Here is the latest stunning news: Last month, the U.S. trade deficit widened to a new record - $60.3 billion. "Imports soar," says CNN.
What a disappointment. The falling dollar was supposed to reverse the trade deficit; it was supposed to rebalance the global economy. Just yesterday we printed a comment from Arthur Laffer, which appeared in the Wall Street Journal. The celebrated dreamer thought the dollar decline was over. It had done its job, he thought - setting the world's books straight.
Alas...not quite...or not yet...or not at all!
We have been saying that Americans spend ALMOST $2 billion more per day than they earn. Now, we can save a word. Every day that goes by makes us $2 billion poorer.
Poorer? "Does not the money come back to us?" asks Arthur Laffer. Andy Kessler wants to know, "Does not it boost up the values of our houses, our bonds, and our stocks? Isn't the whole world eager to place its money in America - because our economy is so dynamic, so free, so fetching in every way?"
We simpletons at The Daily Reckoning can only understand the situation by reducing it to its essentials: One town sells meat. Another sells bread. Trading with each other, the meat eaters in one town buy more meat than they sell bread to the other town. The meat eaters (bread makers) run a trade deficit. The meat producers run a surplus. In order to continue eating as much meat as they want, the meat eaters borrow money from the meat producers. The meat eaters mortgage their houses and bread ovens in order to continue consuming meat. Each day that goes by, the meat sellers gain a larger claim on the bread makers' property. It seems simple enough - the meat producers get richer; the meat consumers get poorer.
But wait, what if the meat eaters' houses go up in price? What if their shrewd central bankers lower the price of credit in order to keep them buying...and triggers a property boom? What if the free-spending ways of the meat eaters make their economy seem irresistibly dynamic? What if the meat producers can hardly wait to invest in it?
How do these additional circumstances change things? Not at all! They just make the essential nature of the transaction harder to see: one group spends more than it makes. The other takes the money and buys up productive assets. The bread makers are made no richer when foreigners buy their ovens! They are no richer when foreigners own their houses. Nor are they made richer when the nominal value of their houses goes up; the house itself still gives exactly the same service.
The bread makers may think they are getting richer. But they, like millions of Americans and a few popular economists, are hallucinating.
A Daily Reckoning reader writes:
"The next time you are in Caesar's Palace, notice the small sign by the door. Like a pack of cigarettes, there is a warning. Gambling can be addictive; if you think you have a problem, call the number below to contact Gamblers Anonymous.
"That is the extent of the Alan Greenspan's warning:
Credit can be addictive; if you think you have a problem, quit drinking our punch."
Our reader would lay the blame on the poor bread makers. If they have mortgaged their houses to buy meat - is it not their own fault? They should have had more sense, our correspondent would say.
But our tired, cynical eyes turn towards our own central banker - Alan Greenspan, the world's most famous public servant since Pontius Pilot. Is the maestro of American casino finance completely innocent? We don't think so. He did something that no casino would dare to do - he rigged the games to make the players think they were winning! No wonder they can't pull themselves away from the slots. Every time they put in a quarter, out come two more. For more than two years, he has lent money at interest rates below the inflation rate. Who can blame the poor schmucks for taking it? All they had to do was to "take out" a little loan from the Bank of Ever-Rising Housing Equity...and they could buy more meat!
And weren't the meat producers happy! It gave them more cash to buy up assets.
The Rude Awakening