Why Australia’s Trade Deficit Can Only Grow Our Woes

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By Dan Denning | January 10, 2013 1:16 PM EST

Before we tuck into today's Daily Reckoning, please note we've brought our technical analyst Murray Dawes into the discussion in one of today's other articles.. Murray looks at the bond markets, Japan, and the Yen carry trade's impact on the ASX/200. With the technical picture covered, let's return to economic data that may give you clues about Australia's future in 2013...and beyond.

   First off, a question for you: what's the surest sign of a culture that's fallen into the habit of consuming more than it produces? That's right: a regular trade deficit. Just as we suspected, consumers went hog-wild in November and spent $5.81 billion on consumer goods. The December number will probably be even more impressive.

   The net result was Australia's 10th consecutive monthly trade deficit. November's $2.64 billion deficit was an increase of 8% over October's figure, according to the Australian Bureau of Statistics. And oh by the way, the ABS snuck in an upward revision to October's deficit. The original October deficit was reported as $2.08 billion. The revised figure was $2.44 billion. Without the revision, you would have seen a month-over-month increase in the deficit of 26%.

   But wait! As we mentioned yesterday, not all imports are bad. There is a school of academic thought that says Australia has to import capital goods in order to extract commodities. All the trucks, industrial equipment, and machines the mining industry uses have to come from somewhere if they aren't made here. The real calculation is the national income generated by the goods exported with all those capital goods.

   Blah blah blah!

   Economists like to make these issues more complicated than they are. But any sensible person will look at the figures and reach the same conclusion: regular trade deficits are not a good sign. To grow wealth, you have to produce and sell things. This generates the income and profit you use to save, invest, and consume. If the country is regularly consuming more than it's producing, it's not getting wealthier.

Does the trade deficit indicate Australia is really getting poorer? Well, it depends on how you look at the national balance sheet. For most households, the biggest assets on the balance sheet are houses. Stocks and other investments probably come second. That means until a credit bubble pops, the national balance sheets tends to show household net worth rising to new highs.

   The trouble is that the assets are generally bought with borrowed money. Borrowed money must be repaid. And the trade deficit numbers - or more generally the country living above its means by consuming more than it produces - mean that Australia is racking up obligations to foreigners faster than ever. You can't get rich by borrowing more to buy stuff, can you?

Dan Denning,
For The Daily Reckoning Australia

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The article was first published by The Daily Reckoning Australia

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