The Trade Deficit Grows The U.S. Debt

Dec. 15, 2012 10:03 AM ET24 Comments
Steven Hansen
3.1K Followers

….. the fiscal (government) deficit in the US cannot go away unless we also deal with the trade deficit. As we will see, it is a simple accounting issue, and one based on 400 years of accepted accounting principles. - John Mauldin

Trade deficit is currently a headwind to GDP. This is as obvious as:

GDP = private consumption + gross investment + government spending + (exports − imports).

In 2011, the trade balance headwind to GDP was more than a 0.5% drag.

It does appear as if there is some correlation (although far from perfect as you look at the divergence during the 1990s) between the yearly USA Federal debt growth and trade balance.

If one steps further back, the cumulative trade balance deficit and US Federal deficit are growing somewhat at the same pace.

The equation leading to this belief in the association between debt and trade is:

Domestic Private Sector Financial Balance + Governmental Fiscal Balance - the Current Account Balance (or Trade Deficit/Surplus) = 0

This is the central exhibit of Wynne Godley's sectoral balance work of the 1980s and 1990s (for which some think he would have a Nobel Prize had he not passed away too soon). The problem is:

  • the world economies are now globalized,
  • the USA economy is not the only game in town,
  • all these equations treat economies like they live in separate bubbles,
  • the dollar itself is the global currency with massive use outside the boundaries of the United States - and this global use is not part of GDP,
  • the dollar is a fiat currency - and unlike a backed currency, its dynamics do not need to add up (1 + 1 = 3).

The equation for the trade balance since at least 2000 for the USA is:

Global

This article was written by

3.1K Followers
Steven Hansen (A.K.A "The Hand") was born, raised and educated in California. Steven worked for 25 years for a major international engineering and construction corporation. He has lived outside of the USA almost continuously since 1978. Steven retired in 1995 to sail the world. He is still sailing today and is currently located in Malaysia. On the financial side, Steven is a pragmatist. His motto is to "go with the flow" and believes that the only correct investing method is one which makes you money both short and long term. He does not fall in love with philosophies – only results. He has invested well enough to retire at 45 and stay retired.

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