It may seem weird to talk about things like the government, inflation, and the Federal Reserve’s role in manipulating money and markets and for most people, it’s hard to see how what they do gets personal. I mean, it’s not obvious just how governments affect our day to day lives.
People know that there’s been trillions of dollars of new money created by the Federal Reserve, but so far for the most part we haven’t seen an insane hyperinflation like Weimar Germany and prices on stuff, yes they’ve gone up, but not so much so to stop us from buying them completely.
In fact, I’d say most people expect inflation and prices to go up every year. I mean, they say inflation is a part of life, right?
I recently learned something that really cleared my moneyvision regarding another threat entirely that though it hasn’t happened yet (and I’m not saying it ever will) presents a very real, and very personal threat to our day to day lives that you’ll definitely notice.
And I’m about to get a bit macro on you, but I promise to deliver the point and by the time you’re finished reading this, you’ll understand exactly why this issue is so personal.
Let me suggest that if you live in the United States of America, about 10% of your standard of living is completely fake, and it’s been fake for a really long time.
What do I mean?
What I mean is that about 10% of your standard of living exists only because the United States runs a massive trade deficit, which means that the United States consumes more goods and services than it produces.
And for the record, having a trade deficit doesn’t apply only to people who live in the United States. Plenty of other countries, such as the UK, Australia, and Canada have their own trade deficits, and on a per person basis, they’re sometimes even wider, but I’m going to focus on using United States statistics to make my point in this post.
Going back to what a trade deficit is and why living in a country with a massive trade deficit makes you vulnerable, what it means is that you rely on imports to support your personal standard of living because your country doesn’t produce everything that it needs, for whatever reason.
In other words, your country is “living beyond its means”.
And when you live in a country that’s manipulating its markets via printing trillions of dollars out of nothing, which of course can be taken as a direct threat against the value of those dollars, you run the risk of really pissing off your trading partners that are selling you the goods you need and on top of that, even lending you the money to pay for them.
And if your trading partners get really pissed off, they might just cut you off completely, effectively forcing you and your country to start living within its means.
And this would have an immediate and obvious impact on your day to day life.
Let me explain what I’m talking about.
According to the World Bank, in 2015 the United States ran a trade deficit of about $463 billion. What this amount represents is the difference between what the United States produces versus consumes as a nation. The difference was a shortfall of 463 billion dollars.
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So what does that really mean?
In 2015, there was an estimated 124.6 million households in the United States.
So a 463 billion dollar trade deficit divided by 124.6 million households runs at about $3,700 per household in the US.
And the median income per household in the US is about $52,000 per year, according to the US Census.
So a $3,700 trade deficit on a $52,000 per year income means that about 7% of the average American’s standard of living is imported from other countries because we don’t produce enough on our own to support us.
So what does this actually mean? Well, have a look at the tags on your clothes and notice where they’re being made. Usually my stuff says “Made in China” or “Made in Indonesia”.
And this isn’t just clothes. It’s also shoes, your TV set, your computer, your car. And this also shouldn’t be surprising since I think most people are aware that a lot of the stuff we use gets made in other countries.
And I know that something like the “trade deficit” might sound a little weird to talk about, but there is absolutely nothing more personal when it comes to your day to day life. I’m not talking about the stock market here. I’m talking about the things that you use every day to drive, work, wash yourself, and wear.
Ok, so where are we going with this?
So you know that the United States (and other countries too) has been creating trillions of dollars out of thin air, and this of course threatens to destroy the value of the dollar, whether or not most people understand that relationship.
And the US dollar also happens to be the world’s largest reserve currency. So what would happen if the value of that currency gets destroyed?
Well, nobody would want it anymore.
Which means that, as a country who relies on imports from other countries, if they no longer want our dollars, and we don’t have any other way to pay for stuff, then those countries would simply stop selling us the goods that we need.
So that 463 billion dollar trade deficit (give or take) that we’ve been living off of year after year would go away, which means that we would be forced to live off solely on what we produce as a country, not to mention the fact that the stuff that we do import would cost a whole lot more than it does right now.
Just as a side note, if there’s anyone who understands how the trade deficit gets so personal, it’s me. I’ve been living in Australia for about 3 years now (originally from the US) and on a per person basis, Australia’s trade deficit is larger than the United States, and yes, things do cost a whole lot more here (obnoxiously more, but I’m not writing this to rant).
So if you’re living in a country whose trade suddenly gets cut off because your trading partners are mad at you, you personally then have no choice but to reduce your standard of living.
And for most people, that would be painful.
So how has the US been getting away with running a massive trade deficit every year?
This circles back to the title of this post and the real reason the US Economy has stopped growing and why it continues to struggle to jumpstart.
The economic problems that we’re dealing with right now are the direct result of globalization. Other countries, like China, produce all sorts of stuff much cheaper than we can and are willing to produce ourselves, the most obvious reason being that their workers work longer hours for way less money.
And globalization eliminated many of our trade barriers and let these way cheaper goods into the US. We were looking at dollar profits, not reality, and letting the introduction of these way cheaper goods kill the market for the goods that we used to produce ourselves, which moved our producing overseas.
For the record, some say the reason for this is that the US has become a more service oriented economy, so instead of producing goods in factories we’re producing services in offices, which elevates everyone’s quality of life, so we should all be happy to send and pay for stuff made cheaper from overseas.
But that doesn’t cancel out the fact that we still need those goods and services. We still need our computers, phones, gasoline, cars, clothes, shoes, soap. As good as life has gotten, we still need the things being produced in order to enjoy it.
Having said all of that, the reason why we’ve been getting away with importing goods we can’t really pay for with other real goods is because other countries, like China, loan us the money to pay for them.
And they loan us the money to pay for their stuff by buying US treasury bonds.
Why would they do that?
No, they’re not stupid. They don’t do this out of the kindness of their hearts. It’s not for the sake of being generous.
This is another story for another post at another time, but basically we’ve all been playing currency wars. By buying US treasury bonds, they help to prop up the value of the dollar, which keeps the Dollar high relative to the Chinese Yuan, so their stuff stays cheap relative to our stuff, which means other countries buy more of their stuff, so their economy continues to grow while ours stalls out.
And what we wind up with is a standard of living that we can’t pay for because we don’t produce the goods to pay for it because we can’t compete because our Dollar costs too much. It’s a whole vicious circle.
And why they continue to buy US treasury bonds to loan us the money to buy their goods is because if they didn’t do this, the Dollar would crash, then we really wouldn’t be able to buy their goods, and then their own economy takes a hit.
So by helping us out in this way they also help themselves.
It’s a dysfunctional relationship that no one wants to see fall apart, don’t get me wrong.
But it’s still a dysfunctional relationship that could fall apart at any time.
So how could this relationship fall apart?
Well, for one thing, the Federal Reserve has been creating trillions of dollars out of nothing, which just about anyone can understand creates the danger of hyperinflation.
And when a currency like the US Dollar’s value is backed by nothing but the full faith and credit of the US government, and the US government goes and creates trillions of more dollars out of nothing, you could say that the US government is breaking their promise to protect the value of the Dollar.
Which can be seen as a slap in the face to the countries who are selling us the goods we use by loaning us the money to pay for them.
Which of course increases the chances that they’ll simply stop selling us the goods.
So what do we need to do?
Well, firstly we need to clearly understand exactly what’s going on here.
Anyone who’s ever spent more money than they make knows what it’s like to live like that. It might be survivable for awhile but you know full well that it’s unsustainable over the long term. When an individual gets to this point, their only options are 1) Earn More Money or 2) Spend Less Money or 3) Declare Bankruptcy or 4) Some combination of some of these options.
Why would a country be any different?
Well, countries control their own currencies and can change the laws around them at any time, so a national bankruptcy is not inevitable.
But ultimately, even countries get forced down to a point where they either have to cut back on consumption or produce more goods to pay for their consumption.
And I’m not saying that we need to stop buying stuff from other countries, but we do have to start producing the goods ourselves to pay for the goods we buy.
And if we don’t? Well, I’ll talk about that in the next article.
So what can you do?
Well, needless to say that the United States is playing with fire here. Despite all the government interventions and façade of a bull market, the economy and its problems are as bad as they were back in 2008 when the sky was falling.
Things don’t look like they’re getting a whole lot better or changing.
The risk of a reduction in the standard of living of the vast majority of people, through no fault of their own, is very much there.
The good news is that there are things you can do to protect yourself.
The bad news is that you won’t learn what those things really are from finance books or the news.
The bad news is that if you do what you’ve been told your whole life about saving and investing for the long term, you’re playing a sucker’s game, whether or not you realize it.
The good news is that if you’re willing to clear your moneyvision and learn what’s not being taught, and learn how to read between the lines, there are things that you can do to not only protect the wealth you’ve worked so hard to build, but actually position yourself to profit from the wealth transfer that this post has only barely scratched the surface on.
The good news is that there is opportunity all around you, as long as you’re trained to see it.