“My Two Cents”
By Andy Sutton

11/10/2006

Anyone who likes to surf the Internet or watch late-night cable television has certainly heard of the Myth Busters and www.urbanlegends.com In case you haven't, these two resources spend a good deal of time and energy debunking some of the more commonplace myths in our society. Well, I have decided to get into the debunking business on matters of an economic nature. Since it is a relatively 'quiet' week all things considered, this week will be the first installment of what I hope will be an educational series for all.

The Myth...

If you turn on a mainstream financial program these days you are bound to hear a cheerleader of some stripe utter the following phrase: "Our trade deficit exists because our economy is growing so much faster than the rest of the world - we ran trade deficits throughout every expansionary period in American history".

The Truth...

A growing trade deficit is NOT an indicator of a strong economy. The trade deficit is what we owe foreigners for imported goods above and beyond the value of the goods we export. If we exported more than we imported, we would have a trade surplus. As it stands, we are running a deficit of nearly $70 Billion per MONTH. Under the discipline of a gold standard we would have to settle that debt monthly by paying our creditors in gold. Obviously, there could only be a finite number of months this could go on without running out of the yellow stuff, thereby limiting our appetite for foreign goods. However, we haven't settled foreign debts in gold since the early 70's, instead opting to sell foreigners Treasury bonds in exchange for their accumulated dollars. I can imagine there are still some folks saying 'so where's the problem?' The problem lies in the fact that with manufacturing continuing to slide into obscurity in lieu of a 'service economy', the chances of ever correcting this problem become smaller with each passing month. It becomes a simple matter of how long foreigners will be agreeable to swapping little bits of paper for even more little bits of paper in exchange for sending us the products of their scarce land, labor and capital.

In other expansionary periods in American history we did run deficits and borrow from foreigners. The difference though is what we DID with the money. Back then we invested in factories, capacity and production so we could produce goods to export thereby paying the deficit back with exported goods. Plus, we enjoyed the benefits of employment and consuming some of the goods we produced. Now we take the same money and blow it on new kitchens, SUV's plasma TV's and vacations to Tahiti. In other words, we blow it on consumption that we cannot possibly use to pay back those deficits.

The Rest...

These growing trade deficits and the resulting current account deficit should be headlines and top stories on every news channel, newspaper and financial magazine in America. Instead, they are barely mentioned. Ben Bernanke or some other stuffed shirt will testify that we have to run these deficits because our economy is growing so much faster than the rest of the world. The only thing that is growing, however, is the bill for our consumption and extravagance. We're about to learn the hard way that we don't get to borrow and consume forever. At some point, we're going to have to save and produce. This shift will require a significant reduction in the standard of living for the average American.

By equating other expansionary periods to the current situation, economists (and I use that term very loosely) are making a comparison that is at the very least intellectually dishonest. It is my contention that this is being done purposely to keep America plugged into the free lunch mentality that has overridden our government in recent decades. With elections now over, beware of more cheerleading and talk of the strong American economy being the engine of the world.

Instead, it is more like the story of the little engine that could. Only this time the little engine is trying to climb Mount Everest with an 800-pound gorilla in the form of the American consumer sitting directly on top of it.

Andy Sutton holds an MBA in Economics from Moravian College and is a member of Omicron Delta Epsilon International Honor Society in Economics.

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