The Flinchum File
Thoughtful Economic Analysis and Existential Opinions

Wrong Deficit

03/08/2019

The December trade deficit was the highest in ten years.  The hand-wringing was immediate and painful.  You’ll recall the President campaigned hard that he would cut that deficit in half.  However, we should give the President a pass on this promise.  The deficit for that one month was not too worrisome, given we’re in the middle of several trade wars, and the dollar is stubbornly strong.

Remember, when the dollar is strong, it is more expensive for foreigners to buy our exports and cheaper for Americans to buy imports from other nations.  This decreases our exports and increases our imports, which creates the deficit.  The President doesn’t have much control over the strength of the dollar, which tends to appreciate when the Fed raises interest rates, which was the case here but is not currently.  More importantly, because the U.S. economy is growing faster than the rest of the world, foreign capital is sucked into the U.S., which increases the bid for dollars to invest here, causing the dollar to appreciate.

If you want to worry about a real deficit, you should worry about our budget deficit, not our trade deficit.  Our national debt now exceeds $22 TRILLION or 105.6% of GDP.

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