Why Do We Owe $10 Trillion?
Part 1: The Trade Deficit
In order to more completely understand the dilemma the new administration is faced with, a quick overview of how the current $10 trillion national debt breaks down is helpful. This three-part series will be published once a month in the last week of the month during the first quarter of this year.
Trade Deficit: China, petroleum, and the automotive industry account for almost our entire trade deficit and taken together are adding almost a trillion dollars of debt to our total national debt per year. I will cover China in this issue and discuss petroleum and the automotive industry in the next issue.
In 2008, the China Daily boasted that the average salary of a Chinese urban worker reached about $14 per day, which constituted a six-year high! Regardless of what those workers produce Americans will buy more of their products than Chinese will buy of the American counterpart products for two reasons: 1) the American consumer on average will find the Chinese product to be cheaper than the American made counterpart, and 2) the Chinese worker doesn't earn enough to afford many of the American made products. This imbalance results in a persistent trade deficit. In other words, for every $10 we spend on Chinese products, they spend about $7 on US products.
So what happens to the extra $3 dollars that the Chinese end up with as a result of this imbalance? Well, for many years now the Chinese, and many of the other countries with trade surpluses, have been using this extra money to do two things: 1) Buy US Treasury Bills, and 2) buy agency securities (securities issued by Fannie Mae and Freddie Mac). A treasury bill is an I.O.U. with interest. Fannie Mae and Freddie Mac were 50% of the secondary mortgage market before they imploded, which means they basically dictated the lending guidelines for the mortgage industry. Free flowing capital to Fannie Mae and Freddie Mac caused loose guidelines. Low yields on aggressively purchased treasury bills drove down mortgage interest rates. Free flowing capital and low interest rates caused the housing boom. Needless to say, the housing bust has pissed off China. But they have built their economy around exports to the US so they are stuck for now. As a country we have been going deeper and deeper into debt for many years because we have been using this borrowed money to stimulate our economy. Our trade deficit with China alone is about $250-$300 billion.
Here's the challenge. We are already drowning in debt. Any stimulus package will require the government to print money that doesn't exist (discussed in Part III) only to enable the American consumer to begin buying Chinese products again, thereby further increasing our trade deficit. See the problem?
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LOL - Laughs OnLine
"Okay, what do you want to do now?"
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What's The Big Idea? 
Joseph Heller coined the term "Catch-22" to describe the following situation. U.S. Army Forces bombardier, John Yossarian, wants to be excused from combat flight duty by demonstrating that he is insane and therefore shouldn't be flying around with bombs. Guideline number 22 used by the military doctors to diagnose insanity is that the person should not know they are insane. Asking to be excused on the basis of insanity presumes that you know you are insane--hence Mr. Yossarian's problem. It seems that our current financial situation is a Catch 22 both because there is currently no obvious way out of the predicament and it is insane that we got ourselves into this predicament in the first place.
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Share If You Care
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Sincerely,
Kwame J. Granderson
Equinaire
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