Our So-Called Foreign Policy: The Other Scary Ukraine War Threat

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energy, energy prices, global financial crisis, globalism, hunger, Lehman Brothers, Lehman moment, Our So-Called Foreign Policy, Russia, Taiwan, Ukraine, Ukraine War, Vietnam War, vital interests, Western Europe

Take it from me – the words “Lehman” and “moment” are words that no one should ever want to see in the same sentence ever again. Yet they’ve been making a collective comeback lately (see, e.g., here, here, and here), signaling in the process that the determination of the United States and other countries to help Ukraine achieve its goal of expelling Russia from the territory it’s lost could backfire disastrously.

This specific risk has emerged not because the conflict could spread beyond Ukraine’s borders and embroil the big new concentrations of U.S. and other NATO military forces right next door – and therefore all too easily escalate to the nuclear level. It’s also emerged because of the growing economic hardship and potential political instability in major world regions created by the disruption of global energy and food trade triggered by Russia’s invasion and the sanctions it’s triggered.  

The phrase “Lehman moment” refers to the time when the national and global financial systems and economies nearly collapsed because so many of the world’s major banks and other lenders had engaged in such reckless practices, and because they were so interconnected that the failure of one – America’s Lehman Brothers – threatened to topple the whole house of cards that had been created.

Today’s Lehman moment is feared to be coming in Europe’s energy sector – also dominated by huge, closely connected institutions and also endangered by contagion. But this time the culprit hasn’t been greedy executives or asleep-at-the-switch regulators. It’s been the price of natural gas. The Russian invasion of Ukraine itself, the duration of the fighting, Russian supply curbs and threats of cut-offs have pushed it so high that many European utilities have been forced to buy the increasingly scarce fuel on the very expensive spot market and sell it to customers at the much lower prices stipulated by the contracts they’ve signed. (See here for a useful explanation of all of the above.)

As with the original Lehman moment, government bailouts are likely to save the day – at least for the foreseeable future. But the costs are shaping up to be astronomical, and even if they’re paid by all of the continent’s well- and less well-off countries alike, enormous national debts are sure to grow. Moreover, Europe’s near-term energy, and overall economic, future looks so grim because major shortages and towering prices this winter seem both inevitable and bound to bring on a serious recession and all the suffering and anxiety that accompany such downturns.

That sure sounds like a formula for even more political instability than Europe has already seen lately, including a loss of public faith in national and regional establishments and institutions of all kinds, and a further strengthening of the sort of political movements – on the right end of the political spectrum in particular – that globalists keep warning are grave dangers to the democracy and even the peace the continent has enjoyed until Russia’s attack on Ukraine.

Nor is Ukraine War-rooted turmoil confined to Europe. As the Biden administration has just warned, “protracted conflicts – including Russia’s invasion of Ukraine” have been developments that have “disrupted global supply chains and dramatically increased global food prices.” As a result, “world leaders [need] to act with urgency and at scale to respond…and avert extreme hunger for hundreds of millions of people around the world.”

Sub-Saharan Africa, one of the areas of greatest risk, has (rightly) never been seen as a high U.S. foreign policy priority. The other area, though, is the Middle East, which has become much less important even to America’s economic well-being because of the energy production revolution at home, but which continues to attract considerable attention from globalist U.S. leaders.

Hence the backfire risk – and a gigantic irony. Globalist backers of the current Ukraine strategy justify it as necessary to protect what they call a “rules-based international order” they believe has been essential for preventing great power conflict, as well as for promoting impressive degrees of prosperity and democracy around the globe. I’d give far more credit to the balance of nuclear terror that’s prevailed for nearly all of that period, but that’s not the main point.  The main point is that, along with great power conflict, the widespread international turbulence being fueled by the duration of the Ukraine War per se is another major geopolitical nightmare that globalism has striven to avert.  

It’s true that incurring great risks to protect specific, concrete interests the U.S. considers vital – like the security of Western Europe and, more recently, Taiwan (because of its leadership in manufacturing the world’s most advanced semiconductors) – by definition are worth running. This logic also holds for objectives like fostering and maximizing stability the world over, even though they’ve always been more dubious because they’re so much gauzier and less realistic. For whatever the damage possible from attempting to safeguard any of these interests, the term “vital” means that failure can generate even greater dangers – particularly national survival and independence.

But running such risks on behalf of Ukraine’s independence – which was never seen as remotely vital U.S. interest even at the height of the Cold War, which was habitually described as a Manichean struggle for the entire world’s future – is a different matter altogether, and indeed makes no sense at all.

During the Vietnam War, a U.S. Army officer is supposed to have told a reporter after one battle that “It became necessary to destroy the town to save it.” The Lehman moment references and mounting signs of tumult in several major regions long seen by Washington as bearing at least significantly and even vitally on America’s safety and well-being indicates how close U.S. Ukraine policy – even if it simply prolongs heavy but geographically contained fighting – is moving toward achieving that absurdly self-destructive goal.

(What’s Left of) Our Economy: The New U.S. GDP Report Shows the Economy Not Just Shrinking but Bubblier Than Ever

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bubbles, GDP, global financial crisis, Great Recession, gross domestic product, housing, inflation-adjusted growth, personal consumption, real GDP, toxic combination, {What's Left of) Our Economy

For an official report showing that the U.S. economy shrank, the Commerce Department’s initial read on the gross domestic product (GDP – the leading measure of the economy’s size) for the first quarter of this year garnered lots of good reviews. (See, e.g., here and here.)

According to these cheerleaders, when you look under the hood and examine why GDP fell, the details are encouraging – and even point to growth resuming shortly. I’m not so sure about that – and especially about the claim that the skyrocketing trade deficit so largely responsible for the negative print is only an accounting phenomenon that results from the peculiar way GDP changes are calculated, and therefore says nothing about the economy’s main fundamentals. (Indeed, I’ll have more to say on this point later this week.)

But if we’re going to examine carefully the components of the economy’s growth and shrinkage, let’s examine them all. Because some other key details of the latest GDP report – and some immediate predecessors – draw a more troubling picture. They show that the economy is looking even more bubble-ized than in the mid-2000s, when expansion became over-dependent on booms in consumer spending and housing, neglected the income, savings, and investment needed to generate sustainable growth, and inevitably imploded into the global financial crisis and ensuing Great Recession. 

The pre-crisis bloat in personal consumption and housing is clear from the magnitude they reached at the bubble-era’s peak. In the third quarter of 2005, this toxic combination of GDP components accounted for a then-record 73.90 percent of the total economy after inflation (the measure most widely followed) on a stand-still basis. And for that quarter, they were responsible for 85.26 percent of the 3.45 percent real growth that had taken place over the previous year.

During the first quarter of this year, consumer spending and housing accounted for 88.17 percent of the 3.57 percent real growth that had taken place since the first quarter of 2021. (Remember – inflation-adjusted growth for all of 2021was a strong 5.67 percent.) And on a stand-still basis, the toxic combination made up a new record 74.04 percent of the economy in price-adjusted terms. 

For the full year 2021, personal spending and housing represented 73.78 percent of inflation-adjusted GDP on a stand-still basis, and generated 101.5 percent of its constand dollar growth.  (Some other GDP components acted as drags on growth.) That stand-still number topped the old full-year record of 73.68 percent (also set in 2005) and share-of-growth figure trailed only the 114.3 percent in very-slow-growth 2016.    

There are three big differences, though, between the peak bubble period of the mid-2000s and today. Back then, the federal funds rate – the interest rate set by the Federal Reserve that strongly influences the cost of credit, and therefore the economic growth rate for the entire economy, was about four percent. Today, it’s in a range between 0.25 and 0.50 percent. That is, it’s only about a tenth as high.

In addition, the Fed hadn’t spent years stimulating the economy by buying tens of billions of dollars worth of government bonds and mortgage-backed securities each month. This disparity alone justifies concern about the health and durability of the current economic recovery. Finally, inflation during that bubble period was much lower.

Even worse, these purchases have now stopped and the central bank has made clear its determination to bring torrid current inflation down by raising interest rates. If these tightening moves cut back on toxic combination spending, it’ll be legitimate to ask where else adequate levels of U.S. economic growth are going to come from, and whether policymakers will try to revive the expansion in an even bubblier way.  

(What’s Left of) Our Economy: Why Inflation Now Looks More Confounding Than Ever

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baseline effect, Commerce Department, consumer price index, CPI, Federal Reserve, global financial crisis, inflation, Labor Department, monetary policy, moral hazard, PCE, personal consumption expenditures index, recession, {What's Left of) Our Economy

Thanks to the Ukraine War, the challenge of figuring out whether and exactly how greatly inflation-prone the U.S. economy has become – and therefore what to do about it – has become more complicated than ever. In fact, it might have become impossible, at least for the foreseeable future. And the latest evidence comes from the most recent official report on the Federal Reserve’s preferred measure of price changes – the price indexes for personal consumption expenditures (PCE) put out by the Commerce Department.

This quandary matters decisively because the main conflicting views of today’s inflation support two equally conflicting policy responses by Congress and the administration, but mainly by the Fed — which has the authority to put anti-inflation measures into effect faster than the rest of the federal government.

Simply put, let’s suppose that current, and multi-decade record, inflation mainly stems from government policies that injected too much money into the economy, through massive spending, rock-bottom interest rates, or some combination of the two. Then the remedy is starting to “tighten” such policies by raising interest rates further and selling the bonds bought by the Fed through its quantitative easing program, or by cutting federal spending, or some combination of all these. Strengthening this case is the magnitude of this policy support for the economy – which ballooned due to the emergency created by the CCP Virus pandemic that finally seems on the wane for good.

But if today’s inflation stems mainly from one-time shocks to the economy that by definition don’t have staying power (which is why for quite a while, the Fed was calling elevated inflation “transitory”), then such tightening moves either could have little effect whatever on prices, and/or backfire by dramatically slowing growth and even causing a recession.

To date, that’s been my interpretation, with the main one-time shock being the pandemic. First the virus produced abnormally low inflation readings when its spread and the lockdowns and behavioral changes that resulted crashed the economy briefly. The rapid recovery that followed wound up producing abnormally high inflation readings as economic activity – choppily – returned to quasi-normal (the “baseline effect” I keep writing about).

Moreover, that stop-start nature of the recovery – which stemmed from the fluctuations in CCP Virus waves and consequent mandates and business curbs – fouled up global supply chains that led to widespread shortages, and therefore pushed up prices, as companies struggled to figure out future demand for the goods and services they supplied.

Last month, I wrote that the baseline effect seemed to be disappearing for the Labor Department’s inflation measure — the Consumer Price Index, or CPI), and a few weeks later, predicted that it fading for the overall PCE in March and for core PCE in April.

But of course, since then have come more outside shocks – Russia’s invasion of Ukraine, the unexpectedly long conflict that’s followed, and the sanctions- and war-related disruptions in global supplies of fossil fuels and grain from both countries. All these closely related developments are certain to send prices to yet another level, and the effects will be felt throughout the entire economy, since more expensive fuels affect any business that transports its products or uses oil or gas to power its operations. As a result, the distinction drawn by both inflation measures between overall inflation rates and “core” inflation rates (which leave out food and energy prices because they’re so vulnerable to outside shocks) will become inceasingly academic.

So where do the new PCE data fit in? In brief, they show that, only a monthly basis, overall inflation hit 0.6 percent in February, and core inflation came in at 0.4 percent. The former monthly inflation rate hasn’t risen since October, and January’s initially reported 0.6 percent result has been revised down to 0.5 percent. The latter figure, meanwhile, was the lowest since September. So no speed-up in inflation is apparent from these statistics.

The annual figures are where the acceleration can be seen. February’s year-on-year PCE inflation rate of 6.4 percent – the fastest rate since 1982, and a meaningful increase over January’s six percent. In fact, overall annual PCE inflation pierced the Fed’s two percent target last March and have risen every single month since.  Core PCE has followed an almost identical pattern, though at slightly lower absolute levels.

Yet as explained previously, both surging annual PCE inflation rates have much to do with the price increases of 2019-2020 that were pushed down so low by the virus’ arrival that they took more than a year to recover even as the economy bounced back (unevenly, to be sure).

Specifically, in February, 2021, the annual overall PCE inflation rate was only 1.6 percent, and the annual core rate was only 1.5 percent.

As mentioned above, the return of annual inflation rates above the Fed target – in March, 2021 for overall PCE and April for the core – meant that this baseline effect looked set to end soon. But the Ukraine war has upset these calculations.

As a result, the big question facing the Fed now is whether inflation – whatever its causes – has become so high, and could last so long, that it needs to be reduced significantly even at the risk of triggering recession. That seems to be the central bank’s stance right now, but color me skeptical. After all, slowing growth to a near-halt during an election year would look like an awfully political move, and one I have difficulty believing would be taken by an institution that touts itself as resolutely non-political.

BTW, as if all this wasn’t bewildering enough, there’s a school of thought that supports major Fed tightening even if recession does result – and has supported it for many years. It holds that the super-low interest rates of recent decades have dangerously distorted the economy and indeed sapped its productivity by creating “moral hazard” – incentivizing foolish and indeed wasteful investments by reducing the costs of failure, and leaving less capital over for spending that fosters greater efficiency and technological progress.

I’ve long found these arguments compelling, especially since the global financial crisis of 2007-09 made the dangers of such moral hazard clear. But there’s no sign of concern about this problem anywhere in Washington. The focus there is — somehow — coping with inflation. The next statistics will be out on Tuesday, and the only certainty is that they won’t make the task look any easier.         

(What’s Left of) Our Economy: Why the Fed is Still (Really) Dovish on Economic Stimulus

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CCP Virus, coronavirus, COVID 19, Employment, Federal Reserve, global financial crisis, Great Recession, interest rates, Jerome Powell, lockdowns, monetary policy, moral hazard, QE, quantitative easing, recovery, stimulus, taper, transitory, Wuhan virus, {What's Left of) Our Economy

Yesterday, I tweeted that the Federal Reserve’s just-published statement on its policy plans looked pretty dovish – that is, signaling a continued determination to keep pouring massive amounts of stimulus into the U.S. economy. Most every other student of the economy worth heeding read exactly the opposite into the message and some related materials it issued – including Chair Jerome Powell’s statement at his subsequent press conference that the central bank could start easing off the accelerator as early as November. (One notable exception:  CNBC’s Steve Liesman.)  

Here’s why I’m right – at least in the most important senses – and why the dovishness I see isn’t great news for the American economy at all over any serious length of time.

The folks reading hawkishness into the Fed’s stance pointed to three main reasons for their conclusion, and I’d be the last person to ignore them. First, the policy statement did declare that “moderation” in the central banks’ bond-buying program, known as “quantitative easing” (QE) “may soon be warranted” if the economy’s progress “continues broadly as expected.” That’s a big change even from the July statement’s analysis:

“Last December, the [Fed] indicated that it would continue to increase its holdings of Treasury securities by at least $80 billion per month and of agency mortgage-backed securities by at least $40 billion per month until substantial further progress has been made toward its maximum employment and price stability goals. Since then, the economy has made progress toward these goals, and the [Fed] will continue to assess progress in coming meetings.”

Second, at the press conference, Powell not only hinted at a November start for the so-called “taper” of Fed bond buying.  He added that the process could conclude “around the middle of next year.” So although the change is expected to occur gradually, the Fed is indicating it won’t take forever to accomplish. 

Third, in a regularly issued graphic summary of their (anonymous) future expectations (called the “dot plot”), fully half of these policymakers made clear they anticipated that next year would also see the interest rate they control begin rising. As Powell told the press, taking this step would mean that these Fed officials had seen much more economic progress than that required for the taper of bond purchases they appear ready to begin.

I actually agree that this evidence adds up to more Fed “hawkishness.” But “more” clears only a very low bar for an institution that’s been super-dovish for the better part of the last decade and a half (since it decided to fight the Great Recession following the 2007-08 global financial crisis by opening up the stimulus spigots to an unheard of extent).

In other words, a Fed that for many more months will be continuing to spur growth and employment by purchasing tens of billions of dollars of bonds every month (only less than the current $120 billion) still looks pretty devoted to easy money to me.

At least as important, Powell in particular made clear that the Fed’s expectations for ending what are, after all, measures taken to counter the Covid-induced economic emergency are so fragile that he and his colleagues could change their minds as soon as the current recovery – which has been strong by most measures – veers off track.

It’s true that at the press conference, the Chair stated that all it would take for him to decide that employment was still improving enough to support a prompt beginning of tapering would be a “reasonably good” and “decent” official U.S. jobs report come out next month – not a “knockout, great, super strong” result. (Powell already believes that the nation’s inflation record – the Fed’s other main “taper test” has already been good enough to warrant reducing those bond purchases.)

But aside from questions about how Powell defines “reasonably good,” etc., his remarks show that he (along with his policymaking colleagues, over whom he wields considerable influence) still believes that a single poor jobs report, or similar discouraging development, would suffice to keep the economy on its exact same monumental levels of literal life support even though the patient has long exited the emergency room.

And these exacting standards for merely reducing current stimulus gradually (which, as the Chair himself noted, would still leave its asset holdings “elevated” and “accommodative”) tell me at least that, however well the economy performs, the Fed will be remaining on a super easy-money course pretty much indefinitely.

The one development that could change this picture significantly: a big, sustained takeoff of inflation.

But if Powell’s right (which I believe he is), then the current burst of higher prices results from “transitory” developments peculiar to the dramatic stop-start dynamics created by the pandemic and its policy and behavioral fall-out. Prices, therefore, should start normalizing before too long.

So what’s the problem? First, if the Fed is afraid that the U.S. economy can’t prosper adequately without what are essentially massive government subsidies, that’s a pretty damning indictment of that economy’s ability to generate satisfactory levels of growth and employment and living standards improvements more or less on its own.

Even more important, even if this Fed judgment is wrong, clearly it’s going to keep the stimulus flowing at historically unheard of rates, and historically, anyway, super easy-money has undermined financial stability – and disastrously – by creating what economists call “moral hazard.” That’s the condition in which over-abundant, dirt-cheap resources produce any number of reasons for using these resources foolishly (i.e., unproductively). After all, they drive down the economic penalties for making these mistakes to rock bottom levels by all but eliminating interest costs.

And an economy that uses resources so inefficiently is bound to run into big trouble before too long and suffer punishing and lingering after-effects. If you’re skeptical, think back to that devastating financial crisis and Great Recession – which weren’t so long ago – and to the slowest U.S. recovery in decades that followed. If that’s not persuasive enough, ask yourself why even the easy-money pushers at the Fed are talking about tapering in the first place.

Making News: New National Interest Article on Why the Foreign Policy Establishment Was Always Overrated

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academia, Afghanistan, alliances, Blob, Bretton Woods, China, Cold War, foreign policy establishment, forever wars, global financial crisis, globalism, Iran, liberal global order, Mainstream Media, Making News, Max Boot, Richard Haass, Soviet Union, The National Interest, think tanks

I’m pleased to announce that The National Interest has just published my latest article for an outside publication: an essay on why recent defenses of America’s bipartisan globalist foreign policy establishment (AKA, “The Blob”) wouldn’t hold any water even if this powerful, durable in-crowd hadn’t botched practically everything about Afghanistan. Here’s the link.

Also, a new twist today: Unfortunately, I thought some of the edits undermined the flow of the piece. I’m going to try to get at least some of them corrected. But in the meantime, to show careful readers what they were, I’m presenting below the draft as I sent it off. Let me know if you think I have some grounds for grousing. (P.S. I’m just fine with their title and love the subhead’s reference to the “poisoned well”!)

And keep checking in with RealityChek for news of upcoming media appearances and other developments.

Why the Blob Really Has Been Unimpressive

by Alan Tonelson

So the Blob is starting to fight back. The bipartisan globalist national foreign policy establishment is being blamed both for President Biden’s hellaciously botched withdrawal from Afghanistan, and (including by the Blob-y Mr. Biden himself), for pushing the transformation of a necessary anti-terrorist operation into a naively grandiose nation-building project.

It’s time, the argument goes, to marginalize – or at least view more skeptically – this hodgepodge of former diplomats and Congressional aides, retired military officers, genuine academics, and think tank hacks that has shaped American diplomacy in two critical ways: by being used as the main personnel pool for staffing presidential administrations and House and Senate offices on rotating bases, and for serving up informal advisers for these politicians; and by dominating the list of sources used by overwhelmingly sympatico Mainstream Media journalists to report and interpret the news, and thus define for the public which foreign policy ideas are and aren’t legitimate to discuss.

“Don’t throw the baby out with the bathwater!” Blob-ers are responding.

“The foreign policy establishment did get it wrong in Iraq, where the U.S. overreached,” allowed Richard Haass, who as President of the Council on Foreign Relations would arguably win a contest for Blob-er-in-Chief. “We got it wrong in Libya, we got it wrong in Vietnam. But over the last 75 years, the foreign policy establishment has gotten most things right.”

Washington Post pundit (and neoconservative apostate) Max Boot similarly has declared that “we can confidently say that, overall, the foreign policy establishment has served America well over the past 76 years.”

In other words, look past not only Afghanistan and Libya and Iraq and Vietnam but also the failure to anticipate the September 11 terrorist attack; and the long-time cluelessness about the emergence of security and economic threats from China (following the stubborn, decades-long determination to antagonize China after 1949); and a peacekeeping debacle in Somalia; and the Bay of Pigs fiasco; and the blind loyalty to an Iranian Shah hated by nearly all his subjects. Focus instead on all the – presumably more important – successes. (I’m excluding the numerous Blob-y decisions to back all manner of dictators, primarily in the developing world, and ignore human rights considerations because whatever their ethical flaws, only the Vietnam and Iran policies undermined American interests significantly.)

Paramount among them: victory over the Soviet Union in the Cold War; the protectorate-alliances, foreign aid, and open trading system that keyed this triumph – in the process pacifying and democratizing Germany and Japan – fostering recovery in these former enemy dictatorships as well as the rest of Western Europe; and ushering in decades of record prosperity in these regions.

One obvious rejoinder: Today’s Blob and its most recent forerunners merit zero credit for those achievements because almost none of its members simply weren’t around or in power then. Meaning maybe America simply needs a more competent Blob?

At the same time, there’s inevitably been personnel continuity in the Blob’s ranks over time (think of recently deceased centenarian George Shultz, and the 98-year old Henry Kissinger, both still influential well into their golden years). Moreover, today’s establishment was largely groomed in Blob-y institutions, claims to be acting in that original Blob-y tradition, and has clearly remained stalwart in its advocacy of tireless international activism, and support for what it calls the liberal global order and its constituent institutions created by the older Blob generation. As a result, including those decades-old developments in judgements of today’s Blob is eminently defensible.

And in retrospect, what’s particularly revealing but neglected about these achievements is the extent to which they stemmed from circumstances almost ideally suited for foreign policy success, rather than from Blob-er genius. Globalists of the first post-World War II decades unquestionably faced serious domestic political obstacles to breaking with the country’s historic aloofness to most non-Western Hemispheric developments.

But they also enjoyed enviable advantages. Especially important was global economic predominance, which blunted much criticism on the home front by permitting subsidization of both the security and well-being of enormous foreign populations without apparent cost to American living standards or national finances.

It’s no coincidence, therefore, that as this advantage eroded, and the core Blob tactic of handling problems literally by throwing money at them and refusing to choose meaningfully between guns and butter became more problematic, the Blob’s record worsened – and undercut the intertwined domestic political and economic bases of active and passive public support for its strategies.

In fact, post-Vietnam, it’s difficult to identify any important foreign policy decision that Blob-y leaders have gotten right, or even handled reasonably well, with the exception of the first Persian Gulf War. (Ronald Reagan’s dramatic military buildup certainly helped spend and innovate the Soviets into collapse, but it was opposed by much and possibly most of the Blob, which favored continued containment and the simultaneous pursuit of arms control and detente.)

Just as important, this Blob’s very profligacy meant that many of its biggest post-Vietnam failures were economic in nature. Two leading examples – the messy collapse of the early World War II international monetary system and structural inflation and long sluggish growth that followed; and the 2007-09 global financial crisis and ensuing Great Recession.

Both crises were brought on fundamentally by global financial imbalances stemming from the Blob-ers’ stubborn refusal to support even minimal budget discipline on the foreign policy side; and from their failure to require reciprocal market access for traded goods either in the early post-World War II Bretton Woods monetary system or into its patchwork successors. And both revealed the Blob’s obliviousness to the intertwined imperatives of maintaining the national economic power needed to pay for their preferred policies responsibly; and of defining U.S. interests realistically enough to avoid needless costs and addiction to debt, inflation, or both.

Do today’s attacks, then, mean that the Blob’s demise is in sight? Not nearly likely enough. After all, it’s survived its decades-long string of blunders with its status pretty much intact. It’s bound to be keep being replenished by the same elite universities whose relevant faculty members are overwhelmingly Blob-y themselves. There’s no sign that their corporate funders are backing away from the think tanks that keep its many of its members employed when they’re out of public office. And its record will surely keep being reported principally by a news media that’s thoroughly Blob-y itself. That – frighteningly – leaves a foreign policy catastrophe inflicting lasting damage on the nation as America’s best hope for replacing the Blob even with simply a more genuinely diverse source of experience and expertise.

(What’s Left of) Our Economy: The Real U.S. 2020 Trade Deficit Remained a Record – & Virus-Distorted

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CCP Virus, coronavirus, COVID 19, exports, GDP, global financial crisis, goods trade, Great Recession, gross domestic product, imports, inflation-adjusted growth, real GDP, real trade deficit, recession, services trade, Trade, trade deficit, Wuhan virus, {What's Left of) Our Economy

The final (for now) official report on U.S. economic growth in the fourth quarter of last year and therefore for the full year contained modestly good news both in terms of the entire economy’s performance and its trade flows, but doesn change the big picture of major pandemic-related setbacks and distortions, and the latter likely to continue for the foreseeable future.

Starting at 30,000 feet, the new data show that in inflation-adjusted terms (those most closely watched), America’s gross domestic product (GDP – or the total of goods and services it produces) shrank by 3.49 percent in 2020, a bit better than the 3.50 percent decline reported last month. Real growth received a boost from a fourth quarter during which real GDP expanded sequentially by 4.23 percent at an annual rate, not the (already upwardly revised) 4.03 percent previously estimated.

Given the record nosedive last spring produced by the CCP Virus and related mandated and voluntary curbs on economic activity, and even given the strong (in fact, sequential, record) rebound in the third quarter, such growth isn’t overly impressive. But presumably the rate will accelerate as vaccination spreads, herd immunity finally arrives, lockdowns are lifted (hopefully for good), and consumer regain confidence about in-person services like dining and traveling.

All the same, 2020’s still ranks as the worst U.S. economic downturn since 1946, when after-inflation GDP tumble by 11.60 percent as the nation transitioned from a war-time to a peacetime footing. Last year’s recession was also worse than the real GDP drop of 2009 (2.53 percent), during the Great Recession triggered by the global financial crisis.

As for the constant dollar total trade deficit, it’s now pegged at $926 billion, up slightly from last month’s reported $925.8 billion, but better than the $926.3 billion estimated in the first read on fourth quarter and 2020 GDP. The annual increase was only 0.92 percent, and as a share of the total economy (5.03 percent), it remained well below the all-time high of 5.95 percent (which came at the height of the bubble decade, in 2005), the deficit’s absolute and relative levels are still remarkable given the economy’s contraction – which normally results in a trade deficit decrease. At the same time, as will be discussed below, the 2020 recession was unusual in most respects.

The trade highlights of this morning’s GDP report confirmed once again that the service sector has suffered the greatest pandemic period hit both domestically and internationally. Indeed, during 2020, the longstanding after-inflation American goods trade deficit dipped by 0.71 percent (from $1.1409 trillion to $1.1328 trillion) while the equally longstanding services surplus sank by eleven percent (from $224.5 billion to $199.8 billion).

The new GDP report upgraded America’s total price-adjusted export performance in 2020, estimating their decline to be 12.95 percent, not the previously judged 12.97 percent. But the decrease is still the worst since 1958’s 13.49 percent plunge, and the $2.2169 trillion level remains the lowest since 2012’s $2.1930 trillion.

Real goods exports in 2020 slid by 9.46 percent in today’s GDP report – a little better than the 9.48 percent calculated last month. But as with total exports, these levels still represented multi-year lows in terms of the magnitude of the decline (the fastest since Great Recession-y 2009) and the absolute amount ($1.6138 trillion, the lowest since 2013). As last months real GDP post reminded, though, goods and services trade figures began to be reported separately by the Commerce Department only since 2002.

The deterioration in real services exports was, again, much more dramatic, and faster than estimated in last month’s GDP figures. They plummeted by 19.26 percent on-year, not the 19.16 percent previously reported, and a record by a long shot. And at $620.5 billion, their yearly total is the lowest since 2010.

Total constant dollar U.S. imports, however, seem to have fallen sligthly more slowly last year (9.27 percent) than previously judged (an already downgraded 9.28 percent). Yet this decrease also remained the fastest since 2009, and the $3.1429 trillion level the lowest since 2015.

Consistent with the above results, the inflation-adjusted goods imports fall-off in 2020 was much less than the overall decline. Interestingly, the new 6.05 percent annual decline reported this morning was notably lower than the 5.45 percent decrease reported last month. It, too, however, was a multi-year worst (since recession-y 2009) and the new $2.7466 trillion level is the lowest since 2016.

The annual after-inflation services imports drop in 2020 reported today was unchanged, at a record 22.54 percent, and the same $420.7 billion level was the weakest since 2009.

On a quarter-to-quarter basis, the real trade deficit registered modest improvement, too. Previously pegged at a quarterly record $1.1230 trillion on an annual basis, it’s now estimated at $1.1220 trillion (still an all-time high), and the sequential increase downgraded from 10.20 percent to 10.11 percent.

Two other findings of note: Although the increase in the annual constant dollar total trade deficit reached an all-time high last year, its effect on economic performance was relatively slight. The trade gap’s widening accounted for 0.14 percentage points of that 3.49 percent annual real GDP drop. Proportionately, that’s less damage than was inflicted in 2019, when the higher trade deficit cut 0.18 percentage points from the 2.16 percent overall growth rate.

On a quarterly basis, though, the trade bite was much deeper, as the price-adjusted total deficit’s increase subtracted 1.53 percentage points from the 4.23 percent sequential inflation-adjusted annualized GDP increase. But not even this blow was the biggest ever relatively speaking – or even close. (The all-time worst such performance came in the second quarter of 1952, when 0.85 percent after-inflation annualized growth would have been 2.23 percentage points higher if not for the sequential increase in the trade deficit.)

(What’s Left of) Our Economy: New U.S. Growth Figures Leave Pandemic Trade Distortions Fully Intact

Tags

CCP Virus, coronavirus, COVID 19, exports, GDP, global financial crisis, goods trade, Great Recession, gross domestic product, imports, inflation-adjusted growth, real exports, real GDP, real growth, real imports, real trade deficit, recession, services trade, Trade, trade deficit, Wuhan virus, {What's Left of) Our Economy

Fittingly, because this morning’s release of the first (of two short-term) revisions of the official figures on fourth quarter U.S. gross domestic product (GDP) tell us only a little more than the first about the U.S. economy’s growth at the end of last years, they also revealed little change in what was reported about U.S. trade flows – and how they were affected in 2020 by the CCP Virus.

The fundamental story remains the same: The pandemic has distorted the nation’s international trade tremendously. What today’s report – which describes growth in inflation-adjusted terms (the most widely followed) – shows is that real exports suffered a bit more than previously judged, and their import counterparts were a bit higher. As a result, the overall price-adjusted trade deficit was slightly greater than first estimated.

In addition, the new figures – which will be revised again next month, and several times down the line – indicate that the trade flow deterioration worsened toward the end of the year.

To set the context, the sequential growth rate for the fourth quarter was upgraded in the new release from the previously reported 3.95 percent at an annual rate after-inflation to 4.03 percent. Normally, that would be an excellent performance, but coming after the roughly 30 percent annualized rubber-band-like economic snap back between the second and third quarters, it’s still a major disappointment.

Moreover, the revisions were too small to affect the annual contraction rate for all of 2020, which stayed at 3.50 percent in constant dollars. That’s still the worst yearly downturn since the 11.60 percent nosedive in 1946, when the nation was transitioning from a war-time to a peacetime footing. In fact, 2020’s slump was much worse than the real GDP decline of 2009 – which was part of what’s now known as the Great Recession. That year, America’s output of goods and services after inflation fell by just 2.53 percent.

(Incidentally, sharp-eyed readers will note that this 2020 real GDP figure doesn’t match up with the one I cited here. That’s because that post’s number represented fourth quarter to fourth quarter constant-dollar output change, which tends to produce different results than those generated by comparing the annual figures, which sum up the collective change for all of a year’s four quarters.)

Luckily, the main reason for optimism remains intact, too, despite the humdrum fourth quarter: The pandemic-driven recession was driven by a virus, and by the widespread shutdowns of economic activity literally ordered by government at all level. That appears much less worrisome than the economic circumstances of the bubble decade of the 2000s, when bloated lending and spending masked fundamental weaknesses in the economy. When the finance sector essentially decided that the resulting Ponzi scheme had grown way too risky even for its tastes, a collapse was triggered that nearly took the entire global economy down.

Once again, the magnitude of the distortion of the GDP figures’ trade component came through loud and clear in this morning’s release. Even though the economy shrank – which typically depresses the trade deficit – the shortfall hit a new record in last year. This morning’s reported $926.3 inflation-adjusted level was marginally larger than the $925.8 billion estimated last month, and represents a 0.95 percent increase over 2019.

It’s true that 2020’s price-adjusted trade deficit wasn’t the largest ever as a share of real GDP. At 5.03 percent, it was well behind the all-time worst of 5.95 percent, set in bubbly 2005. But this percentage was astronomical for a recession year. In fact, you’d have to go back to 2002 (which was only partly recessionary) to find a figure even as high as 4.95 percent.

Since the pandemic and restrictions have hit service industries much harder than goods industries, with the travel and tourism sectors experiencing veritable decimation, it’s no surprise that most of the trade deficit deterioration took place in those parts of the economy. Specifically, between 2019 and 2020, the inflation-adjusted goods trade deficit rose by just $830 million, while the services surplus shrank by $24.7 billion. (And now for an apology – last month I reported the reverse, because I accidentally reported the services change in millions, not billions, of dollars.)

The real trade deficit increased last year in part because total constant dollar exports fell, with the new revisions reporting the drop at 12.97 percent, rather than the 12.96 percent estimated last month. That decrease is the biggest in percentage terms since 1958’s 13.49 percent plunge, and the $2.2165 trillion level was the lowest since 2012’s $2.193 trillion.

The 2020 decrease in goods exports was revised this morning from 9.46 percent to 9.48 percent, and this slide – the steepest since 2009’s 11.86 percent – brought the year’s level to $1.6136 trillion, the lowest since 2013’s $1.57 trillion. (Goods and services trade figures began to be reported separately by the Commerce Department only since 2002).

The new revisions actually showed a marginally better performance for real services exports. Rather than sinking by 19.20 percent in 2020, the dropoff is now judged to be 19.16 percent. But the fall is still a record by a long shot, and the new $620.2 billion level still the lowest since 2010’s $609.2 billion.

Total after-inflation constant dollar U.S. imports were lower in 2020 than in 2019, too, but the contraction was smaller than that for total exports. Today’s revisions report the annual decrease as 9.28 percent versus the previously reported 9.29 percent. This drop was still the biggest in percentage terms since recessionary 2009’s 13.08 percent, and the $3.1426 trillion absolute level was still the weakest since 2015’s $3.0948 trillion.

The reduction in goods imports was as relatively modest as that in goods exports, as they came in 5.45 percent lower in 2020 than in 2019. But last month, the drop was reported at a bigger 6.05 percent – still the biggest since recessionary 2009’s 15.30 percent. And the new $2.7642 trillion level is still the lowest since 2016’s $2.6477 trillion.

The annual services imports decrease in 2020 was also smaller than initially reported – 22.54 percent versus 22.59 percent. Nonetheless, this yearly shrinkage, too, was still by far the greatest ever, and the $420.7 billion level still the lowest since 2009.

On a quarter-to-quarter basis, the previously reported quarterly record $1.1211 trillion total real trade deficit at annual rates for the last three months of 2020 is now estimated at $1.1230 trillion. And the increase over the third quarter level has gone up from ten to 10.2 percent.

Quarterly total real exports today were judged to be 5.06 percent higher than the third quarter level, not 5.10 percent higher, but the new $2.2761 trillion annualized figure was still 8.78 percent below the level of last year’s first quarter – the final pre-pandemic figure.

The fourth quarter’s sequential rise in real goods exports was also revised down this morning – from 7.65 percent to 6.95 percent. But at $1.7224 trillion annualized, they’re just 2.94 percent below the first quarter total.

Not surprisingly, the quarterly export lag in services was much worse. The fourth quarter’s price-adjusted real sequential improvement was only revised down from 1.07 percent to 1.04 percent. But the annualized figure of $587.4 billion was a whopping 19.55 percent below that final first quarter pre-pandemic level.

Total constant dollar imports for the fourth quarter are now judged to have risen by 6.71 percent over the third quarter, not 6.67 percent. At $3.3991 trillion at an annual rate, they’re now 3.53 percent higher than during that immediate pre-CCP Virus first quarter.

After-inflation goods imports are estimated to have risen a bit more slowly on a quarter-to-quarter basis – by 5.25 percent between the third and fourth quarters instead of the previously reported 5.27 percent. Even so, as of the end of last year, they were running fully 8.49 percent higher at an annual rate ($3.0230 trillion) than during the first quarter.

Real services imports, however, expanded faster than previously reported – by 5.52 percent over third quarter levels, not 5.16 percent. But even though they’re now up to $415 billion at annual rates, in real terms, they still 17.41 percent below their pre-pandemic levels.

(What’s Left of) Our Economy: A Feeble Case Against U.S. Populism

Tags

bubble decade, CCP Virus, coronavirus, COVID 19, Donald Trump, France, GDP, Germany, global financial crisis, gross domestic product, per capita GDP, Populism, real GDP, Wuhan virus, {What's Left of) Our Economy

Since I’m still glad that Americans elected a President with strong populist leanings in 2016 (however flawed he was in all the temperament and character ways on full display after his reelection loss), I was especially interested in a new academic study on how well populist leaders have run their nation’s economies when they’ve had the chance.

And since I’m particularly keen on properly assessing former President Trump’s record in this regard (it’s the selfish American in me), I was especially disappointed that this research on “The cost of populism” said nothing useful at all about the subject because it lumped the experiences of populist leaders in widely divergeant economies and across many equally divergeant periods of time into one category. Therefore, I thought I’d provide some perspective.

The authors, a trio of German economists, are pretty emphatic in their conclusion:

“When populists come to power, they can do lasting economic and political damage. Countries governed by populists witness a substantial decline in real GDP per capita, on average. Protectionist trade policies, unsustainable debt dynamics, and the erosion of democratic institutions stand out as commonalities of populists in power.”

And they highlight their finding that, after taking into account the circumstances faced by populist leaders once they’ve gained power or office (which presumably were pretty bad – otherwise, as the authors recognize, why would the populists have succeeded in the first place?), right after a populist victory, such economies as a group fared increasingly worse in terms of their growth rates compared with economies headed by more establishmentarian leaders. To their credit, the authors also try to adjust for whether the countries examined faced financial crises just before their populist political experiments began.

The question remains, though, whether a study encompassing and deriving averages or medians from a group of countries containing many chronically impoverished lands, as well as the high-income United States, can tell us about the latter, whose single populist leader during the period studied served for just a single brief term. Interpreting this American experience is further complicated by three important, concrete factors the authors apparently haven’t considered.

First, the pre-Trump growth rates of the United States were artificially inflated by interlocking bubbles in housing and consumer spending. And because the growth stemmed largely from these massive bubbles, by definition it should never have reached the levels achieved. So viewing that bubble-period growth as an achievement of establishment leaders isn’t exactly kosher methodology. Even more important: The financial crisis that (inevitably) followed these establishment-created bubbles nearly crashed the entire world economy. So maybe this debacle deserves at least a little extra weighting?

Second, U.S. growth during the populist Trump years compared well with that of the second term of the establishment-y Obama administration, especially before the CCP Virus struck and much economic activity was either voluntarily depressed or actually outlawed. For example, during the first three years of Donald Trump’s presidency, gross domestic product (GDP) after inflation (the most widely followed measure), increased by 7.68 percent. During the first three years of the second Obama term, it rose by 7.63 percent. And don’t forget: American economic expansions usually don’t speed up the longer they last.

Even if you include the results of pandemic-stricken 2020, real GDP improved by 3.90 percent under Trump – a rate much lower than the four-year Obama total of 9.47 percent, but hardly disastrous. Moreover, since this growth has already begun accelerating once again, the claim that Trump’s policies did lasting damage looks doubtful.

The price-adjusted GDP per capita statistics (i.e., how much growth the economy generates per individual American), tell a similar story. During the full second Obama term, this number improved by 6.25 percent as opposed to the four-year Trump advance of just 2.46 percent.

But the pre-CCP Virus comparison shows a 5.58 percent climb under Trump versus 4.81 percent during the first three years of Obama’s second term. And here again, the levels have snapped back quickly so far after plummeting during the worst pandemic and lockdown months. Therefore, the populist Trump administration likely left the pre-Trump trends intact at the very worst.

Third, if you want to go international, the Trump economic record holds up well compared to those of establishment leaders in Germany and France. During the CCP Virus year 2020, France’s economy shrank in real terms by 5.01 percent, and Germany’s by 3.88 percent. The U.S. contraction? Just 2.46 percent.

No reasonable person would conclude that these comparisons prove once and for all that American populism has been vastly superior in economic policy terms. And it’s entirely possible that the U.S. record has no or few lessons to teach other countries. But for Americans, nothing in this paper indicates that they’ve paid any “cost of populism,” and a deeper dive uncovers evidence that they’ve actually benefited.

(What’s Left of) Our Economy: Records and More Puzzles in the GDP Report’s Trade Numbers

Tags

(What's Left of) Our Economy, CCP Virus, Commerce Department, coronavirus, COVID 19, exports, GDP, global financial crisis, goods, Great Recession, imports, inflation-adjusted growth, real GDP, real trade deficit, recession, services, Trade, trade deficit, Wuhan virus

So many all-time and multi-year and even decade worsts revealed by the trade data revealed in the official U.S. economic growth figures released this morning! And even though these data on changes in the gross domestic product (GDP) for the third quarter of this year are pretty meaningless from an economic standpoint – because they’re so thoroughly distorted by the government-ordered shutdowns and reopenings due to the CCP Virus – they’re worth noting for the record, anyway.

But here’s something else worth noting – as with the last batch of GDP figures (the final-for-now results for the second quarter), the trade figures don’t seem to add up.

Let’s start with the records. Largely due to the strongest sequential U.S. growth on record (33.1 percent after inflation on an annualized basis), fueled by significant reopening plus massive government stimulus or relief funds (choose your own label), the quarterly inflation adjusted trade deficit hit an astounding $1.0108 trillion annualized. (The inflation-adjusted, or “real,” statistics are the ones most closely followed; therefore, unless otherwise specified, they’ll be the ones used from hereon in.)

Not only was that total a record in absolute terms. The 30.41 percent increase from the final second quarter level of $775.1 billion was the biggest since the Commerce Department began presenting trade deficit figures (as opposed to the simple export and import findings) in 2002. For context, the next greatest such jump was only 13.18 percent, between the first and second quarters of 2010.

The economy was recovering then, too – from the Great Recession that followed the global financial crisis – but that quarter’s annualized growth rate was only 3.69 percent.

As known by RealityChek regulars, the GDP reports treat increases in the trade deficit as subtractions from growth, and the third quarter’s was the worst in absolute terms (3.09 percentage points from that 33.1 percent annualized growth total) since the 3.22 percentage points sliced from growth in the third quarter of 1982. (For some reason, these data go back even further than that.)

In relative terms, though, the trade effect in 1982 couldn’t have differed more from the situation this year, as during that third quarter, the economy shrank in price-adjusted terms by 1.5 percent on an annual basis.

But those internal numbers!

According to the Commerce Department, exports in the third quarter added up to $2.1667 trillion annualized. But if you actually add the separate goods and services numbers provided, you get a sum of $2.1921 trillion. On the import side, the separate figures add up to a total of $3.2123 trillion, not the reported $3.1775 trillion. Therefore, the quarterly deficit would seem to be $1.0202 trillion, not the $1.0108 trillion presented.

As with the previous discrepancies, although this batch’s aren’t big enough to change the overall picture, they do raise some questions about the reliability of the rest of the data. So I’ll be hoping that the apparent confusion will be cleared up a month from now, when Commerce releases its second estimate for third quarter GDP – but not holding my breath.

(What’s Left of) Our Economy: Mixed U.S. Trade News for June – but Little Good on China or Manufacturing

Tags

CCP Virus, China, coronavirus, COVID 19, exports, global financial crisis, goods, Great Recession, imports, manufacturing, merchandise trade, Phase One, Trade, trade deficit, Wuhan virus, {What's Left of) Our Economy

This morning’s report from the Census Bureau on the newest (June) monthly U.S. trade figures is classic mixed bag – at best. The combined goods and services deficit came down for the first time since February, and a several new export growth records were set. Yet the results in China goods and manufacturing trade disappointed and the export records come with big asterisks – the strong growth followed much steeper CCP Virus-related nosedives.

The total U.S. trade gap narrowed by 7.48 percent on month in June, from May’s upwardly revised $54.80 billion to $50.70 billion. The results brought this trade deficit down 16.86 percent year-to-date – from $297.45 billion to $274.31 billion.

The monthly improvement was led by an all-time best 9.38 percent jump in exports – from $144.69 billion to $158.25 billion. (The data, which go back to 1992, show that the previous record was 8.52 percent, set in February, 1994.)

All the same, the June monthly goods and services export total was still the third lowest (after the April and May figures) since August, 2010’s $157.77 billion. In this vein, the June export advance needs to be seen in the context of the all-time worst 31.67 percent cratering of exports that occurred between February and May. Indeed, this three-month nosedive dwarfed that experienced during the gloomiest three months of the Great Recession that followed the global financial crisis (17.12 percent between October, 2008 and January, 2009). Moreover, total exports are down 15.75 percent on a January-June basis.

As for total imports, they rose 4.74 percent sequentially in June from an upwardly revised $199.49 billion to $208.95 billion. The increase, while not as historic as that for exports, was nonetheless the biggest since March. 2015’s 6.71 percent (also affected by natural disruption – that winter’s blizzards).

Yet virus-related distortions were clearly at work here, too, as the June import increase followed a 19.05 percent drop in total U.S. purchases from abroad between February and May. (Interestingly, the Great Recession’s greatest three-month import fall-off was a slightly larger 22.32 percent – and as with exports, took place between October, 2008 and January, 2009.)

For flows of goods specifically, the 5.29 percent June decline in the trade deficit (from an upwardly revised $76.18 billion in May to $72.15 billion) was also the first monthly decrease since February.

June’s 14.49 percent monthly advance in goods exports was another record – significantly exceeding the 9.01 percent registered in March, 1994. Even so, this impressive performance represented another incomplete recovery from a virus-related blow. For it came on the heels of a 35.01 percent collapse in these shipments between February and June – a fall-off much bigger than that seen between the Great Recessionary period between October, 2008 and January, 2009 (21.51 percent).

So it shouldn’t be surprising that June’s $102.87 billion goods export figure was the third lowest (again, after April and May) since April, 2010. Moreover, on a year-to-date basis, goods exports are 16.74 percent below 2019’s levels.

Goods imports were up 5.42 percent month-to-month in June. As with total trade, this change was considerably smaller than that for exports, and below the record of 7.78 percent set in March, 2015. (Those blizzards again.) But it, too, was CCP Virus-distorted, since it followed a 16.42 percent fall from Feb. through May.

The US-#China goods #trade deficit rose by 6.46% on-month in June, from $26.96 billion $28.40 billion. The only good news embedded in this result is that the monthly rate of growth slowed maredly from May’s 19.99 percent. The June number, moreover, was the highest since last October’s $31.26 billion.

Most discouraging – U.S. merchandise goods exports to the recovering economy of the People’s Republic were down 4.14%, month-to-month, from $9.64 billion to $9.24 billion. Especially important – overall U.S. goods sales to China on a January-June basis are running nearly 16 percent below their 2017 level, the baseline year for judging Beijing’s U.S. import commitments under the Phase One trade deal. The total import number doesn’t necessarily mean that China is way behind on this pledge, since it covered many specific sectors of the economy. But so many sectors are covered that the lag does raise important treaty violation questions.

U.S goods imports from China rose 2.85 percent sequentially in June, from $36.60 billion to $37.64 has also slowed significantly from the 17.79% monthly jump in May and the nearly 57 percent surge in April. That month’s performance reflected the restart of China’s factories following widespread CCP Virus-related shutdowns that depressed these sales to the US by 40.49 percent between January and March.

Manufacturing’s June trade figures were even worse. The deficit increase 5.30 percent over May’s $84.68 billion total, and the new $89.16 billion mark was the biggest since last October’s $92.70 billion.

Between May and June, manufacturing exports grew a healthy 15.46 percent, from $61.88 billion to $71.45 billion. But the much greater amount of imports expanded strongly as well, from $146.55 billion to $160.61 billion, or 9.59 percent.

Year-to-date, though, the manufacturing trade deficit is off by 4.53 percent, with exports running 17.17 percent below comparable 2019 levels and imports 11.24 percent less.