Drowning In Debt In A Growing Economy

The headline on October 28, 2005 read "Economy Grows at an Energetic Rate in 3Q." The picture painted is rosy. Even in the face of hurricane Katrina, banks and consumers were spending away.

"Holy Katrina! The economy weathered two major hurricanes and in spite of that showed accelerated growth," said Ken Mayland, president of ClearView Economics. "I think what this shows is that fundamentally the economy was and is in really good shape."

And yet ...

We also get the news that the U.S. has the " fastest decline in real wages on record." Oh, I get it, wages are worth less so people spend more to buy the same amount, so the economy "grows." I thought that was the definition of inflation - cost of goods and services exceeds wages. Silly me, now I am told that this is healthy economic growth.

But there are other signs that the U.S. economic engine may be sputtering - September Trade Gap Set Record. In fact, it has been "setting records" for a while. In September, the U.S. imported $66.1 billion more than it exported - raising the trade deficit for the first three quarters of 2005 to $529.8 billion. That is an 18% increase over 2004, and 2004 was a 23% increase over 2003. According to the Times article, the culprit was oil prices and loss of airplane sales. Yep, Boeing lost foreign sales.

According to Martin Crutsinger at the Washington Post, the real culprit was increasing oil imports. The article goes on to note that this year's deficit is expected to hit $706 billion - a record that beats last year's record deficit. Of course the fact that the U.S. has lost 3 million jobs since Bush took office has nothing to do with it. Nor that the Bush administration's belief is that outsourcing and offshoring U.S. jobs is "good" for our economy.

A significant portion of the trade deficit is a growing imbalance in trade with China. The U.S. is roughly $200 billion behind in trade balance with China. So it is not a huge surprise that China has a record trade surplus. China's surplus is growing at a tremendous rate. They pocketed $$80.4 billion in the first ten months of 2005 compared to $32 billion for all of 2004. The U.S. share of the Chinese bonanza is a whopping 28 percent for the first nine months of 2005. That percentage reflects a 4% increase in imports from China, and a 17% decrease in exports to China.

While trade deficits are one part of the picture, national debt is another. The current U.S. debt is very close to $8 trillion (see Wikipedia - U.S. public debt for a nice explanation of how debt is calculated). Knowing who holds our foreign debt paints an interesting picture. According to a U.S. Treasury report, as of August 2005, the top four foreign holders of U.S. Treasury Securities were : Japan - $684.5 billion, China - $248 billion; United Kingdom - $174.2 billion, and Caribbean Banking Centers (Bahamas, Bermuda, Cayman Islands, Netherlands Antilles and Panama) - $103.4 billion. The total U.S. securities owned internationally was $2.06 trillion. In January of 2005, that total figure was $1.9 trillion.

A report by the Economic Policy Institute does a pretty good job of explaining how things can look good and be bad. Their synopsis is:

"The current account deficit shrank in the second quarter of 2005 because of a sharp $17.5 billion reduction in U.S. foreign aid payments, following a spike in aid payments in the first quarter. These payments are unlikely to shrink again in the near term. The deficit on goods and services increased $1.1 billion and net income from investments and wages fell $4.4 billion, resulting in the second quarterly income deficit on record, which reflected, in part, a deficit in employee compensation. Though net investment income still had a $4 billion surplus in the second quarter, as shown in Figure A, it has declined sharply from a surplus of $52 billion in 2003. This decline was driven by a $39 billion increase in U.S. government payments to foreign holders of government securities, and by a $6 billion decline in net income on foreign direct investment. The need to finance rapidly growing U.S. current account deficits increased the net U.S. international investment deficit to $2.5 trillion in 2004. Overall, payments to foreign investors have increased faster than payments to U.S. investors since 2003 as shown below."

In other words, the U.S. government did not make its foreign aid promised payments and this masked falling wages and increased trade deficits.

This ongoing issue of deficits and debt is characterized by Alan Greenspan as "unsustainable." Gosh, you don't even have to have been Federal Reserve Chair for 18 years to come to that brilliant conclusion.

Watching the reporting on the U.S. economy is a challenge. There is the political effort to spin everything in a positive light (we don't want nervous consumers), but the reality of people's lives stands in stark contrast to rosy pictures. Pay is down, cost are up, and the budget plans only make for an even gloomier scenario as tax cuts for the extremely wealthy go up, bail outs and helping hands for corporations whose profits are off the charts, are balanced by more cuts to the safety net, reductions in the mortgage deduction, and cuts to environmental programs rule the day.