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The Budget Deficit Is Not Our Only Problem. Meet the Trade Deficit

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Investors are well acquainted with the annual U.S. budget deficit and the national debt that accumulates from a succession of deficits. The U.S. budget deficit under Trump is approaching $1 trillion per year, similar to what we saw in 2010 and 2011 under Obama.

This is the result of tax cuts (that don’t “pay for themselves”), removal of spending caps, snowballing student loan defaults and defective growth estimates by the Office of Management and Budget, OMB. With growth now fading after the Trump tax cut boost (there will be no tax cuts in 2019), the debt-to-GDP ratio is now up to 106%, since debt is growing faster than GDP.

That’s all bad enough, but it’s not the only problem. The U.S. also has a huge trade deficit, which is a head wind for GDP growth. As reported in this article, the U.S. trade deficit hit $54 billion in September.

That’s a 1.3% increase over August and puts the trade deficit increase for the year up 10.1% compared with 2017. Since a trade deficit or surplus is one of the components of GDP, this huge deficit reduces GDP and makes the debt-to-GDP ratio even worse.

Some of this deficit is the result of importers buying goods in larger-than-normal quantities in order to beat tariffs that Trump plans to impose. That’s not good news either because these excess purchases go into inventories and hurt foreign economies dramatically once the tariffs do go into effect. That hurts their ability to repay dollar-denominated debt, which has its own potential to morph into an emerging-markets debt crisis.

Enjoy your cheap imports while you can. Imports are about to get more expensive and the global economy is about to hit a wall.

Institutional investors can schedule a proof of concept with the world’s first predictive data analytics firm combining human and artificial intelligence with complexity science. Check out Jim Rickard’s company at Meraglim Holdings to learn more.

 

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