2016 Postmortem

brentspeak

(18,290 posts) Mon Apr 11, 2016, 01:29 PM Apr 2016

The four-letter word supporters of free trade never utter: DEBT

Are you saddled with credit card debt? A home mortgage that seems to be growing more ominous? A student loan that you will not be able to retire even if you were to live to age 200?

The reason can ultimately be traced to a factory in Ohio being relocated to Mexico. And to a textile mill in South Carolina moving to Indonesia. And to an auto plant in Detroit going to China. Or simply thousands of other factories ceasing to exist at all due to cheap imports.
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Before the era of trade liberalization (allowing cheap imports to enter the US market, an era commencing roughly in the early 1970's and continuing to the present time), household debt was virtually unknown. Homeowners did carry mortgages, but strong wages and strong job security easily retired these mortgages in timely fashion. Credit card debt was almost non-existent; wages were that strong.

Similarly, with the sole exception of wartime periods, government debt was also unknown.

But something happened when cheap imports began to flood the US market. People began to use credit cards much more often than they did in the past. They also took on larger auto loans, larger mortgages, larger student loans.

And, crucially, they also had much more trouble retiring these debts.

The stagnant wages brought about by trade liberalization have forced consumers to rely on other means to supplement their diminishing incomes: credit cards, home equity loans, all kinds of loans. Furthermore, the US government's simultaneous near-sponsorship of Wall Street has resulted in creating a sophisticated new industry: the financial industry. We've traded making material things for Americans to sell to themselves and the world market for making new instruments for banks to sell to cash-strapped American consumers.

Free trade agreements have also ballooned the trade deficit, which, in turn, results in a huge increase in government (national) debt, as noted by economist Ian Fletcher:

Now for the debt part of the equation. As I have noted before a nation's accumulation of debt is closely linked to its running of trade deficits, because when we import more than we export, we must pay for it by either selling off existing assets or accumulating debt. (This is a simple matter of accounting, not even economics, so it shouldn't be that controversial, no matter how controversial other aspect of the issue are.)

Over the past 35 years or so that we have been running trade deficits, we have mostly paid for this by assuming debt, and especially in recent years, a huge part of that debt has been public debt. One consequence has been that in order to manipulate the dollar price of its currency downward and boost exports, China has been buying huge amounts of U.S. Treasury securities. Thus the same mechanism that caused our trade deficits also increased our governmental debt.

Note the upward trajectory of both household and national debt in the era of "trade liberalization":

The United States is now experiencing the same syndrome that all the great empires of the past did when they traded away their economies' golden gooses: unsustainable, runaway debt -- at all levels.