Just because we’ve been in a global recession for a while, and spending has slowed, it’s no time to get sanguine about the dangers of trade deficits, writes Peter Schiff of Schiffradio.com.

Earlier this month, the Labor Department reported that 227,000 new jobs were added to the economy in February, marking the third consecutive month of positive job growth. Many observers took the news as evidence that the recovery has taken hold in earnest, helping send the S&P 500 index to the highest level in nearly five years.

However, the very same day, the Commerce Department reported that, after surging for much of the last year, the US trade deficit increased to $52.6 billion for January, the largest monthly trade gap since October 2008. This second data set should dampen enthusiasm for the first.

Before the financial crisis banished the data to the back pages, America’s growing trade imbalances used to be a hot topic. From 2005 through mid-2008, those monthly figures almost always topped $50 or $60 billion, setting a monthly record of $67.3 billion in August 2006.

But when the housing and credit markets imploded, attention was focused elsewhere. In any event, the faltering economy took a huge bite out of imports, pushing the trade deficit down 45% in 2009. Even those people who were still paying attention to trade assumed that the problem was solving itself.

However, after reaching a monthly low of $35.7 billion in May 2009, the trade deficit began to grow again, expanding 31% in 2010 and 12% in 2011. While the $52.6 billion deficit in January is still about 10% below the monthly average seen from 2006 to 2008, if GDP continues to nominally expand—as many assume it will—we may soon find ourselves in the exact same place in terms of trade that we were in before the financial crisis began. That’s not a good place to be.

If the jobs that we have created over the last few years had been productive, our trade deficit would now be shrinking, not growing. But the opposite is happening. These jobs are being created by the expenditure of borrowed money, and are not helping to forge a newer, more competitive economy.

In the years before the real estate crash, our economy created millions of jobs in construction, mortgage finance, and real estate sales. But as soon as the bubble burst, those jobs disappeared. Today’s jobs are similarly being built as a consequence of another bubble, this time in government debt. And likewise, when this bubble bursts, they too will vanish.

Throughout much of the last decade, I had continuously warned that the growing trade deficit was an unmistakable sign that the US was on an unsustainable path. To me, monthly gaps of $60 billion simply meant that Americans were going deeper into debt (to the tune of $2,400 per year, per citizen) in order to buy products that we were no longer productive enough to make ourselves.

I pointed out that America had become an economic juggernaut in the 19th and 20th centuries on the back of our enormous trade surpluses, which allowed for growing wealth, a stronger currency, and greater economic power abroad. This is exactly what China is doing today. Deficits reverse these benefits.

My critics almost universally dismissed these concerns, typically saying that our trade deficits resulted from our economic strength, and that they were a natural consequence of our status at the top of the global food chain. I pointed out that even highly developed, technologically advanced economies still need to pay for their imports with exports of equal value. Instead all that we were, and are, exporting was debt and inflation.

The financial crisis initiated a painful, but needed, process whereby Americans spent less on imported products while manufacturing more products to send abroad. But the countless government fiscal and monetary stimuli stopped this healing process dead in its tracks.

Government borrowing and spending redirected capital back into unproductive portions of our economy. Health care, education, government, and retail have all expanded in the last few years. But manufacturing has not grown at the pace needed to solve the trade problem.

Job creation at home has been like vegetation sprouting along the banks of rivers of stimulus. These artificial channels may help temporarily, but they prevent trees from taking root where they are needed most. Our economy has yet to restructure itself in a healthy manner.

The recession should have forced us to address the problem of persistent and enormous trade deficits. We have utterly failed to do this. So while the job numbers look good for now, the pattern is ultimately unsustainable.

The last time the monthly trade deficit was north of $50 billion, the official unemployment rate was under 6% and our labor force was considerably larger. Should this artificial recovery actually return millions of unemployed to service sector employment, our monthly trade deficits could go much higher, perhaps eclipsing the previous records of 2006. It is possible that the annual deficits could top the $1 trillion mark, thereby joining the federal budget deficit in 13-digit territory.

Also last week, we got news that our fourth-quarter current account deficit widened 15%, to just over $124 billion. The $500 billion of annual red ink is actually reduced by a $50 billion surplus in investment income (resulting primarily from foreign holdings of low-yielding US Treasuries and mortgage-backed securities—however, when interest rates eventually rise, this surplus will quickly turn into a huge deficit).

At anything close to a historic average in employment and interest rates, today’s structural imbalances could produce annual current account deficits well north of $1 trillion. As higher interest rates would also swell the federal budget deficit, it is worth asking ourselves how long the world will be willing to finance our multi-trillion dollar deficits.

Back in the late 1980s, when annual trade and budget deficits were but a small fraction of today’s levels, the markets were rightly concerned about America’s ability to sustain its twin deficits. This anxiety helped lead to the stock market crash of 1987. More recently, large and persistent trade deficits were a significant factor in building the imbalances that caused the US economy to implode in 2008.

But in recent years, most Americans have lost their concern with gaping trade deficits. I believe it will soon come back with a vengeance.

Read and listen more at Schiffradio.com…

Related Reading: