Thinking Citizen Blog — Budget Deficits, Trade Deficits, and Inflation — The Deadline Analogy

Thinking Citizen Blog — Tuesday is Economics, Finance, and Business Day

Today’s topic — Budget Deficits, Trade Deficits, and Inflation — The Deadline Analogy

When, in 1984, I switched careers and moved into finance, first into banking, then currency trading, then stock picking, I learned that from a public policy perspective three things mattered: budget deficits, trade deficits, and inflation. Thirty-six years later the data suggests that the conventional wisdom was wrong on all three scores. I am reminded of the Douglas Adams quote “I love deadlines — I love the whooshing sound they make as they fly by.” Experts — please chime in. Correct, elaborate.

THE THREAT OF INFLATION, INTEREST RATES, AND IRRESPONSIBLE MONETARY POLICY

1. Back in the 1980s, the number one job of the Fed was understood to be to fight inflation.

2. Paul Volcker was the paragon of responsible Fed policy — he was the dragon slayer.

3. Zero interest rates were absolutely inconceivable.

NB: Today, short term interest rates have been close to zero for 12 years! And the outlook is for more of the same. Cassandras have been making a living for 36 years by crying wolf. Is the wolf finally ready to pounce? Above: chart of the Fed Fund rates versus inflation from 1960 to present.

BUDGET DEFICITS: YOU ABSOLUTELY MUST KEEP THEM UNDER CONTROL, RIGHT?

1. As a result of cumulative budget deficits, the Federal debt has risen from roughly $1 trillion in 1980 to over $20 trillion before COVID and is set to explode going forward.

2. But interest rates have declined from double digits to almost zero.

3. And the stock market is up 30X on a nominal basis and over 10X on an inflation-adjusted basis.

NB: Above is a chart of US public debt as a percentage of GDP from 1790 to present.

TRADE DEFICITS: A SURE RECIPE FOR CURRENCY COLLAPSE AND FINANCIAL CATASTROPHE

1. Negative spin: trade deficits are an “unsustainable imbalance” that will lead to long term capital flight. Remember the Latin American crises of the 1980s? The East Asian crisis of the late 1990s?

2. Positive spin: not at all, they are a sign of relatively strong economic growth. Check out the US data.

3. You have a trade imbalance with your supermarket, so what?

Monetary policy of the United States

Ignore The Endless Talk Of Doom, Budget Deficits Really Don’t Matter

Why Trade Deficits Really Don’t Matter Very Much

Pros and Cons of a Trade Deficit

YOUR TURN — Please share:

a.) the coolest thing you learned this week related to business, economics, finance.

b.) the coolest thing you learned in your life related to business, economics, finance.

c.) anything at all related to business, economics, finance.

d.) anything at all