Thursday, June 29, 2017

Mailvox: Free trade and private debt

A college student asks if there is a link between the two:
Over the years in which the US has abolished trade barriers and enacted a multitude of international free trade agreements we have experienced a massive increase in trade deficits, national debt, as well as personal debt. I can see the obvious connection between free trade trade, trade deficit's and national debt but is there a connection between free trade and the rising PERSONAL debt? If so what is this connection? Furthermore if we had trade barriers in place would Americans not still have rising personal debt as they instead spend the same amount on domestic products rather than international? 
There is certainly a correlation between increasingly free trade and private debt, but I doubt the relationship is a causal one. For one thing, the decline in private debt which began in 2008 was neither caused nor echoed by a similar decline in free trade.

The economic logic also doesn't support a causal link. Private debt is mostly linked to big-ticket items such as homes and cars. Free trade in goods is mostly neutral on the former and negative on the latter with regards to debt. While the free movement of peoples would tend to increase debt, more people being able to take out more loans, that's not going to alter the debt per capita rate much, for obvious reasons.

One of the major components of private debt is education-related debt, and that has nothing to do with free trade. So, I would say there is no meaningful link between free trade and private debt.

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Blogger Johnny June 29, 2017 7:27 AM  

There used to be a thing called the business cycle. It still holds up a little, but not so much as in the past. The apparent decline in the cycle is a combination of Keynesian economic thinking along with the willingness of modern governments to manage or attempt to manage the level of economic activity.

It could just as well be called the debt cycle because it was the ease with which credit was made available that drove it along. Start out with "tight money" defined as a great reluctance on the part of borrowers to take risk when lending money. That produced loans that were very safe and almost never went bad. That produced an expanding willingness for borrowers to take a low level of risk, more loans were made, and the economy expanded. The expanding economy made loans more secure, which made borrowers more willing to borrow and so on.

Wash rinse and repeat and in thirty years time, or sixty years time, credit became overly abundant, some class of loans started to go bad, and borrowers tightened up. The economy started to slow, more loans went bad, and down and down we go. The end would be recession or depression and back to very tight money.

Summing it up, the business cycle was a credit cycle, and we had numerous of these. Borrowing for speculation on western land triggered a debt expansion that in turn produced a credit contraction that produced a recession-depression that goes unrecorded because the data is not good enough to document it. And we had a machine tool credit blowout, a railroad blowout, and so on. Now because the gov steps in the reaction is less, but it still goes on. The S&L crises, the Dotcom bust, the recent real estate home loan bailout, and so on.

The downside of gov intervention is that we never get a meaningful credit tightening. That in turn has produced this ballooning up of debt, some of it plainly not secure. Where it ends nobody knows, except along the way we have these huge debt loads.

Anonymous Athor Pel June 29, 2017 7:37 AM  

If you don't go to college how can you compete against H1B holders? But that's not trade related exactly except in the mobility of labor sense.

The free trade agreements did gut American manufacturing. All those jobs went away but the people didn't. Using a credit card to pay some bills while they look for another job likely happened to millions of Americans.

Anonymous glosoli June 29, 2017 7:40 AM  

*Free trade* in Eurodollars has been the main factor in debt increasing the world over.

Americans tend to forget that the suspension of the Bretton Woods gold window was only ever temporary.

Eurodollar balances have been declining since the credit crunch, hence such an anaemic recovery. All part of the BIS plan to kill off the USD.

Blogger dadofhomeschoolers June 29, 2017 7:43 AM  

Um, the cycle is as old as the history of money. If you remember GOD told the Israelites that credit needs to crash every 7 years. The Mystery of the Shemitah and Know the Times Change your World both illustrate how every boom and bust is pretty predictable.The hubris of world "leaders" in attempting to circumvent that cycle to their own gain is part of man's rebellion.
Thanks Vox, keep up the good work.

Blogger Johnny June 29, 2017 7:49 AM  

I would imagine the existence of large foreign debts makes it easier emotionally to tolerate large domestic debts. Plus of course the government backs the stuff. That is critical to the student loan stuff because it is not that secure.

What I wonder about is to what extent the IMF and World bank are really an effort at dollar diplomacy, getting leverage over foreign countries with easy credit along with the threat of withdrawing credit.

Anonymous HI June 29, 2017 8:14 AM  

As the original comment noted, there's an obvious connection between national debt (meaning total debt, public+private) and the trade deficit. They are linked by the accounting identity that the current account must balance the capital account as a definitional matter (see Michael Pettis). This part is simple. The direction of causality is more complicated, and here you have to look at details. In the case of national debt, the causality runs mostly from the capital to the current account--in other words, China and other Asian governments buy US assets in order to cause a trade surplus for themselves, and not as a result of an endogenous trade surplus.
I don't have a good answer for the original poster's question, other than to note that Vox's claim that "The economic logic also doesn't support a causal link" is obviously wrong. There clearly is a causal link, but it's complicated, and again you'd have to look at details. As a starting point, there probably is an accounting identity similar to (capital account=trade account) that you could use to see the connection to personal debt, but I don't know exactly what that would be. A good economist or finance guy should be able to figure it out though. Vox, read Michael Pettis' The Great Rebalancing before posting any more on this topic.

Anonymous HI June 29, 2017 8:20 AM  

Here's an explanation regarding the link between public debt and trade. The mechanisms would be different for private debt, but the general logic is similar.

Blogger Joshua_D June 29, 2017 8:31 AM  

Athor Pel wrote:If you don't go to college how can you compete against H1B holders? But that's not trade related exactly except in the mobility of labor sense.

The free trade agreements did gut American manufacturing. All those jobs went away but the people didn't. Using a credit card to pay some bills while they look for another job likely happened to millions of Americans.

This is what I was thinking. Free trade HAS gutted American blue collar jobs. You can no longer graduate high school and make a decent living. In order to simply have a chance at a decent wage, young people are loading up on student loan debt. Combine that with people using credit cards to buy groceries, etc., and a desire to finance cars, appliances, tvs etc. to live what is considered a middle-class lifestyle, then you have a recipe for rising private debt caused by free trade policies, at least indirectly.

Anonymous FriedChicken June 29, 2017 8:32 AM  

While the free movement of peoples would tend to increase debt, more people being able to take out more loans, that's not going to alter the debt per capita rate much, for obvious reasons.

The free movement of people will increase the per capita debt of desirable locations (ie Western Countries), where the increased housing pressure would over-inflate the property markets. Australia, Canada and New Zealand would be prime examples. Having said that, those examples could also be a result of bad government policy. In Australia's case - negative gearing.

Blogger OGRE June 29, 2017 8:37 AM  

Housing related debt is by far the largest household debt, which saw a dramatic rise up until 2008, making up about 67% of personal debt loads. Thats followed by student loan debt of 10% and auto loans of 9%, which were increasing slightly until 08 but have been rising at a much faster rate since then, particularly the student loan debt. Credit card debt has remained pretty stable over the last 15 years (6%), although it had risen significantly over the prior 15 year period.

I don't see a causal link between any of these and increased foreign trade, and the only one really affected by foreign trade directly is auto. The causal factors on each of those debt types are numerous and seem to be mostly influenced by domestic policy decisions at the federal level, particularly those made by the FED but also changes in tax laws and banking regs. Just looking at those top three categories (housing, student loan, auto) its pretty easy to spot where such changes pushed the aggregate debt load higher. For instance, whenever the laws were changed making bankruptcy more difficult for student borrowers its immediately followed by an increase in overall student loan debt. (A significant decrease in the riskiness of making student loan debts leads to an increase in loans available for student borrowers; followed by universities 'adjusting' tuition rates accordingly.)

In general though it seems a lot of it goes back to bretton woods. Significant personal debt was almost non-existent prior to that, relative to todays standards.

Anonymous peter June 29, 2017 8:40 AM  

ok - so lets look at examples college debt as private debt -- in my youth there were 10 factories down the road that you could get a job are right out of high school, work there and have a middle class life -- Now everyone has to go to college, even those that should NOT be going to college, and they get large debt for a degree in art history ... and now still no job... Since it was free trade that closed the factories, there's a link there.

Anonymous peter June 29, 2017 8:44 AM

Blogger Shimshon June 29, 2017 9:00 AM  

Isn't it possible that because foreign trade is settled in dollars instead of gold, that any surpluses have to find their way back to the US, as credit?

This seems somewhat close to blaming China for a "savings glut" a la Bernanke (or was it Greenspan?), but couldn't it be said that much of the debt boom couldn't happen absent a fiat (or credit) money environment coupled with free trade with countries like China that can undercut just about anything Americans can make?

Blogger OGRE June 29, 2017 9:14 AM  


sure thats a factor..if increased foreign trade leads to lower domestic income levels (less jobs and lower wages), and lower domestic income leads to increased demand for personal debt. But the same could be said of the increase of women in the workforce which has greatly contributed to wages being stagnant since the 70s.

I don't think the effect of foreign trade on domestic employment factored heavily in the housing bubble; if anything it would have exerted downward pressure on housing prices as lower incomes would lead people to seek less expensive housing. But we saw the exact opposite of that, people have been buying much more housing in the past 15 years than they had previously.

And while less manufacturing jobs could lead to a greater demand for college education, and thus increased demand for student debt, that doesn't seem to explain the absolute explosion in student debt over the past 20 years. Less manufacturing jobs also wouldn't affect the supply of student debt; the increased supply is a result of the increase in profitability of lending to students which is almost entirely a result of increased gov guarantees of student loans and the removal of bankruptcy protections for borrowers.

Blogger bosscauser June 29, 2017 9:39 AM  

They keep lending me money I keep borrowing.
Then I get to keep my stuff after I go bust!

And rinse n repeat as the jobs go somewhere looking for better investor returns..

Government makes it so!

Blogger Johnny June 29, 2017 9:47 AM  

Along with the other stuff there would seem to be a casual linkage between debt and the distribution of income. Rich people are net savers, the poor net borrowers. Plus stagnant or slightly declining incomes tend to encourage borrowing. People want to stay at or above their ordinary level of spending.

We do not see a ballooning up of debt in poor countries because often the poor lack credit. In the US even below average income people can borrow heavily, no doubt accounting in part for our high levels of debt.

Anonymous JamesD June 29, 2017 10:15 AM  

Lower wages. Doesn't force you to take on more debt, but makes it more probable. Also inflation caused by money printing: college tuition, car prices, and medical costs.

Anonymous Jen June 29, 2017 10:41 AM  

You can't see it in the numbers directly, but for many there has been a shift from:

"I will go ahead and buy this on credit, no worries, because my job is secure and I can easily make the payments"


"I need to buy this on credit so that I can survive/keep up appearances, and I hope that I will be able to someday pay it off."

Blogger OGRE June 29, 2017 10:51 AM  

We're just looking at the demand side...the consumer demand for debt...and what shifts that up. But to fully explain the increase in debt we need to look at the supply side too; whats made it more desirable for lenders to issue more loans? Banks won't give loans to those with little income and no assets if theres no profit to be made.

Blogger Johnny June 29, 2017 10:57 AM  

OGRE wrote:Banks won't give loans to those with little income and no assets if theres no profit to be made.

For a house loan it used to be income and assets in the form of a down payment. Now the gov is often a covert or direct guarantee-er of of loans, making even ill advised real estate loans profitable.

Blogger modsquad June 29, 2017 11:03 AM  

The purpose of free trade is wage control for major corporations. Look at the auto industry as an example. The NAFTA (North American Free Trade Agreement) removed import/export tariffs for large corporations between the U.S., Mexico and Canada. This allowed auto makers to assemble cars in Mexico without any trade penalty for bringing finished vehicles back into the U.S. market. Building cars in Mexico means no UAW union to deal with, no pension contributions to make, no health care services to provide their workers, and hourly wages that were less than 1/4 they were paying to American workers.

Did all these savings cause the prices of cars to drop? No, prices didn't change, the difference in manufacturing costs went into the pockets of the Big Three. As for personal debt, the guy in Michigan that used to assemble Chevys for $30/hr was now out of a job and left with pushing a broom at his local high school for $8/hr. Never mind that he had a mortgage based upon his earnings of $30. All that value of the labor moved to other countries, wiping out the earnings of locals.

To cap it off, there are certain jobs that simply can't be exported to Mexico or China. Plumbers, electricians, mechanics, etc.... how can the powers that be bust down those wages like they did with manufacturing? Unlimited immigration. Bring the third world here and let that unionized electrician compete with a guy that will work for half or less.

This is what got Trump elected and this is why the power structure is fighting him every day. The goal is slavery without the responsibility of housing and feeding the slaves.

Anonymous peter June 29, 2017 11:09 AM  

Orge wrote "But the same could be said of the increase of women in the workforce which has greatly contributed to wages being stagnant since the 70s."

First. thank you for the well thought out response. All excellent opinions.

I could not agree more - the changing of the traditional role of women as mother, child rearing and homemaker to whatever we call today's role is greater than immigration, greater than free trade ... its one of the single most significant factors. It was in-fact the first wave of outsourcing (in this case from men to women), it drove the post war commercialism .. etc .. evetual failure of families, single parent/no father ghettos ... all bad things. Traditional women were the glue that held things together -- when they got liberated -- there was no more glue.

Blogger dc.sunsets June 29, 2017 11:50 AM  

Birds of a feather...

I concur, no causal relationship, but all of the pathological economic, social and political trends of the last 50 years clearly (to me) spring from Fifth Wave social mood optimism, capped by a once-in-three-centuries social mood mania.

Unprecedented credit inflation, asset manias, shift from manufacturing to services, magic dirt, blank slate, worship of political centrism, it all looks like different hues of the same light, just defracted.

Blogger Carl June 29, 2017 1:04 PM  

Most of this stems from a basic lack of understanding associated with bank generated debt-based credit being used as if it were money, and actual money. There is a current recorded total of $1.9-Trillion in credited demand deposit accounts yet the economy churns over $-Trillion in credit transactions on a daily basis. We export out of the economy an average of $7.3-Billion in "credit dollars" on a daily basis. U.S. corporations import $6-Billion of that exported $7.3-Billion as gross profits, on a daily basis. Wall Street churns an average of $90-Billion on a daily basis. And banks are the intermediaries in 100% of those transactions. All on $1.9-Trillion in credited demand deposit accounts and banks holding just $74-Billion in legal tender dollars to cover all of it.

The $9.3-Trillion in bank credited savings accounts are not a factor in any of this, as "savings accounts" are nothing more than dormmate bank debt given 'monetary' credibility by banks crediting interest to the accounts, more bank debt. I suspect that at least 1/4th to 1/3 of what's credited to savings is the product of bank administered 'sweeps' programs, which would possibly account for the high volume in daily credit transactions with only $1.9-T in credited sight-deposits.

The whole capitalist system is designed to extract profits from the economy. Imports come into the economy for the express purpose of extracting profits from the economy. What's left of our industrial base produces $2.2-Trillion annually and that is supposed to be the basis for $18-Trillion in annual economic churn? It is reported that 47% of the economy is government, where does it extract the 'money' to run? An estimated 70% of all jobs in the U.S. are non-productive busy-work jobs, and I suspect that's a lowball estimate.

Where are we, the economy, getting all this 'money' to continue to function as an economy? Bank generated private credit.

Blogger Kevin June 29, 2017 1:10 PM  

Only public companies were able to go into debt. That changed in the 1920's. I think most people know what happened around 1929. Yes, people would buy houses with all cash (or a note from a bank). The implications are way too broad for someone like me to be able to understand. Almost no one talks about pre 1920's america. You get a fee references to the 1910 boom, but what about the 1800 or 1700's. Just lost down the memory hole?

Blogger Carl June 29, 2017 2:21 PM  

In a system based in physical 'money', the natural deflation resulting from innovation frees money to pursue other ventures and increases overall standards of living. When you pay back loans, the money received gose into a pool of loanable funds that can be loand again. Even if businesses fail in this environment, it simply frees the misallocated capital (money) to be used elsewhere.

In contrast, a system based in 'credit' being used as if it were money, that same natural deflation resulting from innovation simply leads to less 'credit money' being created, any economic gains that would have been achieved are offset by less 'credit money' available. When you payback a credit money loan, that credit money ceases to exist, there is no pool of loanable funds, new credit money has to be created to replace the credit erased, which requires someone willing and able to go into debt. The same occurs when a business fails in a 'credit money' system, the capital (credit money) ceases to exist as credit and reverts to its natural form, debt.

Asset values form the backbone of modern debt based banking. Asset values are the source of bank liquidity and the determining factor in their solvency. Asset values backs every penny's worth of 'credit money' (bank debt) created by banks, which fuels 97% of all U.S. commerce. A bank's 'liquidity' and solvency is the product of the value of the assets it holds and the value of the assets used as collateral for the 'loans' it generates. Therefore a sustained fall in asset values decreases bank liquidity, (which is nothing more than asset values in excess of liabilities) and threatens their solvency. Carried too far, the bank goes insolvent and all 'credit money' generated by the bank that is dependant upon asset values for its existence, which businesses and people use in daily commerce, ceases to exist as 'credit money' and reverts to its true form as unbacked bank debt. This necessarily means that all deposit accounts held by the bank and dependent upon the bank's solvency for its existence, also creases to exist as your 'credit money'. That's the core of what happened in 2008. And that's why almost the entirety of the Fed's efforts was directed at propping up asset values. That's why deflation in a 'credit money' system is so feared, especially so in an economy already saturated in debt.

Anonymous Aeoli Pera June 29, 2017 8:06 PM  

Disagree, because immigration. The point of taking on personal debt is social competition, and free movement of peoples means higher income stratification and disparity. Therefore more competition, therefore more debt.

Anonymous MegaAvalonn June 29, 2017 9:02 PM  

My day job is a loan officer for a major chartered bank, and I can tell you from experience, "free trade" has caused a lot of personal debt for many of my clients. The number one reasons people borrow are as follows:

1. Education - when you factor in there's absolutely no individual collateral for this type of lending, from a debt to service ratio perspective, people lend more for "education" than anything today, even more than housing. As already pointed out, the free movement of people generated from free trade is causing a lot of demand. Jobs requiring less education are being shipped out, but what a lot of people don't realize is that isn't the primary source that's driving the demand. Immigrants are driving the demand for education. The grand majority of people who call me up asking for education loans in the 100K+ range are immigrants in fields like engineering and health care. Quite often, their 3rd world credentials don't meet the cut when it comes to being a doctor, so they have to retrain. So not only are the immigrants driving down wages through increased supply by coming here - they're also directly contributing to education costs by having to retrain to meet regulations. Hence, overall personal debts for everyone.

2. Housing - free movement of people coming from free trade has put so much pressure on housing stock in the West. Simply put, we're importing lemmings faster than our technology permits us to build housing to meet the demand. As a result, housing prices have skyrocketed, causing people to take on more debt to get entry into the housing market. While you could argue it balances out due to increasing equity - this is a Ponzi scheme. You can't create more land. There's a real limit as to how many people you can fit into one geographical location - free trade doesn't respect this law of nature at all.

3. Consolidating other debt - In a world were the debt scales get higher and higher because of stressing demands due to immigration (free trade), suddenly paying that 2000$ fine to break your contract with a previous lender makes sense for a 0.5% decrease in interest rate. And to make matters worse, people often pay the fine by taking on more debt. See where this is going?

4. Moving expenses - This is probably a surprise to most people, but this is starting to become an increasingly popular reason people borrow. In this "free trade"/"free movement" world, people have to move where the jobs and promotions are. Unfortunately, moving is expensive. If you're say, lower middle class, and need to move half way across the country to get your first solid middle class job, chances are you're going to need to take out a loan.

5. Travel - thankfully, most white people, young and old, still traditionally save up for a vacation. Unfortunately, I can't say the same for the immigrants. Did you know that your average middle class Canadian immigrant travels back to his/her home country an average of FIVE TIMES in a year? So much for loyalty! All of this traveling increases the demand for personal lending once again. And it's all related to the free movement of people. Even the most staunch Muslim who swears against usury will take out a loan if it means it's the only way he can visit his million and one inbred cousins in Qatar come Ramadan.

6. Cars? Cars? Auto loans are old school. A distant sixth. Young people and the immigrants don't buy cars. Old people, based on deteriorating health conditions, probably shouldn't buy cars.

So if you're read this far, this is just an "on the ground" view of personal lending from the only white guy in a sea of Jewish and Chinese bankers. Jewish and Chinese bankers that alas, wouldn't even be here in the first place if not for "free trade." To say "free trade" may indirectly cause personal debt is an understatement. I would go on to say the goal of free trade is to BURRY EVERYONE under the shekels of personal debt!

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