Monday, April 26, 2010

How Not to Counter the Trade Deficit Redux

We have the identity: (I - S) + (G - T) + (X - M) has to equal zero. Investment - Savings + Government Expenditures - Taxes + EXports - IMports is equal to zero. So if (X - M) is seriously negative, (G - T) has to be seriously positive for there to be any net investment in the private sector. (Unless there is dissaving. The national Savings rate is now about equal to zero.) The government has to run a deficit, and it has to be larger than the trade deficit. Current trade deficit is about 5% GDP, so for investment to run 3% above private savings, the government has to run a deficit of about 8% GDP. Savings are future inflationary, since they represent consumption in the future, so you want investment to out pace savings. $1.2 Trillion deficit then is what the government should be running now. So only with a significant trade surplus can you allow government to run a surplus.

Can't run up debt, though. That would outstrip GDP growth. So you have to 'print' it. Would be inflationary but the extra goes to foreign countries, who can't get rid of it very easily. They have to spend it. Here. It would be like they had it in a savings account, if they buy bonds. Or like a checking account if they hold onto the cash. So one of the purposes (the purpose?) of selling bonds is to keep the money out of circulation, until the bond matures.

So, with deflationary pressure from the trade deficit uncompensated for because of inadequate government deficits a good investment strategy would be to short US industry. If you were a ...what? Traitor? How is investing betting of the failure of your neighbor? Or your own failure, for that matter. But the losing strategy results from the government inadequacy of spending.

Still not a very good way of compensating for the trade deficit, though.

No comments:

Post a Comment