How trade deficits are making the U.S. poorer, while in the past they have made the U.S. wealthier.
Topics covered include:
- Two ways countries can increase their competitiveness
- How savings always equals investment
- Why excess savings flows to the U.S. leading to a drop in U.S. domestic savings
- Why the U.S. current trade situation could lead to a debt crisis
Show Notes
Why U.S. Debt Must Continue to Rise by Michael Pettis—Carnegie Endowment
A User’s Guide to Restructuring the Global Trading System by Stephen Miran—Hudson Bay Capital
Is Peter Navarro Wrong on Trade? by Michael Pettis—Carnegie Endowment
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Related Episodes
515: Tariffs and the Mar-a-Lago Accord: What Trump Really Wants
470: How the Economy Really Works: Savings, Investing, Consuming and Market Distortions
144: Trade Deficits Aren’t Always Bad. Trade Wars Are.
Transcript
Welcome to Money for the Rest of Us. This is a personal finance show on money, how it works, how to invest it, and how to live without worrying about it. I’m your host, David Stein, and today is episode 516. It’s part two of “What Trump Wants. How Trade Deficits and Capital Flows can Harm or Help Countries.”
Last week, we covered a challenging topic of trade deficits, currency accords, and why the Trump administration wants a weaker U.S. dollar in order to help U.S. manufacturers. They see this as a national security issue. One of our Plus members on the Plus member forums wrote after listening to the episode that it scared the bejesus out of him.
He wrote, “I hate to puke everything”, in other words, sell all his assets, “but there is something scary about rejiggering the economy and the international financial paradigm.” I agree that this intervention, these tariffs, the potential to start taxing or charging a service fee on capital coming into the U.S.—that’s scary because we don’t know what the impact will be.
My nephew, after listening to the episode, sent me a thoughtful text, and he wrote, “Considering the U.S. is part of a much larger global economy, is it better for America or Americans in general to pursue which of these two courses?
Weaken the U.S. dollar, reduce the trade deficits, and help the manufacturing base while reducing the global economy’s reliance on our currency and its stability, or is it better to maintain the strength of the U.S. dollar, continuing to increase the trade deficit, the capital account surplus, as foreign capital flows into the U.S.?” He mentioned it could take years for the U.S. manufacturing base to increase and that if it does, costs could be higher.
These are complicated topics, and so I find it helpful to kind of go back to first principles, to review and understand how there are certain accounting identities, certain formulas that just by nature have to be true. We’ve referred to some of those in last week’s episode.
Michael Pettis
As part of that review that I did this week in preparing for this episode—because I’m thinking about this; because it doesn’t come intuitively for me. And so, I’ve reviewed this past week the work of Michael Pettis. Pettis is an American professor of finance he’s located in China, and he’s also a non-resident senior fellow at the Carnegie Endowment for International Peace.
I have followed his work for years at Money for the Rest of Us and also when I was an institutional investment advisor. And I’ve referred to his work in earlier Money for the Rest of Us episodes, including eight years ago when we covered a similar topic, episode 144, on trade deficits and trade wars.
Pettis is an expert on China and on how trade works and capital flows. He’s written books on it, and I will reread his work, his essays. One that I will refer to and link to in this episode he published in 2019, another in 2017. Hopefully, you’ll find this review helpful as we look at what the administration is trying to do, why they’re trying to do it and think about whether it will work or not.
So we’re gonna go back to first principles and focus on two accounting identities.
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