Trade Rains on the Jobs Parade
Earlier this month the Labor Department reported that 227,000 new jobs were added to the economy in February, marking the third consecutive month of positive jobs growth. Many observers took the news as evidence that the recovery has taken hold in earnest, helping send the S&P 500 index to the highest level in nearly five years. However the very same day the Commerce Department reported that, after surging for much of the last year, the U.S. trade deficit increased to $52.6 billion for January, the largest monthly trade gap since October 2008. This second data set should dampen enthusiasm for the first.
If the jobs that we have created over the last few years had been productive, our trade deficit would now be shrinking, not growing. But the opposite is happening. These jobs are being created by the expenditure of borrowed money, and are not helping to forge a newer more competitive economy. In the years before the real estate crash, our economy created millions of jobs in construction, mortgage finance and real estate sales. But as soon as the bubble burst, those jobs disappeared. Today's jobs are similarly being built as a consequence of another bubble, this time in government debt. And, likewise, when this bubble bursts they too will vanish.
Throughout much of the last decade I had continuously warned that the growing trade deficit was an unmistakable sign that the U.S. was on an unsustainable path. To me, monthly gaps of $60 billion simply meant that Americans were going deeper into debt (to the tune of $2,400 per year, per citizen) in order to buy products that we were no longer productive enough to make ourselves. I pointed out that America had become an economic juggernaut in the 19th and 20th centuries on the back of our enormous trade surpluses, which allowed for growing wealth, a stronger currency, and greater economic power abroad. This is exactly what China is doing today. Deficits reverse these benefits. (To learn how China is spending its surplus, see the article in our latest newsletter.)
My critics almost universally dismissed these concerns, typically saying that our trade deficits resulted from our economic strength and that they were a natural consequence of our status at the top of the global food chain. I pointed out that even highly developed, technologically advanced economies still need to pay for their imports with exports of equal value. Instead all that we were, and are, exporting was debt and inflation.
The financial crisis initiated a painful, but needed, process whereby Americans spent less on imported products while manufacturing more products to send abroad. But the countless government fiscal and monetary stimuli stopped this healing process dead in its tracks. Government borrowing and spending redirected capital back into the unproductive portions of our economy. Health care, education, government, and retail have all expanded in the last few years. But manufacturing has not grown at the pace needed to solve the trade problem.
Job creation at home has been like vegetation sprouting along the banks of rivers of stimulus. These artificial channels may help temporarily, but they prevent trees from taking root where they are needed most. Our economy has yet to restructure itself in a healthy manner. The recession should have forced us to address the problem of persistent and enormous trade deficits. We have utterly failed to do this. So while the job numbers look good for now, the pattern is ultimately unsustainable.
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here] More importantly, don't wait
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to buy Peter Schiff's best-selling, latest book, "How
an Economy Grows and Why It Crashes."
For a look back at how Peter Schiff predicted the current crisis, read his 2007 bestseller "Crash Proof: How to Profit from the Coming Economic Collapse" [buy here]
More importantly, don't wait for reality to set in. Protect your wealth and preserve your purchasing power before it's too late. Discover the best way to buy gold at www.goldyoucanfold.com, and subscribe to our free, on-line investment newsletter.
Mr. Schiff is one of
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