion
Personal consumption expenditures.......................... 7,502.8 (70.13% of GDP)
Gross private domestic investment.......................... 1,626.9 (15.21% of GDP)
Net exports of goods and services........................... -485.7 (-4.54% of GDP)
Government consumption expenditures and gross investment... 2,053.6 (19.20% of GDP)

The current BALANCE OF TRADE is in deficit, which is considered unfavorable.
It is SUBTRACTED from the items that make up GDP.

And at historic highs, it diminishes our domestic economy by about 4½% - more than twice the normal variation. This is NOT insignificant.

[Willie Green]

More info from AP:

The Detroit News
Thursday, June 19, 2003

Current account deficit swells to record $136.1 billion in first quarter

By Jeannine Aversa / Associated Press

WASHINGTON -- The deficit in the broadest measure of trade swelled to a record $136.1 billion in the first three months of 2003 as war tensions stoked the prices of imported crude oil and other petroleum products.

The latest snapshot of trade activity reported by the Commerce Department Thursday shows that the mushrooming "current account" deficit in the January-March quarter was 5.8 percent larger than the previous record deficit of $128.6 billion set in the fourth quarter of 2002.

The Bush administration believes the way to deal with swelling trade deficits is for other countries to remove trade barriers, rather than raising barriers to imports coming into the United States. That would allow U.S. companies to more freely do business in overseas markets, thus boosting America's global competitiveness, the administration says.

But critics say growing deficits are proof that the administration's free-trade policies aren't working. U.S. companies have moved operations overseas, while imports flood into the United States, a combination that has cost millions of lost American manufacturing jobs.

In another report, new claims for unemployment benefits dropped last week by a seasonally adjusted 13,000 to 421,000, a five-week low, the Labor Department reported.

The four-week moving average of claims, which smooths out weekly fluctuations, also declined last week by 3,000 to 432,000, another encouraging sign.

Although the claims figures are still running above 400,000 -- a level associated with a weak job market -- the decline in claims raises hope that the pace of layoffs may be stabilizing.

The current account deficit is considered the best measurement of a country's international economic standing because it measures not just the goods and services reflected in the government's monthly trade reports, but also investment flows between countries and unilateral transfers, including U.S. foreign aid payments.

In the January-March quarter of this year, the deficit in goods widened to $136 billion in the first quarter -- up from the deficit of $132.2 billion in the fourth quarter -- as imports of goods outpaced exports.

Petroleum imports accounted for three-quarters of the increase in goods imports in the first quarter, which rose to $309.2 billion. The rise in petroleum imports reflected an increase in price, a government analyst said.

In the services category, which measures things such as airline travel, the United States is running a surplus. The surplus, however, narrowed to $14.4 billion in the first quarter, down from $16.1 billion in the previous quarter.

The government said large declines in travel and passenger fares, reflecting concerns about the war in Iraq and the highly contagious SARS virus, contributed to the narrowing of the United States surplus in services.

The U.S. surplus on investment earnings decreased to $2.6 billion in the first quarter, compared with $3 billion in the fourth quarter.

The category of unilateral transfer, which includes payments that the United States makes in foreign aid to other countries, widened to $17.1 billion in the first quarter, up from $15.4 billion in the fourth quarter.

[CanadianFella]

Scenario 1: I exchange 500$ for a television with a Chinaman. He then exchanges 500$ for western clothing with an American.

"trade deficit" with China: 0$

Scenario 2: I exchange 500$ for a television with a Chinaman. He converts them to Euros and buys a German blender. The Japanese money-changer who bought his USDs buys American clothing for 500$.

"trade deficit" with China: 500$, but for America the situation is exactly the same: buy 500$ (TV), Sell 500$ (clothing). The "trade deficit" is for economic illiterates and special interests (especially manufacturers) exploiting the useful idiots.

[A Vast RightWing Conspirator]

Doesn't this mean that we are about to borrow almost half a trillion this year? This should be on top of whatever we alerady owe. Right?

$485 Billion divided by a population of 270 million, times 5 (the size of my family) indicates that my family share of this year's account deficit is near $9000.

Very, very impressive.

[Willie Green]

Scenario 1: I exchange 500$ for a television with a Chinaman. He then exchanges 500$ for western clothing with an American.
Scenario 2: I exchange 500$ for a television with a Chinaman. He converts them to Euros and buys a German blender. The Japanese money-changer who bought his USDs buys American clothing for 500$.

A fertile imagination can concoct many ludicrous scenarios.
The reality is that the American Textile Industry is being obliterated.
Do you have any other bright ideas???

[A Vast RightWing Conspirator]

The real scenario is this: you buy some junk from China for $500. Since you don't have anything to sell to China that China wants, you print $500. China is using the money to further 'modernize' its army, engaging in some cooperative nuclear effort with Pakistan, or maybe Israel.

The $500 you printed further increases the over-supply of Dollars, causing your currency to further decline and maintaining or increasing domestic inflation.

You are able to do the printing trick until your currency becomes fully discredited. When then happens, China is going to demand Euros, or gold next time you are trying to buy something from China. There's no way you can print Euros or make gold.

[Willie Green]

Doesn't this mean that we are about to borrow almost half a trillion this year?

$485 Billion seems to be a low estimate to me.
Dubya just signed a bill allowing a record $984 billion increase in Debt last month, and already U.S. May Hit New Debt Ceiling in 2004.

I've never dreamed that a Republican could be so fiscally irresponsible,
It's as if he is intentionally plundering the U.S. Treasury.

[Weimdog]

The textile business is gone.

All of our production has gone to China. Check your labels.

The NYSE listed company I work for used to manufacture about 90% of our garments in the U.S. using approximately 75% U.S. textiles. That was ten years ago. Today we manufacture about 95% of our product overseas.

The Chinese aren't buying ANYTHING, THEY ONLY SELL!

[A Vast RightWing Conspirator]

Someone insisted that his tactic is that of 'starving the beast' (beast = big gov't) by making this incedible borrowing the only way the gov't can continue. But... he is GROWING the government. Almost all he asks for is spending increases. There may be a couple of symbolic 'cuts' for propaganda purposes but... the federal government is being inflated like crazy.

[CanadianFella]

A fertile imagination can concoct many ludicrous scenarios.

Yeah it's really ludicrous to imagine a chinaman buying a german blender. outlandish! You are so full of it, you don't have a single argument against my post.

The reality is that the American Textile Industry is being obliterated.

I can see you at the beginning of the century saying how the nation's future depended on the survival of the buggywhip industry. bull**** then, bull**** now.

Do you have any other bright ideas???

Yeah, read "Hidden Order" by David Friedman

[A Vast RightWing Conspirator]

You are able to do the printing trick until your currency becomes fully discredited. When then happens, China is going to demand Euros, or gold next time you are trying to buy something from China. There's no way you can print Euros or make gold.

But, let me continue.

All of a sudden, your Dollars are not wanted by the Chinese any longer and... surprise!!!! you no longer have the ability to make the stuff you got used of buying from China for printed money.

Now... the 'fun' part begins...

[CanadianFella]

The real scenario is this: you buy some junk from China for $500.

Wrong! I work hard for my money and never spend it on junk. not even junk food

Since you don't have anything to sell to China that China wants, you print $500

Wrong! printing money is, uhm, illegal.

The $500 you printed further increases the over-supply of Dollars, causing your currency to further decline and maintaining or increasing domestic inflation.

Wrong! I never printed the 500 in the first place, and if I did I'd be in jail. You're full of it just like Willie.

[Cacophonous]

Nice post. Thanks.

[KDD]

HOOVER DIGEST
1997 No. 4
Milton Friedman and Rose Friedman
THE CASE FOR FREE TRADE

In international trade, Hoover fellow Charles Wolf Jr. argues in a previous article, deficits don't much matter. Here the Friedmans discuss what does: freedom. A ringing statement of logic and principle.

http://www-hoover.stanford.edu/publications/digest/974/friedman.html

It is often said that bad economic policy reflects disagreement among the experts; that if all economists gave the same advice, economic policy would be good. Economists often do disagree, but that has not been true with respect to international trade. Ever since Adam Smith there has been virtual unanimity among economists, whatever their ideological position on other issues, that international free trade is in the best interests of trading countries and of the world. Yet tariffs have been the rule. The only major exceptions are nearly a century of free trade in Great Britain after the repeal of the Corn Laws in 1846, thirty years of free trade in Japan after the Meiji Restoration, and free trade in Hong Kong under British rule. The United States had tariffs throughout the nineteenth century, and they were raised still higher in the twentieth century, especially by the Smoot-Hawley tariff bill of 1930, which some scholars regard as partly responsible for the severity of the subsequent depression. Tariffs have since been reduced by repeated international agreements, but they remain high, probably higher than in the nineteenth century, though the vast changes in the kinds of items entering international trade make a precise comparison impossible.

[Cacophonous]

Oh man, I wanted to say that. Your response to canadianfella was right on. Well illustrated. Unfortunately, he probably understood nothing.

[Willie Green]

I can see you at the beginning of the century saying how the nation's future depended on the survival of the buggywhip industry. bull**** then, bull**** now.

Suggesting that we balance our trade with textile products was YOUR position, numbnutz.

[Cacophonous]

Ever since Adam Smith there has been virtual unanimity among economists, whatever their ideological position on other issues, that international free trade is in the best interests of trading countries and of the world...

Only by those that haven't actually read Adam Smith.

Yet tariffs have been the rule.

Read Adam Smith's "Wealth of Nations", Book IV

[KDD]

I think I'll take Milton Friedmans word over yours...or Willies.

[A Vast RightWing Conspirator]

You never printed money???? Printing money is illegal?????

Did you ever write a check?

Do corporations issue common stock????

What makes the 'money supply' increase?

[Cacophonous]

What about Adam Smith, often cited as (in your post, too) as an advocate of untended "free" trade? Are you retracting your earlier post?