Click to enlarge.
What's wrong with that picture? Time for some sarcasm!
1. Over the long-term, not only do we get $1 in government debt for each dollar we import more than we export (not all that unexpected), but we also get a bonus 39 cents of government debt as well. Woohoo!
2. From 2005 through 2008 (the part well below the trend line) we had way too much trade deficit and not nearly enough government debt. Problem solved!
3. Correlation does not imply causation. In other words, even if we do somehow miraculously manage to export as much as we import someday, that does not necessarily mean that our government debt problem would also be under control. Hurray!
Current Account
Note the cumulative trade deficit in the following chart. I think it does a fine job of showing the world's trade imbalances.
Click to enlarge.
October 11, 2010
Calculated Risk: Duy: The Final End of Bretton Woods 2?
However I didn't expect the imbalances to return so quickly, and that is very concerning. And I hope Tim Duy is wrong about how it ends.
Well, we can always hope.
Update:
Rob Dawg (in the comments at Calculated Risk) wished to see the chart in inflation adjusted dollars.
That changed the formula a bit. What was once 39 cents of bonus debt is now 17 cents of bonus debt.
Update #2:
Upon further reflection, I should have adjusted each quarter's trade data for inflation and not just the grand total up to a given point in time. Here is the corrected chart.
Doing it this way means that over the long-term we seem to get about 95 cents worth of government debt to every one dollar in trade deficit. The ratio is nearly 1:1.
See Also:
Cumulative Trade Deficit Nightmares
Source Data:
St. Louis Fed: Total Public Debt
St. Louis Fed: Balance on Current Account
St. Louis Fed: CPI-U
Notice how close to 1 this gets now?
ReplyDeleteWe have a self-sustaining economy. It is our government that is 1:1 our overspending problem.
Anonymous,
ReplyDeleteIt is sort of a chicken and the egg problem though.
Let's say I buy a Chinese toaster for $20.
Let's say they now use that $20 to buy US debt.
There's the 1:1 ratio.
However, we are clearly part of the problem here. If we didn't offer them so much government debt then they might be forced to buy something we actually sell. If they did that then we wouldn't even have a trade deficit.
Just thoughts.
Sooner or later, something has to give.
ReplyDeletemab,
ReplyDeleteIt is all about giving. Yes.
He who wished to secure the good of others, has already secured his own. - Confucius
I wonder what he would have said about securing the *goods* of others, because man, we've really been nailing that one, lol. Sigh.
Stag,
ReplyDeleteThe manner in which one adjusts for inflation when multiple variables are in play can definitely skew results. I was playing with some data today and ran into that very same problem.
mab,
ReplyDeleteI am down at least 20 IQ points today based on lack of sleep. That's not helping either.
A -0.45% rate on 5-year TIPS and the 30-year TIPS yield of 1.46% is stressing me out a bit.
If Bernanke was trying to stress me, it is working!
If he was trying instead to entice me into visiting this country's many malls, then his plan is not working though. I need more sleep in order to drive, lol. Sigh.
What was once the tin foil hat area, scrapping Bretton Woods 2, has now become a coversation piece in normal circles. How far we have come!
ReplyDeleteGYSC,
ReplyDeleteThis could be a major problem. Anyone who has played golf casually knows just how terrifying those "Woods" can be, both the tools to hit the ball and the location of the ball once it lands, lol. ;)
You are too much! Luv it.
ReplyDelete"Doing it this way means that over the long-term we seem to get about 95 cents worth of government debt to every one dollar in trade deficit. The ratio is nearly 1:1."
ReplyDeleteWhat about countries like Great Britain, Spain, Italy, etc., would their ratio also be close to 1 to 1, or does the US hold that distinction all by itself?
watchtower,
ReplyDeleteNo idea. I suspect 1:1 is at least partly just coincidence, but who really knows for sure?
Further, what works in the long-term definitely didn't seem to work in the short-term.
When our imports slowed, up went our national debt in an attempt to counter it.
Who cares when you have the RESERVE CURRENCEY!
ReplyDeleteGYSC,
ReplyDeleteReserve your currency today! Orders are filling up fast! Everything must go!
You'll need the cash to buy one of these!!
No its not a coincidence. Its due to sterilization policies in East Asia.
ReplyDeleteThey only need to sterilize the amount of their trade surplus, and they do so by purchasing our debts.
Anonymous,
ReplyDeleteThat's certainly why I wanted to create the charts, but in theory some of that sterilization money finds its way into things other than our government debt though (think mortgage backed securities, corporate bonds, and so on). It is just a subset of our debts. The 1:1 ratio may therefore at least partly be just a coincidence.