The Trade Deficit Blowout is as Predictable as My Dog Begging for Food at the Dinner Table
The big news of the day relates to the continuation of a trend that has been going on since 2013: the widening of the trade deficit. The trade deficit in dollar terms at $-59.8bn in December and $-622bn for the year broke down to a new 10-year low. The trade balance as a percent of GDP at -3% broke down to a level not seen since 2013. Yes, these are big numbers, but they are entirely reflective of the economic policies pursued in this country and really shouldn’t come as much of a surprise. More important for our readers than that though, is the question of what this all means from an investment perspective. In this note we’ll cover both the why and what it means for financial markets.
Why is the trade deficit blowing out? It’s the result of simple math, really. Without going into the mathematical derivation, suffice it to say that:
T-G=(I-S) + (X-M), where T=taxes, G=government spending, I=investment, S=savings, X=exports and M=imports.
That is to say, the budget deficit equals investment minus savings plus net exports. In layman’s terms, if we run higher government budget deficits then either investment must fall and we must save more, we must import more than we export, or both. One way or another, someone has to foot the bill for higher budget deficits. That someone is either the domestic sector in the form of more savings and less investment or foreigners via importing capital (i.e. running larger trade deficits).