Tuesday, June 1, 2010

Spending Power vs. Trade Deficit

I present one of the scariest charts yet for your consideration.

Click to enlarge.

The black line represents our spending power. See the following post for an explanation of that.

Spending Power (Version 2)

The red line represents our cumulative trade deficit since 1990.

The dashed blue line represents where we might be had we not taken on $4 trillion in new government debt to prop up our spending power. At the end of 2005, we had $8 trillion in government debt. At the end of 2009, we had $12 trillion in government debt. We've borrowed $4 trillion from the future to plug the hole.

This plan is not going to work long-term. It's barely even working right now. This chart has huge implications for anyone investing long-term in the stock market or real estate in the USA. It also has huge implications for those investing in China. Their top customer is tapped out.

Trade Deficit, China Trade Taxes Economic Recovery

The trade deficit, along with the credit and housing bubbles, were the principal causes of the Great Recession. Now, a rising trade deficit and continued weakness among regional banks threatens to stifle the emerging recovery and keep unemployment near 10 percent through 2011.

I absolutely agree. This is roughly my 80th trade deficit post since I started this blog.

Money spent on Chinese coffee makers and Middle East oil cannot be spent on U.S.-made goods and services, unless offset by exports.

I absolutely agree. Every dollar spent on a Chinese coffee maker and/or Middle East oil is a dollar that's permanently missing from our economy.

To keep Chinese products artificially inexpensive on U.S. store shelves and discourage U.S. exports into the Middle Kingdom, China undervalues the yuan by 40 percent.

I strongly disagree. China undervalues its workers. They have a billion of them. This has very little to do with currency manipulation. As long as the Chinese worker will work for far less than the American worker, we're going to find more and more of our "spending power" moving to China. It's just that simple.

Will a billion Chinese be driving cars though? I don't think so. How are undervalued workers ever going to be able to afford expensive gasoline?

I am so incredibly bearish right now. In my opinion, at best it will be decades before there is a return to normal. We fell off the "normal" path in 1990 and we don't even seem to realize it yet.

See Also:
Trend Line Disclaimer

Source Data:
FRB: Flow of Funds
St. Louis Fed: Balance on Goods and Services
St. Louis Fed: Total Public Debt


EconomicDisconnect said...

Well I Googled "BING" and all I got was some old crooner with the last name of Crosby.

I will try LYCOS search next,and then WEBCRAWLER.

Stagflationary Mark said...


Stagflationary Mark said...

**** SPAM Notice ****

I just turned down the comment moderation to apply only to posts older than 3 days.

Feel free to comment on any posts older than that. They might not appear right away though.

The spammer in the Republic of Korea who hit my blog with hundreds of SPAM comments may have given up.

If he appears again, I'm heading back to DEFCON 1 though, lol.

**** SPAM Notice ****

G.H. said...

Stag, have you run this whole "trade deficit" thing past Dennis Kneale?

Here's a terrific page I think you'll enjoy:

The Odds of "Recession Is Over Version 2.0" Occurring Are as Likely as...

"While the dollar has decreased in value thus making DOW 10,000 of 2009 really like DOW 7,700 of 1999 in purchasing power, it hasn’t really put a big dent in the trade deficit we have with most every other nation, especially China. We need China. They don’t need us to get along in this world."

I had no idea it was possible to be first so right and then so wrong in the same sentence. BTW, that's not Kneale's comment, but there are plenty of busted predictions of his to ponder in this article.

EconomicDisconnect said...

I remeber the old film "DEFCON 4" which was pretty bad:

Great line from tonight:
"We fell off the "normal" path in 1990 and we don't even seem to realize it yet."
I am inclined to agree 100%.

Stagflationary Mark said...


From your link...

In looking over some of the Peter Schiff was right videos from the past few years, I ran across one of CNBC’s regulars, Dennis Kneale’s predictions in June of 2008 that “the recession is over.”

I believe Kneale said that in June of 2009, not 2008, so we can't heckle Kneale on this particular point... at least not yet.

Just like Jim Cramer, Dennis Kneale is sometimes right. Too bad. If they were both always wrong, then we could simply make money continually betting against them. Cramer is like a random dartboard. Buy, sell, sell, buy, blah, blah, blah. Kneale is like a stopped clock that's always stuck on bullish. Very tough to make money following either of them, lol.

Further, even bearish Peter Schiff was wrong. Enormously so. He had everyone piling into commodities and China of all things just before the bottom fell out, lol.

Mish: Peter Schiff Was Wrong

Mish: Peter Schiff Hugely Right, Enormously Wrong as Hard Landing Hits China

Stagflationary Mark said...


I think that's certainly one reason gold is priced the way it is.

However, I can't say I understand how it can be worth SO much more to people than aluminum. That's not normal either.

What does make sense any more though?

A Scanner Darkly

This is a world getting progressively worse. Can we not agree on that? ... What's on the dessert menu?


EconomicDisconnect said...

That flick done in all rotoscope was so cool. Not many have seen it, which is too bad.

As we have discussed, aluminum used to be worth much more than gold, but alas, the sorceror's stone was able to make aluminum from bauxite. Still waiting for the gold equivalent.

Stagflationary Mark said...


Fortunately, unlike aluminum, I don't actually need gold. I could go the rest of my life without it and I probably wouldn't even know the difference.

The best use of gold to me would be as a hedge against rising jewelry costs. Seeing as how I don't wear jewelry, it would seem I don't have much to worry about. I rarely even wear a watch.

That said, the rich are often fond of jewelry. That's especially true of the recently rich. Therefore, your investment in gold may do well even if you are ultimately wrong about the reason. Perhaps all that money flowing into the hand of the top 1% of Chinese will indeed continue to find its way into gold too.

Bling bling bing bing!

I think back to the first time I bought gold just to be buying gold. It was the same time I bought a diamond just to be buying a diamond. It was a huge mistake. It ended up in divorce. Hey, it could be a lot worse though. I could have been having kids simply to be having kids. What a nightmare that would have been.

April 15, 2009
A Worldwide Diamond Glut

GawainsGhost said...

"The best use of gold to me would be as a hedge against rising jewelry costs."

Well said! The only gold I own is my college graduation ring. It is white gold of course, with a real diamond in the center of the University of Texas star.

How much do think I could get for it? Not anywhere near as much as I paid for my degree.

Stagflationary Mark said...

One more thought.

In a recent post I said that a one cubic foot box of gold now costs $21 million. I said I had no interest in buying it at that price.

Here are some other things I would not pay $21 million to have.

March 14, 2010
The $21 million iPad

It's not too late to bid on the new, sealed-in-box 16GB iPad being offered by egiftscentral_123 -- an eBay "top-rated seller" with 99.3% positive feedback -- for the Buy It Now price of $21 million (plus $14.42 for shipping).

I think the $14.42 shipping cost is just insult to injury, lol.

May 23, 2010
This Italian Countess Would Like to Sell You Her $21 Million New Jersey Mansion

But Nucci says she's not selling to anyone who has $21 million. "I envision someone who appreciates the very best. Someone very refined."

I honestly think I'm about to vomit.

Stagflationary Mark said...


I gave my girlfriend piece of silver jewelry with a red garnet. I thought it was beautiful. It cost me about $50 and she loved it. I even told her how little it cost me and she didn't care.

She got a lot of compliments on it and then one day someone stole it from her doctor's office while she was receiving treatments. That person probably felt they hit pay dirt. Not really. It wasn't expensive. It just looked like it was.

That's the thing with jewelry to me. If people can't actually tell the difference, then why would people want to pay more? Why should the actual rarity of the metal or the stone make any difference? Jewelry is either pretty or it isn't. End of story for me.

I feel the same way about pets. We love our dog. She's just a common mutt and we got her for free. The price we paid for her has zero impact on the value of her as our pet. Those who need "the very best" pet often get a pure breed from a questionable breeder with built in genetic defects caused by years of inbreeding though. Go figure.

dearieme said...

I understand that the one-child policy means that soon the population of China will go into decline, and that same population will be ageing too. "They'll get grey before they get rich", as someone said. How does that affect your outlook?

Stagflationary Mark said...


There have been numerous comparisons of the euphoria in China's economy to that of Japan's before its economy fell apart. If what you say is true, then that would seem to be another similarity.

I suppose China could impose a Social Security system though. It seemed to help Americans consume more on the (mistaken?) assumption that private retirement savings were somewhat optional.

If I thought I could count on Social Security to provide for me in the future, I'd certainly be tempted to spend more now. I just don't think I can.

Stevie b. said...

perhaps this is another in the "scariest chart" series?


Stagflationary Mark said...

Stevie b.,

That's certainly one heck of a scary chart!

I was just telling my girlfriend that I expect the economy to be in even worse shape a decade from now and then you had to post THAT chart?


Stevie b. said...

Mark - i've been aware of this chart for a few weeks - the source is here, courtesy of Jesse:


But....the thought now suddenly occurs - and I'm mathematically challenged - that adjusted and to account for inflation over the period, wouldn't we actually need say 7 times as many borrowed $$ for the same growth effect of 1 extra borrowed $ 50 years ago? So the whole thing could be much less meaningful than it appears...unless of course i'm missing something?

Stagflationary Mark said...

Stevie b.,

Thanks for supplying the link.

I would think that you would not need to adjust it for inflation, but it is hard to know without seeing the actual math behind the chart.

My gut says that this is what the chart is trying to say.

$1 of 1964 debt generated about 60 cents of 1964 economic growth.

$1 of 2009 debt generated about 10 cents of 2009 economic growth.

If that's the case, then no inflation adjustment is needed. The chart would therefore be as scary as it looks.

Stevie b. said...

Mark - thanks - appreciate your thoughts - even though it means I now remain very afraid...

Anonymous said...

Mark, some comments on China.

1) Worker salaries in southern China went up by 20% after Chinese New Year - that was in March. If it is "revaluing their workers" or just inflation, it will turn up in the export prices no matter how hard they game the Yuan. Same goes for rising steel prices in China, rising food prices in China, etc.

How would an inflationary environment in China interact with a deflationary environment in the USA?

2)China does not just sell to the USA anymore. They sell to the whole world. This mitigates a little if the US stops buying so much.

3) The Yuan issue is interesting, but if they revalued (which I hope they do - I have a ton of CD accounts in China earning interest and waiting for this) I think it would help other poorer countries like Indonesia, India, Pakistan, etc. who would become more competitive in textiles for instance. China would still do well as they have been moving up the industrial ladder. I think their government right now is simply paralyzed with fear, so the Yuan peg will remain.

(Bad for me, but I am getting 2-3% interest - not sure how inflation there in RMB would affect me if my plans to spend would all be in USD? any thoughts?)


Stagflationary Mark said...


There does definitely seem to be some wage pressure in China. However, I'm not convinced much of it will be passed on to us.

I think the inflationary environment in China won't last long. I could be wrong though. Think back to 2008. Oil was screaming higher and everyone piled into TIPS. Bad move in hindsight. It's too easy to use the rear view mirror to predict the future.

I don't have much of an opinion on the Yuan. There's a chance they might even devalue it if their economy falls apart. I just don't trust any of the numbers coming out of China.

"I think their government right now is simply paralyzed with fear, so the Yuan peg will remain."

I do not trust a Chinese government paralyzed with fear to be telling me anything resembling the truth.

As for China selling to the whole world, Europe is in serious trouble. The euro just went into the toilet. If China does manage to export any inflation, it will now go their way first.

Keep in mind China's leaders would be more than happy building washing machines and simply burying them directly in landfills if it would stop their citizens from protesting.

I still believe there's a decent chance that China will recreate our Great Depression.