David Malpass on The US Trade Deficit

Bear Stearn's chief economist, David Malpass, wrote a wonderful piece in the Wall Street Journal last week. His topic was how the US deficit is misunderstood and misinterpreted by many observers. In this, he is but one of several to have authored op-ed pieces in the Journal to this effect over the last decade or so.

I won't go into detail about the many data items Malpass cites as he conditions his observations in the article. However, this passage is perhaps the piece's best distillation of his message,

"The common perception is that Americans drive the trade deficit in an unhealthy way by spending more than we produce. To make up the difference, foreigners ship us things on credit. This sounds bad, but should be evaluated in terms of our demographics, low unemployment rate, attractiveness to foreign investment and rising household savings (my bold)."

A little further, he continues,

"Growing corporations are expected to be cash hungry. This leverage is treated as a positive for companies, but a negative for countries, a key inconsistency in popular economics. Rather than paying back the debt back, the growing economy rolls the debt over and adds more, just as the U.S. has been doing throughout most of its prosperous economic history. Part of each additional bond offering puts the company and the U.S. in the position of investing more than we save, drawing in foreign investment and contributing to the trade deficit."

Together, these passages make Malpass' critical point, i.e., sovereign debt, and/or trade deficits, matter in the context of the country's economic trajectory. In our case, we have the largest, vibrant, resilient and attractive economy in the world. Despite what economic and political gloomsters would have you believe, we borrow at favorable rates because others wish to participate in our economic success. They hold dollars, or dollar-denominated debt, and invest in our country directly. We use that capital to grow. Malpass makes the point further in his article that American household net worth is growing faster than net foreign debt of the U.S.,

"meaning foreigners are investing in the U.S. too slowly and conservatively to keep up with our growth."

It's a nice problem that we have, actually. Our economy is the envy of the world, which is one reason why even The Economist has sounded like a broken record on this topic for as long as I can recall. Context matters. Context means everything in macroeconomic analysis. By the way, in one of the earlier Journal pieces on this topic, another author cited the late 1800s in the U.S. as a parallel economic period. We had significant growth and a large trade deficit, consistent with heavy imports to fuel our rapidly-industrializing young nation. While Abe Lincoln was right about a lot of things, he was wrong to worry about trade deficits.

It goes without saying that this type of nuanced analysis will go over the heads of most U.S. Senators and Congressmen, and probably most Presidential candidates as well.

It reminds me of something my father used to frequently say. When listening to yet another media criticism of low voter turnouts in some fall election, he would remark thusly,

'Son, you only get to vote once every four years for the President. But you vote each day with your dollars, and those have a much larger and frequent impact than your political vote.'

What I think this means, pursuant to this post, is that, despite most politicians, and even most economists, not understanding the real dynamics of our trade deficit, so long as our nation's citizens just continue to drive our economy as usual, the trade deficit will not be any more of a problem in the future than it has in the past.