Are America's Trade Deficits Really a Problem?

 | Jul 14, 2018 | 2:00 PM EDT
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There is much misinformation flying around about trade deficits.

Are America's trade deficits with other countries a problem? Do they represent "unfair" trade practices? Would a trade surplus mean we are winning?

Answering these questions is easier if you think of how these same situations affect your personal life.

If you are like most people you run trade deficits with your doctor, auto mechanic, dry cleaners and grocery stores. You spend more on their goods and services than they do on yours.

Is that a problem for you? Nope. They provide your needs, accept your money as payment and both you and those businesses proceed normally. If you were a big earner, thrifty or lucky enough to have simply earned more after-tax income during 2017 than you spent... congratulations. You ran an overall trade surplus last year.

By definition you accumulated some net new wealth. That cash could be parked in a bank, stuffed in a mattress, used to buy CDs, bonds or stocks. People, or countries with net trade surpluses become richer. Those who run annual deficits, by spending more than earn, accumulate new net debt plus the interest costs associated with carrying that balance.

For that reason, it's always preferable to run a net surplus. What doesn't matter is whether you ran a surplus or a deficit with any particular trading partner.

A trade deficit for a country is akin to an individual running up their credit card balance due by consuming more now than they have money to pay cash for. You would enjoy the thrill of having what you want at a future cost of needing to cut back later to pay down the debt plus interest.

Countries, like people, can handle a certain amount of debt without undue problems. At some point, though, debt service expense can become burdensome or crippling. In a worst case, as with Venezuela or Greece, back in 2011, additional credit may become ultra-high priced or even unavailable. That would dictate either forced austerity or even default and bankruptcy.

America cannot solve its trade deficit situation by forcing other countries to buy our goods and services. Individuals cannot coerce their bakers, dentists, plumbers, etc. to buy from them as a way to balance out accounts.

The only guaranteed way to pay down or eliminate trade deficits is to stop spending money you don't have, on goods you want, but don't need.

Cutting back on spending is never pleasant as it implies a lower standard of living than you are used to. It much more fun to live above your means... until the bills come due.

Countries which have fully convertible, fiat-based, freely traded currencies, have an edge over people when times get tough. Their central banks can simply "print" new money to pay bills. That's been going on for years. It ultimately causes inflation, though, which steals buying power from those prudent enough to have deferred consumption previously.

Ever increasing money printing by central banks and the inflation it causes is unlikely to stop voluntarily. It is equivalent to heroin addiction for politicians.

The only defense we have against it is to avoid holding permanent capital in fiat-based (non-asset backed) currencies. Owning shares of profitable companies gives you a fighting chance to overcome both the inflation and taxes imposed by governments to finance their deficits.

(This commentary originally appeared on Real Money Pro on July 13. Click here to learn about this dynamic market information service for active traders and to receive daily columns like this from Paul Price, Bret Jensen and others.)

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