Small Luxuries Fueling Trade Deficit

I read a recent article in the LA Times that commented on the increased trade deficit.  The trade deficit stands at $49 billion in July, the highest since October 2008.  The article said that as our economy has worsened and people’s disposable income decreased, consumers have put off purchases of big items, such as houses and cars.  However, Americans still feel a need to buy products that connote high class and luxury.  So they may instead purchase smaller luxuries, such as ipods, fine imported liquor, or clothing.  Or they may buy a lower-end model of a luxury line of goods that they can no longer afford, as with Mercedes or BMW.

The problem with this tendency is that these kinds of products, unless one is careful, tend to be imports.  Just walk down any shopping area in a Las Vegas casino – what do you see?  Versacci, Gucci, Sharper Image, Apple, William-Sonoma: all that is sold is imports!  I’m quite disgusted with Apple, personally.  They used to make all their products in the US, but now everything they sell is made in China.  A check to Apple is a check to Mr. Zha Bao and Mr. Fu Jin Tao.  I do own an Iphone, since all the smart phones are imported anyway, but I certainly don’t want to buy another one if I don’t need one.  I am not excited about giving Apple any more of my money!  I would never buy an Apple product as a present either.

So how can this pattern of small luxuries being imported and pushing up the trade deficit be improved?  There are a number of ways, one of which I mentioned above.  One way is to buy only what we truly need in electronics, if there are no Made in USA options.  For instance, if your flat screen tv is good for you and works well, don’t rush out and buy that new LED tv just because you want that next new product.  Early adopters are not good for the US economy in this area.  Another avenue is gift-buying.  If something is a gift, you can either give cash or buy something made in USA.  You can always buy something from Etsy.com, if you can’t figure out what to get them that is mass-produced and made in USA.  Finally, there is no necessity to buy imported luxury consumables.  For every French cheese and Italian wine, there is an American counterpart.  There is no need to buy imported fruits and vegetables – domestic versions are all available, at least seasonally.  Ethnic foods are available from American producers also.  You can buy American chocolate, coffee, whiskey, vodka, and even caviar!  (If I hear another person smugly request Grey Goose in their vodka tonic, I’m going to explode!:) )

So keep trying to buy American!  See if you can incorporate some of these strategies in your shopping.  Please comment with any suggestions you may have!

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The Trade Deficit and Our Current Economic Meltdown

The credit crisis and recession of 2008 are symptomatic of the underlying problems of the American economy.  In my opinion, what has been going on is an overall decrease in Americans’ incomes.  This is due in large part to the loss of manufacturing jobs in the US.  These highly-paid jobs are replaced with either no jobs or poorly-paying jobs.  Despite their decreasing earning power, Americans continued to spend at record rates, financing their spending with credit.  This was evidenced by the housing bubble, where housing was generating record prices while Americans real earning power was falling.  People without jobs or verifiable income were being given loans with the expectation that this ponzi scheme would continue through additional home sales and rising home prices.  Of course this process eventually collapsed as the foreclosure rate began to rise.

However, don’t let the foreclosure crisis guile you into thinking that that is the underlying problem with the American economy.  It is not.  The real underlying problem is the fall in American income and wages.  The #1 cause of this is our trade deficit.  American retailers and outsourcing manufacturers have long falsely claimed that purchasing products made more cheaply in foreign countries is good for US consumers.  What this fails to explain is with what income will those consumers be buying those products?

Let’s simplify this idea with a very simple analogy.  Let’s say there are 2 farmers.  One farmer grows apples and grows 10 bushels of them.  Another farmer grows wheat and grows 10 bushels also.  To keep it simple, let’s say that all you need to survive are apples and wheat and that the only economy that exists is between the 2 farmers.  The apple farmer only needs 1 bushel of wheat to sustain himself and his family but the wheat farmer needs 2 bushels of apples.  So since the apple farmer has no use for the wheat farmer’s extra bushel of wheat, he is willing to <i>lend</i> the wheat farmer an extra bushel of his apples by pawning some of his farm equipment or by outright purchasing the wheat farmer’s land.  So with time, the wheat farmer either goes into debt to the apple farmer or loses his earning power in order to maintain the same level of spending on apples.   Eventually, he either starves or loses his farm if he maintains the same trade imbalance with his neighbor.

American consumers are in the same situation.  Rather than keeping our money at home, we’ve continued to spend at record rates on foreign products.  This money goes overseas and pays for the jobs of foreigners.  That money is not sent back here to buy American products.  Asian and European consumers are not so foolish as to buy as many imports as we do.   A much higher percentage of general merchandise sold in Europe and Asia is domestically produced.

So in my opinion, we now have a simple choice.
1) We spend less and become accustomed to a lower standard of living in accordance with our decreased manufacturing base, or
2) We change our buying habits and buy more American-made products and have a positive trade balance, or
3) We impoverish ourselves through indebtedness to the point of pauperism and slavery to foreign powers (no thanks!)

The choice is ours.

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