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Economist keep telling everyone that trade deficits don’t matter. The only person with an economics PhD who disagrees is Peter Navarro – our problem being that Navarro’s in the White House advising Trump. Still, it’s good to have Gary Cohn speaking out on this:

Former Trump advisor Gary Cohn could care less about trade deficits.

“Look, I have always said a trade deficit doesn’t matter,” the ex-White House chief economic advisor said during a Washington Post interview Thursday. “In many respects, it’s helpful to our economy.”

A trade deficit doesn’t matter. For, as a matter of definition, if there’s a trade deficit then there must be a capital account surplus. That is, foreigners must be investing in the US by exactly the same amount as that deficit. And seriously, it’s not a problem when people come invest in your economy.

Sure, Warren Buffett likes to speculate about what happens when the foreigners own the entire economy but that’s just not something to worry about. The US creates, anew, wealth at a rate of some $5 to $8 trillion a year. The trade deficit is some $500 billion (no, the goods only trade deficit of $800 billion matters even less than nothing). Foreigners can continue to invest in the US at this rate forever and they’ll en up owning an ever smaller potion of the economy. Yes, smaller.

There are also those who seem to think that this investment is some debt that has to be repaid – nope, it ain’t. They can buy stuff as well as lend money. And buy a lot of stuff they do.

“If you end up with a tariff battle, you will end up with price inflation, and you could end up with consumer debt,” Cohn, the former chief operating officer of Goldman Sachs, said in an interview with The Washington Post. “Those are all historic ingredients for an economic slowdown.”

And as Cohn points out the supposed remedies for that problem that doesn’t exist, that trade deficit, are harmful in themselves. So, not a problem, the things people recommend to solve the not a problem make the economy worse, we’d better go back to treating it as not a problem and therefore doing nothing about it, shouldn’t we?

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  1. No, trade deficits don’t matter, because all the dollars sent to China must eventually be recycled back to the USA, whether buying services, physical assets, debt, or a share of American management.

    But it’s refreshing that Trump has adopted the viewpoint of the manufacturing worker, who wants the US President to help sweep away foreign barriers to the purchase of the things he spends the day making. Whereas Cohn has the viewpoint of — Goldman Sachs. And it and Bain Capital and so on do fine work diverting undervalued and underproductive assets into the hands of people who can get them to function. But they also are the cronies of politicians, as when they want us to admit foreign workers faster than they are assimilating so that they can pay lower wages than they otherwise could. Trump’s adopted viewpoint also makes him more re-electable, as there are more workers than bankers.

    If Trump gets us into a tariff war, some/many sectors will face an “economic slowdown,” because of the lower efficiency, counteracting Trump’s tax cuts. But it won’t cause “consumer debt” or “price inflation.” Increased prices to reflect any new government obstacle must be counteracted by individual cutbacks in other purchases, not borrowing to buy the exact basket you would have otherwise bought — unless the Fed guns the printing presses again.

  2. Tim you fail to explain, if the trade deficit is really such a piffling amount, why trying to reduce that will have any noticeable effect on the economy whatsoever.

    There is a persistent misapprehension that Trump is illiterate. Mark Perry in particular believes that the only way to get his message through to the Prez is by repeating it forcefully twice daily, while knowing in his heart that the Don will never read it for the simple reason that he can’t read. On the contrary, Carpe Diem and It Is All Obvious Or Trivial are the first two web pages that Donald Trump opens every morning and he is thoroughly au courant with the arguments for and against free trade. He however has a voter base who are overwhelmingly in favour of protectionism. In fact that was one of his manifesto promises, which he is earnestly trying to keep. Thus all the whining at our supposedly ignorant American friend is an utter waste of bandwidth. Find a page that’s got beer and broads on it to push your message and it might just have an effect.