What To Do About Record High Trade Deficits?
The U.S. Commerce Department reported this month that the trade deficit for 2018 reached a record $891.3 billion and grew by almost 13% over 2017. As investors, what should we be taking away from this metric?
The first question might be how did we get to this point? President Trump assured us one year ago that raising tariffs on imports from other countries would force them to lower their import tariffs and correspondingly reduce our trade deficit. So far this strategy does not appear to have worked. In fact, his announcement last year of the imposition of the punitive tariffs had the opposite effect of stimulating U.S. businesses to import more before the costs went up, which exacerbated the imbalance. Other factors as reported by the New York Times include a slowdown in China’s and Europe’s economies resulting in reduced demand for U.S. consumer goods as well as the strengthening of the U.S. dollar making U.S. products more expensive overseas. When you add in lower tax revenues resulting from Trump’s hefty 2017 corporate tax break, the overall U.S. budget deficit is on track to reach $1 trillion this year according to the U.S. Treasury Department.
Are large government deficits a problem? The answer depends on whom you ask. Economists who are followers of Modern Monetary Theory would argue that the only deficit constraints on countries with fiat currencies (that is, those with the power to expand their own money supply such as the U.S.) are inflation and unemployment. With inflation still relatively benign and unemployment at record lows, we have plenty of room today for even higher deficits without causing a problem. Other economists believe that it is not fiscally sound for any government to spend more than its GDP. The cost of maintaining a high level of accumulated debt will crowd out spending in other areas, potentially reducing the ability of government to continue to provide important services to citizens.
For investors, this data presents a number of choices for consideration:
- Sell all our U.S. stocks on the assumption that the U.S. economy will soon tank from the trade imbalance and buy foreign stocks because they are developing more efficient trade deals among themselves. Foreign stocks are also much less costly than are U.S. stocks right now.
- Sell all our foreign stocks on the assumption that the Trump trade war is hurting their economies and buy U.S. stocks because Trump tells us he always wins.
- Sell everything because we have no idea what is going to happen and we’re becoming worried.
- Ignore all this and instead continue to follow an investment strategy that is not based on timing markets but rather on minimizing the risk needed to grow our savings sufficiently over time to fund all our future needs.
My choice is #4. Which choice would make you feel most comfortable?