US Debt Clock

Take a deep breathe before clicking on the picture.

Sphere: Related Content

Retail Sales Post Depressing Drop

The American consumer is in a state of depression. I am not just talking about their mood after opening their quarterly brokerage account. The U.S. Census Bureau released the Retail Sales figures for December 2008 today. Adjusted for inflation, Retail Sales plunged in December by 2.7% compared to November and by 10.2% compared to a year ago. Economists were expecting a 1.2% drop compared to November. This is the largest annual drop since July 1951 (which was an aberration due to a very high increase in July 1950). While the NBER has declared the American economy to be in a state of recession, we are a long way off towards being a depression. Some economists define a depression as real GDP declining by 10% over a year. Retail Sales, however, have now entered into depression levels.

This current decline in Retail Sales is a result of a change in dynamics. For years, America has maintained a trade deficit, importing more goods than exports. This deficit has been funded by increases in personal income. The net result has been a positive increase in lifestyle that was sustainable. After the 2001 recession the dynamics changed. The trade deficit took off while personal income was slow in recovering. Consumer spending was no longer sustainable.

Consumer spending was being supported by changes in household net worth. The Federal Reserve publishes a plethora of information including the Balance Sheet of Households and Nonprofit Organizations in their quarterly Flow of Funds Report. From 1970 to 1994, U.S. Households averaged a gain of $2.0 trillion (in 2008 dollars) in household net worth each year. From 1995 to 1999 that increased to an average of $4.6 trillion in gains a year. During 2000 to 2002, net worth dropped by an average of $609 billion a year. But from 2003 to 2006, stock prices recovered and the housing boom took off. Household net worth went up an average of $5.9 trillion a year. Consumers, propped up with enormous paper gains continued spending even though it wasn't supported by gains in personal income.

In 2007, the financial crisis erupted. From the fourth quarter in 2007 to the third quarter of 2008, the net worth of U.S. households declined by a horrific $7.15 trillion. The S&P 500 declined by 22.5% in the fourth quarter. Housing also started declining faster last quarter. When the Fed reports the latest Flow of Funds report in March, the total loss in net worth through the fourth quarter will likely be over $10 trillion. Obama's $800 billion stimulus and the remaining $350 billion in TARP money pale in comparison to the losses sustained. Fears of rising unemployment are also affecting the consumer. We have entered into a new era; U.S. consumer spending will continue to face pressure to come down to a sustainable level.

Sphere: Related Content

Trade Deficit declines to $56.77 billion

The Department of Commerce announced that the goods and services deficit in June declined to $56.77 billion down from the revised figure of $59.20 billion in May. This is down from when the trade deficit peaked in 2006 averaging $62.77 a month. Exports of goods increased by $5.7 billion while imports of goods increased by $5.7 billion. The goods deficit increased $2.1 billion from May to $70.0 billion and the services surplus increased by $0.4 billion to $13.3 billion.

The deficits with our biggest trade partners all increased last month. China was up to a $21.4 billion deficit (from $21.0 billion in May), OPEC was $18.1 ($17.9), the European Union $8.2 ($7.9), Canada $7.2 ($5.4), and Japan $6.1 ($5.0).

Adjusted for inflation, the trade deficit for the last twelve months ending in June declined slightly from the deficit for the one year period ending in May. The trade deficit peaked in August of 2006. The annual change in Personal Income adjusted for inflation in June was positive but this year Personal Income has been down sharply compared to last year. Before 2000, Personal Income was growing faster than the Trade Deficit. At that time an argument could be made that we were investing in the future. Since 2000, the trade deficit has ballooned while personal income growth has fallen. We are now borrowing from the future to fund our current lifestyle.

Sphere: Related Content

Trade deficit increases in April

The Department of Commerce announced that the goods and services deficit rose to $60.9 billion up from the revised figure of $56.5 billion in March. The increase in exports of $5.0 billion was offset by the increase in imports of $9.4 billion. The goods deficit increased $4.5 billion from March to $72.9 billion and the services surplus increased by $0.1 billion to $12 billion.

The deficits with our biggest trade partners all increased last month. China was up to a $20.2 billion deficit (from $16.1 billion in March), OPEC was $15.6 ($14.1), the European Union $8.5 ($7.5), Japan $7.6 ($7.5), Canada $7.6 ($6.4), and Mexico $6.8 ($6.0).

Adjusted for inflation, the trade deficit for the last twelve months ending in April declined slightly from the deficit for the one year period ending in March. The annual change in Personal Income adjusted for inflation in April rebounded a bit from its freefall over the last few months. However, the increases in personal income are negligible compared to our trade deficit (unlike in the past when it more than offset our trade deficit). With the increases in commodity prices and the weaker dollar we are continuing to borrow from the future to fund our current lifestyle.

Sphere: Related Content

Trade deficit falls in March but personal income falls faster

The Department of Commerce announced today that the U.S. Trade deficit decreased to $58.2 billion in March down from $61.7 billion in the previous month. Exports were lower in March by $2.6 billion, but this was offset by a decrease in imports by $6.1 billion. The goods deficit decreased $3.5 billion from February to $68.6 billion and the services surplus was unchanged at $10.4 billion.

The largest deficits by country were with China $16.1 billion (vs. $18.4 billion in February), OPEC $14.1 ($13.2), Japan $7.5 ($6.9), the European Union $7.5 ($6.9), Canada $6.5 ($6.5), Mexico $6.0 ($5.5).

The trade deficit is following the trend of declining during periods of economic slowdown or more precisely with the fall of personal income. Before the 2001 recession, increases in the trade deficit were offset by larger increases in personal income. However, in this decade, America has begun living way beyond their means. The disparity is now over $700 billion a year and growing because personal income is dropping faster than the reduction of the trade deficit.

Sphere: Related Content

Trade Deficit increases in February 2008

The U.S. Department of Commerce announced that the Trade Deficit rose to $62.4 billion in February 2008 up from $59.0 Billion in January. The increase was due to a $6 billion increase in imported goods that was not offset by a $2.6 billion increase in exports and a minor increase in the service surplus of $0.1 billion.

The largest trade deficits (in billions) were with China $18.4 ($20.3 in January), OPEC $13.2 ($15.5), and Japan $6.9 ($6.6). Petroleum imports for February were at $37.745 billion compared to $39.785 billion in January.

The increase in the trade deficit was a surprise as the deficit normally decreases as the economy slows down. The trade deficit normally goes up and down with personal income (as discussed in last month's post).

Sphere: Related Content

Trade Deficit increases in January 2008

The U.S. Department of Commerce announced today that the U.S. Trade deficit of goods and services for January 2008 was $58.2 billion, up from $57.9 billion in December 2007. The trade deficit of goods with China was $20.3 billion (up from $18.8 in December); the trade deficit with OPEC was $15.5 billion (up from $12.6 in December).

The increase in imports was mostly caused by increases in oil costs. Consumer goods imports decreased by $1.7 billion reflecting weakened consumer demand. Here is a chart of the monthly trade deficit adjusted for inflation compared to the Median Household Income also adjusted for inflation. The trade deficit normally declines during recessions as household incomes decline. The pattern broke down after the 2001 recession. Incomes have increased by 0.6% from the end of the recession to the 2006. The trade deficit increased by 81.5% in that same period.



This next graph compares annual changes in personal income to the annual trade deficit. The trade deficit lags the changes in personal income. However it follows the 3 year moving average of the personal income. When income goes up over time the trade deficit has also gone up and vice versa. Up until the 2001 recession, the increases in personal income were greater than the trade deficit. However after the recession the trade deficit grew much faster than incomes did. From the beginning of the 2001 recession to now, Personal income has grown by an average of $217.8 billion a year and the trade deficit has averaged $628 billion a year. We are now borrowing from the future to fund our lifestyles of the present. Perhaps a reason for the change was the wealth effect of the surging house prices.

Sphere: Related Content

Trade Deficit

The U.S. Department of Commerce released the details on the trade deficit of goods and services for the month of December 2007 and the complete year. The deficit for December decreased from November by $4.3 billion. The trade deficit for 2007 decreased from $758.5 billion to $711.6 billion. This was the first decline in the trade deficit since 2001.
The weaker dollar led to a fall in imports in December. Automobile imports led the way decreasing by $2.1 billion. This offset the increase in Crude Oil imports of $1.6 billion.

The U.S. had the largest trade deficit with China at $18.8 billion for the month and $256.3 billion for the year. Japan was next at $6.6 billion for the month and $82.8 billion for the year. Mexico was third at $6.5 billion for the month and $74.3 billion for the year. Canada was fourth at $4.7 billion for the month and $64.2 billion for the year.

The trade deficit is now around the same level it was at during 2005.

Sphere: Related Content

Warren Buffet’s analogy of Squanderville and Thriftville

With the recent surge of capital infusion from foreign investors into American financial juggernauts, I was reminded of Warren Buffet’s classic analogy of Squanderville and Thriftville. Warren Buffet wrote an article about the trade deficit in November 2003. Here is the analogy that he used in the article:

“Our trade deficit has greatly worsened, to the point that our country's "net worth," so to speak, is now being transferred abroad at an alarming rate.

A perpetuation of this transfer will lead to major trouble. To understand why, take a wildly fanciful trip with me to two isolated, side-by-side islands of equal size, Squanderville and Thriftville. Land is the only capital asset on these islands, and their communities are primitive, needing only food and producing only food. Working eight hours a day, in fact, each inhabitant can produce enough food to sustain himself or herself. And for a long time that's how things go along. On each island everybody works the prescribed eight hours a day, which means that each society is self-sufficient.

Eventually, though, the industrious citizens of Thriftville decide to do some serious saving and investing, and they start to work 16 hours a day. In this mode they continue to live off the food they produce in eight hours of work but begin exporting an equal amount to their one and only trading outlet, Squanderville.

The citizens of Squanderville are ecstatic about this turn of events, since they can now live their lives free from toil but eat as well as ever. Oh, yes, there's a quid pro quo--but to the Squanders, it seems harmless: All that the Thrifts want in exchange for their food is Squanderbonds (which are denominated, naturally, in Squanderbucks).

Over time Thriftville accumulates an enormous amount of these bonds, which at their core represent claim checks on the future output of Squanderville. A few pundits in Squanderville smell trouble coming. They foresee that for the Squanders both to eat and to pay off--or simply service--the debt they're piling up will eventually require them to work more than eight hours a day. But the residents of Squanderville are in no mood to listen to such doomsaying.

Meanwhile, the citizens of Thriftville begin to get nervous. Just how good, they ask, are the IOUs of a shiftless island? So the Thrifts change strategy: Though they continue to hold some bonds, they sell most of them to Squanderville residents for Squanderbucks and use the proceeds to buy Squanderville land. And eventually the Thrifts own all of Squanderville.

At that point, the Squanders are forced to deal with an ugly equation: They must now not only return to working eight hours a day in order to eat--they have nothing left to trade--but must also work additional hours to service their debt and pay Thriftville rent on the land so imprudently sold. In effect, Squanderville has been colonized by purchase rather than conquest.

It can be argued, of course, that the present value of the future production that Squanderville must forever ship to Thriftville only equates to the production Thriftville initially gave up and that therefore both have received a fair deal. But since one generation of Squanders gets the free ride and future generations pay in perpetuity for it, there are--in economist talk--some pretty dramatic intergenerational inequities."

Let's think of it in terms of a family: Imagine that I, Warren Buffett, can get the suppliers of all that I consume in my lifetime to take Buffett family IOUs that are payable, in goods and services and with interest added, by my descendants. This scenario may be viewed as effecting an even trade between the Buffett family unit and its creditors. But the generations of Buffetts following me are not likely to applaud the deal (and, heaven forbid, may even attempt to welsh on it).

Think again about those islands: Sooner or later the Squanderville government, facing ever greater payments to service debt, would decide to embrace highly inflationary policies--that is, issue more Squanderbucks to dilute the value of each. After all, the government would reason, those irritating Squanderbonds are simply claims on specific numbers of Squanderbucks, not on bucks of specific value. In short, making Squanderbucks less valuable would ease the island's fiscal pain.

That prospect is why I, were I a resident of Thriftville, would opt for direct ownership of Squanderville land rather than bonds of the island's government. Most governments find it much harder morally to seize foreign-owned property than they do to dilute the purchasing power of claim checks foreigners hold. Theft by stealth is preferred to theft by force."

Since 2003, when Warren Buffet wrote this article, the trade deficit has grown. Here are some charts on the trade deficit, the drop in the personal savings rate, and the growth in U.S. National Debt. You can click on the charts for a larger view.

As Buffet forecasted, the residents of Thriftville are opting for direct ownership in record fashion. Sovereign wealth funds, which are investment pools backed by governments, already have invested about $27 billion in Merrill, Citi, Switzerland's UBS AG and Morgan Stanley. Now Merrill Lynch and Citi are going back for seconds.

Kathleen Pender at the San Francisco Chronicle raises some interesting questions.

I don't know what is more striking about this news: the fact that two of our largest financial institutions are in such bad shape they're seeking additional bailouts from foreign governments, or how little controversy these investments are stirring.


It wasn't long ago that politicians went bananas when foreign governments tried to get their mitts on U.S. companies. In 2005, a proposed acquisition of Unocal by an oil company 70 percent owned by the Chinese government ran into so much opposition that the Chinese company withdrew its bid, citing "the political environment in the United States." Unocal accepted a lower offer from cross-state rival Chevron.


In 2006, the takeover of seven U.S. ports by Dubai Ports World, a government entity in the United Arab Emirates, raised such a political and media firestorm that Dubai immediately sold its newly acquired ports - including those in New York and New Jersey - to a U.S. firm.


Sen. Chuck Schumer, D-N.Y., a leading opponent of the ports deal, was quoted as saying, "The question that needs to be answered is whether or not (Dubai) can be trusted to operate our ports in this post-9/11 world."

Yet recent investments in ailing U.S. financial firms by sovereign wealth funds have been generally well received. Schumer welcomed the Abu Dhabi investment, saying it "will bolster Citigroup's capital and competitiveness, and thereby help preserve New York's status as the world's financial center."

Sphere: Related Content

U.S. consumers plod along; Foreign investors pull back their money

The U.S. Department of Commerce released the 3rd Quarter 2007 U.S. International Transactions report Monday. Per the report the current account deficit narrowed by $10.463 billion to $178.5 billion in the third quarter of 2007 from $188.9 billion (revised figures) in the second quarter.

$5.279 billion of the reduction in the current account deficit came from an improvement in the goods and services trade deficit. The goods and services trade deficit for October 2007 was announced earlier this month and deteriorated slightly ($0.705 billion higher than September 2007). $7.787 billion of the reduction in the current account deficit came from income receipts from U.S.-owned assets in foreign countries versus income payments on foreign-owned assets in the U.S. Net unilateral current transfers (transfers without anything received in return) increased the deficit by $2.603 billion largely due to an increase in U.S. government grants.

While the weakened dollar has naturally strengthened exports, the U.S. consumer is not flinching at the weak dollar. Recession also appears to be held at bay as they have not decreased their imports as was the case during the 2001 recession.


Per the report “Net capital account payments (outflows) were virtually unchanged at $0.6 billion in the third quarter.”

For the Financial Account: “Net financial inflows--net acquisitions by foreign residents of assets in the United States less net acquisitions by U.S. residents of assets abroad--were $93.4 billion in the third quarter, down from $152.8 billion in the second.”

Foreign investors flocked to safety of U.S. Treasuries, which were up $46.7 billion in the third quarter, up from $1.8 billion in the second. At the same time they shunned Agency securities (Fannie Mae, Freddie Mac, etc.) and U.S. corporate stocks and bonds with “net foreign sales of $44.2 billion in the third quarter from net foreign purchases of $243.0 billion in the second. Transactions in U.S. stocks shifted to net foreign sales of $19.7 billion from net foreign purchases of $104.1 billion. Transactions in U.S. corporate bonds shifted to net foreign sales of $8.2 billion from net foreign purchases of $109.7 billion. Transactions in federally sponsored agency bonds shifted to net foreign sales of $16.2 billion from net foreign purchases of $29.1 billion.”

This is only the third time in over 30 years that there were net foreign sales in U.S. securities other than treasuries. During the recession of 1990 in the 3rd quarter, there was a net sale of $2.874 billion. During the stock market crash of 1987 in the 4th quarter there was a net sale of $4.888 billion. You have to go back to the recession in 1974 for the next previous net sale. Net foreign sales to the degree of $44.2 billion is without precedence. After reaching a low in net sales in August, transactions have reverted back to net purchases in September and October per the U.S. Department of the Treasury’s Treasury International Capital (TIC) report.

One quarter does not necessarily set a trend, but we are at an unique point in history.

Sphere: Related Content