I don’t think that you can talk about America’s economy and all the problems we’re facing right now without talking about the trade deficit that America been running for the past 20 years or so.
The trade deficit has to be the starting point in any discussion about the US economy, because its existence for such a long time is an indication that there is something fundamentally wrong with the US economy.
The USA cannot keep running away from this issue. It’s not going to go away unless something is done about it. And it is absolutely unconscionable that the politicians and the media just want to sweep it under the rug and pretend that it is not a problem.
Here is why the trade deficit should be the number one topic in America today:
A country’s long term trade deficit, like what America has had for the past 20 years or so, is a reflection of its economic health. If a country is running a huge trade deficit year after year, you have to figure out why that’s happening, and you have to take steps to reverse it.
A country’s balance of trade, which means its imports versus its exports, is basically its income and expenditure statement. It shows you what the country is earning from the international market place versus what the country is spending back into that same international market place to satisfy the needs of its people. If a country is continuously taking in less than what it is paying out, it is basically living above its means, and at some point that country will have to face the music, in terms of austerity, deflation, recession, unemployment, stagnant wages, etc.
And make no mistake about it: America has reached that point, and America has passed that point. We’re in serious trouble.
You see, don’t believe what the experts are telling you when they try to argue that America is too big to fail. The truth is that a country is no different from a family. If a household’s income is less than its expenditures year after year, it has to go into debt every year, and the debt will pile up over the years, and eventually the family may have to declare bankruptcy.
I’ve heard so many commentators, and politicians and so called economic experts say that deficits don’t matter.But please, don’t listen to these people. They live in a theoretical world, and they don’t really understand reality. Of course deficit matters. Once you borrow, you have to pay back. And, the fact that you have to borrow means that there is a problem. And you have to address the problem. So don’t listen to these people.
It doesn’t matter if you’re an individual, a family, an organization, a corporation, or a country, debt is debt, and it has to be repaid
Now, my main argument in this video is that the trade deficit is at the root, at the core, of the economic problems we face right now, and unless we tackle it we will never get back on track and we will continue to limp along in economic chaos. We cannot continue to ignore the trade deficit as we’ve been doing for the past 20 years or so.
The other thing you have to understand about running such long term trade deficits is that it causes a massive transfer of wealth away from the United States. The USA is getting poorer, and other countries are getting wealthier. Right now, the money is flowing away from the United States and towards other countries. For example, China has roughly 3.5 trillion dollars in reserves. That’s $3.5 trillion in excess cash, and they don’t know what to do with it. The United States? 16 trillion dollars in debt, and counting. And we’re on the verge of bankruptcy.
So what should we do to solve the problem? To solve the problem we have to understand how we got here in the first place. The answer is: America’s International Trade Policy. America’s international trade policy has been horrendously bad for America. The USA has opened up its markets way too much to other countries. For example, the USA buys 5 times more from China than what they buy from the US. For every dollar that China spends on American goods, America spends 5 dollars on Chinese goods.
Yes, goods coming in from abroad are cheaper, but that doesn’t mean that America has to go bankrupt purchasing imported goods like there is no tomorrow. A government has to do what is in the best long term interest of its own people. I believe that taking down all the trade barriers the USA had prior to the 80’s and 90’s was the biggest mistake America ever made. Yes it did increase America’s exports to other countries, as the proponents of free trade argued, but here is the downside that they didn’t foresee, and this is critical: America’s imports increased by much, much more than its exports.
The proponents of free trade are always quick to point out how America’s exports have risen after free trade. But risen at what cost? It doesn’t make sense to gain a billion dollars from exports and then lose 5 billion dollars on imports. You have to look at both sides of the ledger. For example, if I tell you that there is a bag of treasure worth $1,000 buried at a particular place and you’re free to go and get it, but it will cost you $5,000 in transportation and other costs to get there, would you spend $5,000 to get $1,000? No you wouldn’t. But yet, that’s what we’re doing as a result of free trade. We’re sacrificing $5.00 in imports to get $1.00 in exports. Does that make sense? Absolutely not.
So the benefits of free trade were skewed towards countries with lower wages, and against countries with higher wages. You see, the theory of free trade has a serious flaw: It assumes that labor and capital cost the same for all countries. But in reality, they don’t.
As you know, labor is much, much cheaper in the Developing Countries than in the USA.
And given the labor intensive nature of manufacturing, this meant that those countries have the advantage. Hence, the USA cannot compete anymore, because it pays its workers much more.
So again, here is the bottom line on free trade: free trade only works well for both partners if they both have the same labor and capital costs. This is a major point that the advocates of free trade either ignored or didn’t understand at the time.
So where do we go from here? I believe that the USA has to incrementally impose restrictions on some imports, on a sector by sector basis. And note the word I’m using: incrementally It has to be a slow and deliberate process. The USA cannot impose the restrictions all at one time. If it does it all at once, it’s gonna disrupt the system and throw America’s economy and the World’s economy into chaos; so it has to be done gradually over many years. It took many years to get us into this situation and it will require many years to move us out of it.
Imposing restrictions will help the USA in two ways: First, it will slow down imports because it will make them less available and more expensive. Second, it will give local entrepreneurs a chance to start manufacturing stuff again. Right now, there is nothing more we can manufacture here in the USA, and so restricting imports will open up opportunities for domestic manufacturers which in turn will boost investment and create jobs.
You know, it irritates me every day when I watch television and hear the discussions about the economy and everyone from the President on down saying “we have to create jobs”, but they don’t say how. They never offer a concrete proposal or change of policy.
Just how do we create jobs? What should be do? The answer is manufacturing. Right now the USA has a production problem. We’re not producing enough. Our consumption is greater than our production.
The basis of a prosperous society is to produce more than it consumes. It’s a pretty basic concept. The USA cannot survive as a country without manufacturing things. China and Germany, for example, are doing great because they are producing more than what they’re consuming. Unlike the United States, they’re both running trade surpluses. America cannot survive on services, and dot coms, and the manipulation of financial instruments.
As a country we seem to be obsessed with phony wealth such as stock market gains and rising home prices, and we’ve forgotten how to create real wealth. We have to get back to manufacturing. Making things. That’s where the real wealth is, not in the stock market.
What made America great was its ability to make stuff. We seem to have given up on that.
Now, I can foresee two arguments against restricting imports, and I just want to take a minute or two to rebut them both.
First, people are gonna say to me well, if you impose restrictions on cheap goods coming in from overseas that would make everything more expensive and poor people will suffer because they will have to pay more for stuff.
My response to that is this: How did America and the American people survive and prospered (greatly) for 200 years without cheap goods coming from overseas? I mean, this phenomenon of massive importation from other countries started only 20 or 25 years ago. The USA got along fine for 200 years consuming what it made. Why all of a sudden now we need cheap stuff from abroad?
You see, there is a difference between need and want. You have to understand that cheap stuff coming from overseas has led to overconsumption and waste on a massive scale.
We don’t need all the stuff that comes in from overseas, but because it is there, and it is cheap, we buy. Take clothing, for example. People don’t take care of clothing any more so that it could last them a long time, like we did 20 or 30 years ago.
I mean, go to Wal-Mart and see the amount of stuff that people buy. They wear them for a few weeks or a few months and then they stuff them in a closet or discard them, or give them away to charity. So clothing is a great example of where we can cut back on imports and manufacture domestically and create jobs. There are many other areas where we can do this.
My point here is that it is not gonna hurt us if prices of some stuff go up, and we start manufacturing them in the USA, and we pay a little more for them, and we take care of them better so that they last us longer. If you’re an environmentalist, and you care about the earth’s resources, this is actually good for the environment, don’t you think?
Now, I would never be in favor of food prices going up, because obviously poor people will suffer greatly from that. But for other things, as I said before, America survived for 200 years without cheap imports. And it is an erroneous argument to now say that we have to go into debt to finance our consumption of cheap stuff from abroad. It just doesn’t make sense.
Now, my critics are gonna scream “protectionism.” They’re gonna say “Oh this guy wants to go back to the days of protectionism, He wants to erect a wall around the United States,” and so on and so forth. But that’s one of the problems with debate in America today: People always try to pretend that it is either one or the other. In this case, either free trade, or protectionism. So if you’re not for unbridled, unfettered free trade, you’re a protectionist.
But in reality that is not how the real world works. There is no country on earth where you have pure free trade or pure protectionism. It is usually a question of degree. It is usually a question of the right mix.Other countries protect some of their industries. They give subsidies to help them compete. They also put up other restrictions that make it difficult for the USA to penetrate their markets. So why can’t we have a mix of free trade and protectionism that suits our national interest? We don’t have to go one way or the other. It is not free trade or protectionism. We can have free trade in some areas and have trade restrictions in other areas. The two things are not mutually exclusive.
The second argument I foresee, is this notion that we don’t want to start a trade war with countries such as China, and that such a trade war will eventually make things worse.
But what the proponents of this argument don’t tell you is that most countries don’t want a trade war with the United States. Should there be a trade war between China and the USA, for example, China will lose much more than the USA. In 2012 China sold $425 billion worth of good to us. In the same year, 2012, we sold only $110 billion worth of goods to them. If trade should cease between the USA and China, China will have a net loss of $315 billion in sales. This will have a massive and crippling effect on the Chinese economy. Do you think they want that to happen?
Now, theoretically if we do get into a trade war with China, the United States will actually be better off because it would have avoided going into an extra $315 billion worth of debt
Another related argument against doing anything about the trade deficit, is this notion that if we make China angry they will dump our currency and the dollar will collapse in value. But here again, China does not want the dollar to go down in value. If the dollar depreciates, China’s currency, the Yuan, will necessarily go up in value, and Chinese goods will become more expensive. Do you think China wants its goods to become more expensive? No, because this will drastically reduce its exports and throw its economy into chaos. China will not dump the dollar.
So the United States hold all the cards, but you see, the politicians are being paid by the lobbyists and Special Interests not to change the status quo. Big Business (such as Wal-Mart and others) love the current system because they’re making a ton of money, and they line the pockets of the politicians and the politicians simply don’t want to change the system.
In effect, our politicians, both Democrats and Republicans, are selling out the interest of the United States in order to get enough campaign funds to fund their political campaigns. And you know what the sad part of this is: the media, both left and right, refuses to hold these politicians accountable. And this is one reason why I believe that things will never change unless the political campaign finance system is reformed, which is a totally separate topic, and one that I will deal with in a later video.
So to summarize:
A country’s balance of trade is an important indicator of the economic health of a country.
It is basically a summary of a country’s income and expenditure.
You cannot run trade deficits year after year.
Once you see deficits starting to pile up, you have to take steps to decrease your imports and increase your exports in order to bring trade back into balance.
The current path the United States is on is untenable, it’s unsustainable.
The USA has to gradually increase tariffs and other restrictions on imports coming in from overseas so that domestic manufacturing can sprout back again.
If this involves a renegotiation of existing international trade agreements, then so be it.
The future of America is at stake.