The U.S. has been in a trade war with the rest of the world for years. We just have not been fighting back.
Foreign investors and governments currently hold about $6.2 trillion of U.S. treasuries, $872 billion of so-called agency debt (mostly Fannie and Freddie mortgage securities), $3.2 trillion of corporate debt and $6.2 trillion of corporate stocks in Dec. 2015, according to data compiled by the U.S. Department of Treasury.
Overall it represents a massive $16.5 trillion foreign investment in U.S. dollar-denominated assets, including debt and equities. It actually peaked in 2014 closer to $17 trillion after experiencing increases averaging $1.4 trillion from 2012 through 2014. In 2015, the number actually dropped a few hundred billion dollars as emerging markets imploded.
But where did the foreigners get so much money to invest in U.S. dollar assets? A large chunk of it comes from the trade deficits the U.S. experiences annually with the rest of the world, which has averaged $539 billion a year since 2000, totaling $8.7 trillion alone, and $10.6 trillion since 1974.
Consider that. 82 percent of trade deficits has been since 2000, right at the same time permanent normal trade relations with China was granted. Those dollars were then reinvested by foreigners into U.S. dollar assets.
This in turn had the effect of devaluing foreign exporter currencies against the U.S. dollar, like the Chinese yuan, making their exports cheaper, and further exacerbating ever larger trade deficits here. This is the essential currency manipulation that made it all work — which U.S. policy makers simply never responded to with any real effect.
That failure helped fuel the emerging markets bubble and emerging markets’ need for oil and industrialization, which blew up the price of commodities throughout the 2000s across the board — not just of oil but everything across the board including foodstuffs and metals — driving the U.S. trade deficits even higher.
As that capital was reinvested in the U.S. dollar assets, it in turn helped blow up the U.S. housing and stock bubbles here and drove interest rates down. It created a borrowing binge the likes of which the world had never seen, leading directly to the financial crisis of 2007 and 2008.
In the meantime, the U.S. market share of manufactures exports worldwide — that is, U.S. exported manufactures as a percent of worldwide exported manufactures — peaked in 1999 at 13.48 percent, and has been declining ever since, according to data compiled by the World Bank. In 2014, it was down to 7.45 percent.
Almost 5 million manufacturing jobs have been lost since that time, according to the Bureau of Labor Statistics, and the U.S. has been losing labor participation among 16 to 64 year olds, those in their prime working years, which has declined from more than a 77 percent in 1997 rate to just 72.6 percent in 2015, representing 10 million who either left the labor force or never entered on a net basis since then.
All the while, with the demand for labor in the U.S. sinking, so too have incomes been flattening — even while the cost of living, housing, education and health care were all skyrocketing.
It incentivized the expansion of the U.S. national debt, as revenues with fewer jobs and flattening incomes fell short while the U.S. deindustrialized and shifted production overseas, slowing the economy, which has not grown above 4 percent since 2000 and not above 3 percent since 2005.
So, what does this all mean? In short, we’re losing the trade war. These global imbalances are redistributing wealth overseas, fueling the boom to bust cycle, making investments riskier, leading to less domestic growth, fewer jobs and creating a generation of Americans who are effectively poorer than their parents were.
Consider, if that $8.7 trillion had never been shifted overseas, the Gross Domestic Product (GDP) would be nearly $27 trillion today. What would that have meant for the U.S.?
For starters, the ability to have added upwards of 72 million new jobs if you simply take today’s $18.2 trillion GDP supporting 151 million jobs and ask how many jobs a $27 trillion GDP might have supported. That means there would have been a real increase in the demand for labor, resulting in an increase in incomes.
Of course the population would not have increased that quickly to support all of those jobs without massive increases in immigration. So, perhaps much of the money would have instead been invested into our aging infrastructure. Or put in the factories of the future or spent on space exploration and economization. Or bankrolled as budget surpluses into our flailing health and retirement systems. Or you name it.
Of course it’s all easier said than done. How could we have prevented the trade deficits?
Probably by making a concerted move toward energy independence — much of the trade deficit is actually oil — and by counteracting exporting nations that engaged in real currency devaluations against the dollar. This could have disincentivized the reinvestment into dollar-denominated assets — and all the harm that followed.
Taken alone, there’s only so much tinkering around the edges of tariff reductions via massive trade deals like the 12-nation Trans-Pacific Partnership trade pact can accomplish, when the real tariff on U.S. goods and services is foreign currency devaluation, which naturally is not addressed by the trade agreement.
Consider, starting in about 2001, the U.S. dollar was being devalued but the whole time, China’s yuan was pegged below the dollar. The more we devalued, the cheaper Chinese exports got, and the larger our trade deficit became. By 2008, the dollar had dropped almost 37 percent against major currencies, all to the benefit of exporters that wisely had pegged below the dollar. Our own attempt at currency manipulation had backfired.
Meanwhile, it was easy for the carry trade to commence, borrowing in the U.S. at low rates here and dropping the money into the emerging markets bubble over there or in the commodities bubbles or in the housing and equities bubbles here. Nice work if you can get it. Investors who benefited loved the policy.
The dollar bottomed in 2011, and has been rising steadily since then by more than 33 percent. That hit U.S. exporters directly, comparable to a massive tariff being levied on U.S. goods and services overseas.
Sure, China has let the yuan appreciate here and there, but it was always still pegged below the dollar. When the dollar was sinking, the yuan was cheaper and when the dollar was rising, the yuan was still cheaper. It never truly floated. And the West did almost nothing in response except complain and issue feckless statements.
That essential policy failure, which helped fuel the commodities and emerging markets bubbles, exacerbating the oil trade deficit, and promoted the housing, equities and bond bubbles here, has led directly to the current economic malaise in the U.S.
That is why the tariff reductions contemplated under the Trans-Pacific Partnership for example are very much laughable. Whatever reductions are agreed upon may just be offset by exporting nations devaluing their currencies below the dollar once the agreement is in place. What a joke.
Moreover, it is simply not necessary to engage in these policies to help the rest of the world grow. With or without our assistance via these trade and monetary shenanigans, foreign economies will grow.
The U.S. had a duty as the steward of the world’s reserve currency to be responsible, and not to lead the global economy on such a volatile and dangerous path. We have been the world’s engine for economic growth since the end of World War II. But no longer.
By letting foreign actors latch onto the dollar like a parasite and suck wealth out of the U.S. economy, these currency manipulators have levied and maintained a perpetual tariff against U.S. growth and prosperity for almost two decades now.
Antiquated notions of tariff reductions — borne out of the Depression era to address a different set of problems — cannot help in the face of such devaluations. Simply enacting more trade agreements won’t do a thing. It is just more libertarian fantasy.
Until the U.S. addresses currency manipulation by hook or by crook, we will continue losing the trade war with the world, and declining economically.
That will mean less growth, less jobs and declining U.S. power abroad, which destabilizes regions where our security sphere — which the world has depended on since World War II and the Cold War — dissipates. In a nuclear world, that combination could ultimately prove explosive, quite literally. U.S. decline is a dangerous prospect in that regard.
We are on a reckless course presently.
To overcome these challenges, the U.S. needs to take the issue of monetary policy far more seriously in a global context. Take growth more seriously. We need it. There is a long game being played against us. And we will continue losing it every single year we refuse to fight back, making the world a more dangerous place to live.