Section 4. Impacts of the runaway trade deficit (2): Inevitable consequences

After probing the motivation of enacting the runaway trade deficit based Globalization Scheme, in this section we will investigate the inevitable consequences induced by the runaway trade deficit.

Diminishing personal saving

As discussed in the previous section, there existed two money pools in the era before the runaway trade deficit based Globalization Scheme. Those two money pools are the commercial banking system, and the money pool dominated by the money of insurance companies. Money lent out of those two pools served as the seed money to move the whole economy. Too much seed money reduces consumer spending, and too few seed money will restrain business borrowing and thus the business activity. Both cases will reduce the growth rate of the economy. The invisible hand of the free market will keep the amount of seed money at the proper level to ensure an optimal economic growth under a given environment.

It has been pointed out already that the trade-deficit-generated dollars must be returned to the U. S. market and be lent out to the highest bidders. This means that the trade-deficit-generated dollars are also serving as the seed money. Now there will be too much seed money if the seed money from the previous two money pools are not reduced. Since there is no reason for insurance premium to decline in the era of Globalization, it was the personal saving must drop as the trade deficit ran wild. Actually the data shows that as the trade deficit explodes, the personal saving rate indeed has declined. At the peak of the trade deficit, the personal saving rate had litterary dropped to near zero.

Unavoidable deregulation of commercial banks

In the era before the runaway trade deficit, the major source of funding of commercial banks came from personal saving. However, as the runaway trade deficit starts, the personal saving has dwindled as has been discussed. Commercial banks had no choice but to borrow from the pool of returning trade-deficit-generated dollars in competition with Wall Street speculators. Since tightly regulated commercial banks are only allowed to make loans to consumers and businesses, the yield from those businesses cannot compare with the yield form speculations. This means that regulated commercial banks could not have competed with Wall Street speculators to borrow money from the pool. Either deregulate commercial banks or see them been wiped out. The route to deregulate commercial banks were chose. As the result large commercial banks have become just like Wall Street speculators. Some so called experts do not understand that the real culprit is the runaway trade deficit, and arbitrary pointing finger to the deregulation of commercial banks as the source of all evils. Even if commercial banks had not been deregulated, the self-destruction of the runaway trade deficit based Globalization Scheme could not have been avoided as we will see later.

We should also note that the opening of the flood gate of money market mutual funds to consumers has also speed up the demise of regulated commercial banks. Without FDIC insurance, those money market mutual funds offer higher yield than bank deposits. As personal savings are attracted to money market mutual funds for higher yields, the demise of commercial banks has quickened.

Bubble, bubble and bubble

We know already that the runaway trade deficit has allowed Wall Street speculators to leverage and blow bubbles. Thus bubble after bubbles have indeed been blown by Wall Street speculators as will be detailed in Sections 7, 8 and 9 later.

Disinflation and the longevity of booms

The runaway trade deficit means the influx of inexpensive foreign made goods. This naturally suppressed inflation. With timid inflation. The Federal Reserve will be able to keep interest rate low for many years, causing the boom tied to bubbles last longer. For example, the boom from Reagan's junk-bond bubble had lasted almost ten years. Clinton boom based on the dot-com bubble had lasted almost nine years. Bush boom based on the mortgage and housing bubble had last a much shorter time than Reagan and Clinton booms, but that was due to the self-destruction of the runaway trade deficit based Globalization Scheme.

Now let us see some actual data about inflation and interest rate. At the right, a graph borrowed from Comment 31 is posted. The red curve in the top portion of the graph is CPI (Consumer Price Index) and the green curve is the federal funds rate, that is, the short-term interest rate that is controlled by The Federal Reserve. We can see from the red curve that inflation rate has indeed plunged since the onset of the runaway trade deficit at early 1980s. Following the falling CPI, the the green short-term interest curve has also declined in synchronization. Before the era of the runaway trade deficit, recessions were triggered by the substantial rise of interest rates. However, in the era of the runaway trade deficit, interest rate had not risen at all before the 1991-1992 recession, and the interest rate had risen only by a small amount prior to the 2000-2001 recession. In the following two sections we will show that the recessions in the globalization era are triggered by the wane of trade deficit. The wane of the trade deficit is in turn triggered by the depreciation of U. S. Dollar against the currency of major trade-surplus countries.

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