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Cash-for-Clunkers Widens Trade Deficit to Most Since 1999

By: Steve Johnson

9/10/2009 - 14 Comments

The U.S. trade deficit is a much better way to look at the progress of an economic recovery then using government numbers like the CPI and GDP. 

As I have said before, the recession looks to be ending in terms of dollars as the GDP will likely be positive in Q3.  But the trade deficit tells a different story. The trade deficit tells a nation how much money is coming in and going out.  According to a recent Bloomberg article,

“The U.S. trade deficit widened in July and imports gained by a record in percentage terms as demand for cars, computers and oil increased.

The gap between imports and exports increased 16 percent, the most in more than a decade, to $32 billion from a revised $27.5 billion in June that was larger than previously estimated, the Commerce Department said today in Washington. Imports soared 4.7 percent, outpacing a 2.2 percent gain in exports.

Automakers boosted production in response to the Obama administration’s “cash-for-clunkers” program, increasing purchases of imported components and machinery.”

This report shows that the cash-for-clunkers program didn’t actually help the U.S. economy because much of the money that was borrowed from the earnings of future taxpayer wages left the country.

And the bad loans will further hurt the banks. Many of the vehicles that were purchased (something like 750,000) will end up getting repossessed in the next few years when people are unable to continue making the payments.  

The banks will then be forces to sell the cars at liquidation prices because of the lack of qualified buyers and the dramatic increase in cars owned by banks. The banks will need another bailout from the losses they will incur in the process of repossessing all these vehicles.  If the Fed does not fund another bank bailout, hundreds more banks will likely fail and if the Fed does fund another bailout then the losses will once again be socialized through inflation.

In the end, these cars have not been paid for and we don't have the money to pay for them. The cost of these cars will be paid for by the next generation of taxpayers and the current generation of retired savers through inflation.

On top of that, the cars didn't improve our productivity and therefore cannot be considered assets. These cars are unfunded liabilities.

The cash-for-clunkers program was a complete waste of money that pushed the nation ever closer to a currency crisis.  The program added 15 billion (750,000 x 20k per vehicle) to the liability side of our national balance sheet.  Forget political parties for a minute, this is accounting 101. The current congressional leadership has no idea what they are doing.

When the Dollar Sinks

When the dollar finally sinks into crisis range the recession we face today will look like a party. The current policies of inflation and socialism are going to linger for a long time. 

Prices of imported goods will be so expensive (in dollar terms) that we will not be able to purchase them anymore.  Wal-mart will have more stores outside the US then inside. We will have to start producing our own products again and we will also have to increase our exports. 

With that is mind, the current manufactures that export products will likely see a large increase in demand (that would be the place to get a job).

The current policies of inflation that are weakening the dollar will force our imports to drop and our exports to increase until we get back to a positive trade deficit.  When we cross that line, then I will believe that the economic recovery is underway, but it will be very painful as the dollar crisis drives down the average standard of living. 

Crossing that line of a positive trade deficit will be just the beginning. It will take ten years of positive trade deficits to get back the wealth that was lost over the last ten years running negative trade deficits.

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