Wednesday, February 23, 2011

Domestic Financial Profits and the Trade Deficit

The following chart shows the domestic financial profits as a percent of the total domestic profits.



I have added a median value in red using the data from 1952 to 1984. Why 1984? As seen in my last post, that's the year we first started to embrace an unsustainable trade deficit.



How much do you currently trust domestic financial profits? Before answering, you might want to read the following quote.

January 26, 2011
Retreat on 'Marking To Market'

Accounting rule makers, bowing to an intense lobbying campaign, took a key step Tuesday to reverse a controversial proposal that would have required banks to use market prices rather than cost in order to value the loans they hold on their balance sheets.

For what it is worth, I think the cumulative trade deficit made us feel wealthier at first and is now having the opposite effect. It makes sense if you think of the cumulative trade deficit as an exponentially growing debt. Going into debt to buy cheap goods is a lot easier and emotionally satisfying than getting out of debt once it has piled up.

Here's the worst part. We've exported dollars to the rest of the world in exchange for cheap goods. There was no free lunch here. The rest of the world is now using our dollars to buy oil. That's pushed the price of oil up. A higher oil price only adds to our trade deficit though. We need to somehow stop this cycle before it is too late.

This post inspired by Jazzbumpa in the comments of the previous post.

Source Data:
FRB: Flow of Funds Accounts
at

9 comments:

  1. Mr SlipperyFebruary 23, 2011 at 6:07 AM

    "A higher oil price only adds to our trade deficit though. We need to somehow stop this cycle before it is too late."

    A US trade deficit is a requirement as long as the dollar is the reserve currency.

    See Triffin's Dilemma at the bottom of this IMF page.

    We compound the trade deficit with structural fiscal deficits currently running about 10% of GDP. We have no political will to stop over spending.

    The system is in the process of breaking down. Early or late stage, I don't know. The IMF wants the SDR to replace the dollar as reserve currency, but there are technical and political hurdles to overcome.

    Let the Good Times Roll!

    ReplyDelete
  2. AnonymousFebruary 23, 2011 at 6:13 AM

    Silver Train Is A Comin: Are You Onboard?

    >>If you really understand Silver as money, then you are prepared to buy Silver, all the way to zero, in a price of dollars.<<

    http://www.321gold.com/editorials/thomson_s/thomson_s_022211.html

    Idiocy does go beyond the Yahoo message boards when it comes to some things.

    ReplyDelete
  3. AnonymousFebruary 23, 2011 at 6:21 AM

    http://www.multpl.com/s-p-500-earnings/

    This chart looks the same as your first chart in the post and reflects the easing of mark to market rules in early 2009.

    ReplyDelete
  4. Stagflationary MarkFebruary 23, 2011 at 6:39 AM

    Mr Slippery,

    The system is in the process of breaking down.

    Let the Good Times Roll!

    This needs a musical tribute. Something with "cars" no doubt! ;)

    Cars

    Here in my car
    I feel safest of all
    I can lock all my doors
    It's the only way to live

    ReplyDelete
  5. Stagflationary MarkFebruary 23, 2011 at 7:10 AM

    Anonymous,

    From your link:

    The number of ounces you own defines your wealth, not the price per ounce. Few want to hear this fact.

    Since it is a fact and not an opinion, I am left with only one logical conclusion.

    I've been destitute my entire life, except for a brief period from 2004 to 2006. ;)

    ReplyDelete
  6. nanuteFebruary 23, 2011 at 9:32 AM

    Eureka!http://www.youtube.com/watch?v=92vV3QGagck

    ReplyDelete
  7. AaronFebruary 23, 2011 at 11:06 AM

    1984 also was when China and other cheap labor countries really started to pick up steam for exports.

    Its also when electronics took off, high value items that need lots of assembly.

    I once heard that if China actually paid for all of the software and movies they pirate, we wouldn't have much of a trade deficit...anyone know about that?

    ReplyDelete
  8. Stagflationary MarkFebruary 23, 2011 at 2:22 PM

    nanute,

    LOL!

    ReplyDelete
  9. Stagflationary MarkFebruary 23, 2011 at 2:35 PM

    Aaron,

    July 4, 2006
    Piracy and counterfeit goods cost U.S. billions yearly

    Worldwide, officials estimate that piracy and counterfeiting cost U.S. industry as much as $250 billion a year.

    It's certainly not pocket change!

    February 16, 2011
    China: The Intellectual-Property Battleground

    While America's leaders worry about how to curb China's increasing influence in currency, inflation, and trade issues, they are in danger of overlooking an even larger threat—one that could make those debates pointless: China is expected to surpass the U.S. in patent filings this year.

    Good grief. The worry box is overflowing as it is!

    ReplyDelete