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