More Trade Deficit Craziness

Part of the mission of Manhattan Contrarian is to try to spread to the world some information about basic economic concepts.  I'm not talking here about the kind of economics expertise you would need to get a Ph.D. in the subject, or even a B.A.  Rather I'm talking about simple things that ought to be obvious to all, but somehow aren't.  Things like: that wealth is created by the hard work of the people rather than by government fiat; that the government doesn't make the people as a whole wealthier by increasing taxing and spending; that making investment more costly, difficult and risky (such as by increasing taxes and regulations) impairs economic performance; or that socialism destroys economies by undermining the virtuous incentives of the private property system.  Of course this whole project would be much easier if we didn't have the very most highly-credentialed economists on the public stage constantly spouting total nonsense and fallacy, including as to many subjects on that list.  (I'm talking about the likes of Krugman, Blanchard, et al.)

Anyway, high on the list of things that ought to be obvious is that the money-issuing prerogative of the sovereign is a great advantage, at least if used judiciously.  Certainly, the U.S. government understands this concept in the context of its dealings with its own citizens.  The economy needs money to operate, and as it grows it needs increasing amounts of money; and as long as the increasing money supply stays consonant with the growth of the economy, inflation will stay in check.  

Take a look at statistics on the deficits run by the federal government during the Obama years, and compare those numbers to the increases in debt held by the public.  Over the period 2009 to 2015, the deficits aggregated about $6.7 trillion, while the debt held by the public only went up by about $5.9 trillion.  The difference of about $800 billion (real money!) is what the government was able to spend without increasing the publicly held debt.  Who wouldn't want the ability to do that?

Translate the same concept to the international arena, and suddenly we are talking about a "trade deficit" that somehow is a huge problem.  And thus I was watching some of President-elect Trump's speech in North Carolina last night, and there he was talking about the big trade deficit and what kind of incompetent people could have "negotiated" such a thing.  Going forward, we're going to do much better "deals"!  Huh?

Of course what's going on is that the world needs money for its economy to operate, and the least-incompetent money-issuer in a big economy is the U.S. Federal Reserve.  So the world uses the dollar as its principal money, and it needs an ongoing and increasing supply of them.  To get them, they have to sell us more goods and services each year than they buy from us.  We didn't get into the position of being world money-issuer by sovereign privilege, but functionally it's the same thing.  

Now I for one am very hopeful that Trump will succeed in giving a real and immediate boost to the economy.  As just one example, the announcement today of Oklahoma Attorney General Scott Pruitt to head EPA is a terrific signal that the war on fossil fuels is about to end and the energy economy unleashed.  And the stock market took off and went up almost 300 points.

But what does this mean for the trade deficit?  Of course a rapidly expanding U.S. economy means that the trade deficit is likely to increase, and maybe by a lot.  Here is a post on the subject from yesterday by Mickey Levy of Berenberg Capital Markets.      

For now, the expectation is that the boost in economic activity from likely tax reform, infrastructure spending and an easing of burdensome regulations will stimulate stronger economic growth while increasing the demand for foreign goods and widening the US foreign trade deficit.

And really, if you think about it, Levy is highly likely to be right.  An expanding U.S. economy means more demand by us for imports, and an expanding world economy means more need by them for a growing money supply.  Month by month the trade deficit could bounce up or down, but over a time horizon of quarters or years it will be highly likely to increase, and maybe by a lot.

Relax!  This is a good thing!