I had another great chat with my fellow Being Libertarian contributors about TPP and its impact on the United States and international trade:
Today the BEA announced that the US trade deficit declined to $26 billion in May 2009:
Goods and Services
The U.S. Census Bureau and the U.S. Bureau of Economic Analysis, through the Department of Commerce, announced today that total May exports of $123.3 billion and imports of $149.3 billion resulted in a goods and services deficit of $26.0 billion, down from $28.8 billion in April, revised. May exports were $1.9 billon more than April exports of $121.4 billion. May imports were $0.9 billion less than April imports of $150.2 billion.
In May, the goods deficit decreased $2.6 billion from April to $37.3 billion, and the services surplus increased $0.2 billion to $11.4 billion. Exports of goods increased $2.0 billion to $82.1 billion, and imports of goods decreased $0.5 billion to $119.4 billion. Exports of services decreased $0.1 billion to $41.3 billion, and imports of services decreased $0.4 billion to $29.9 billion.
In May, the goods and services deficit decreased $34.6 billion from May 2008. Exports were down $33.3 billion, or 21.3 percent, and imports were down $67.9 billion, or 31.3 percent.
…this is an ongoing and expected continuation of the end of the last Consumption Business Cycle, the End of Consumerism. It is reasonable to assume that Chinese government’s suppressing the value of the Dollar is accelerating this process of declining US trade deficits significantly, as can be seen in this chart:
Today’s BEA report shows that the US trade deficit continued its decline in February:
The U.S. Census Bureau and the U.S. Bureau of Economic Analysis, through the
Department of Commerce, announced today that total February exports of $126.8
billion and imports of $152.7 billion resulted in a goods and services deficit
of $26.0 billion, down from $36.2 billion in January, revised. February exports
were $2.0 billion more than January exports of $124.7 billion. February imports
were $8.2 billion less than January imports of $160.9 billion.
This it The End of Consumerism in action. Imports to the US will continue their decline until balance is restored.
In the latter one I already wrote:
The outcome of all this is pre-ordained: The massive current account deficit will be reduced because people in the US consume less. Americans have begun to save more. There is no way this trend will stop anytime soon. China will need to export less and begin investing more domestically, while at the same time importing and buying more goods from or in the US. This will happen, whether the US government likes it or not. The End of Consumerism is in full swing. But the government’s reckless borrowing, spending and bailouts assure that this correction will take a very long time. I don’t think it is unreasonable to assume that it will take until 2020 or so until an approximate trade balance between the US and China is restored.
The credit expansion by the Federal Reserve bank has set in motion the workings of the business cycle in the United States. As explained, in phase 5 of the business cycle, would-be savers are crowded out of the market and purchase either inflated stocks or consume part of their earnings which they would have usually saved. This additional demand for consumer goods, coupled with a decline in the actual production of these basic consumer goods, sends consumer prices higher.
Now, if we introduce a second country, say China, to this model, the consumers in the US will turn to goods produced abroad whose prices have not risen yet. Since they have to exchange their fiat money for foreign fiat money, the value of the US Dollar will drop against the Chinese Yuan, thus, after a short adjustment period, curbing US demand again and limiting Chinese exposure to inflated demand from the US and keeping US consumers from outbidding Chinese ones with inflated money. In addition, a cheapening of US goods to Chinese consumers will impel Chinese consumers to buy goods from the US, balancing the current account.
If, however, the Chinese central bank, prints additional Yuans in order to buy the excess Dollars and thus keeps the price of the Dollar in Yuan up, this will enable US consumers to outbid Chinese ones on the market for Chinese consumer goods. This way the Chinese central bank essentially inflates together with the US and lets the Chinese consumer shoulder the burden of US induced inflation, favoring Chinese export businesses who receive the new Yuans first and get to spend it first. A prolongation of the current account deficit in the US ensues which will not disappear until phase 9 of the business cycle, the correction, is completed.
(What adds to imports from China are added imports from other countries that also occur as a result of credit expansion. If the currencies of those countries are free floating, the exchange price of the Dollar will fall when expressed in those currencies. This is what could be observed when looking at the Dollar exchange rate in terms of Euros, Canadian Dollars, and lots of other currencies over the past years.)
The official RMB(Yuan)/USD exchange rate was pushed from 1.50 yuan in 1980 to 8.62 yuan by 1994 (lowest ever on the record). The Chinese government then maintained a peg of 8.27 yuan per USD from 1997 to 2005. As can be seen in the chart above, the current account deficit has developed accordingly.(From 2005 on, China began to peg its currency to a basket of currencies rather than the US Dollar alone. But a certain level of pegging against the Dollar remains due to this basket.)
In doing so, the Chinese central bank impelled its countrymen to produce more and consume less than they would have done without the monetary intervention. The Dollars obtained in exchange for newly printed Yuans were invested in US Treasury securities and thus in effect loaned out to the US government. This is how the Chinese central bank amassed its infamous portfolio of US Treasury securities, providing for an ongoing suppression of the interest rate on US Treasury securities, and creating the illusion of a never ending supply of financing from abroad. Of course the money was being spent by the US government on more consumption at home and thus ultimately resulted in domestic consumer price inflation as well.
If US politicians were sincere about addressing the issue of the US current account deficit, they would need to remedy the source of the problem. This would require an unconditional abandonment of the policy of credit expansion and a return to a sound monetary policy under a gold standard.