Monday, July 23, 2018

One Simple Policy to Simultaneously Strengthen Your Currency and Weaken Your Exports

July 23, 2018

One Simple Policy to Simultaneously Strengthen Your Currency and Weaken Your Exports

If a policymaker wanted to simultaneously strengthen the foreign exchange value of a country’s currency and weaken the country’s exports, that policymaker would be advised to impose tariffs on the country’s imports. This is the policy prescription I gleaned from reading Dartmouth College Professor Douglas A. Irwin’s 30-page monograph, “Three Simple Principles of Trade Policy”. The three principles of trade policy discussed in this intellectually powerful and compact publication are: (1) a tax on imports is a tax on exports, (2) businesses are consumers too, and (3) trade imbalances reflect capital flows. I have previously discussed, albeit in a less eloquent way than Professor Irwin, his third principle in my March 5, 2018 commentary, “The Expected Widening in the U.S. Federal Budget Deficit Has Trade Protectionist Implications”. In this commentary, I want to present Professor Irwin’s first principle, again less eloquently than he.

Suppose that the U.S. government imposes tariffs on say, Chinese goods. This will increase the price of those Chinese goods on which tariffs are imposed. The quantity demanded by U.S. residents of these Chinese goods will decrease. This will lessen the demand for Chinese yuan in the foreign-exchange market because fewer Chinese goods are now being purchased by U.S. residents. The fall in the demand for Chinese yuan will cause its foreign-exchange value to depreciate vs. the U.S. dollar. Alternatively, the foreign-exchange value of the U.S. dollar will appreciate, or strengthen, vs. the Chinese yuan. So, one Chinese yuan will now purchase fewer U.S. dollars, making the yuan price of U.S.-produced goods higher. The appreciation of the U.S. dollar will cause the quantity-demanded by Chinese residents of U.S.-produced goods to decrease. So, the net results of the imposition of tariffs by economy’s policymaker will be to cause that economy’s currency to appreciate in the foreign-exchange market and to cause that economy’s exports to decrease.

Professor Irwin makes the argument that “[e]xports and imports are inherently interdependent, and any policy that reduces one will also reduce the other.”  This suggests that an economy’s exports and imports should be positively and highly correlated. That is, if exports rise, so should imports. The chart below in which are plotted year-to-year dollar changes in the annual averages of nominal U.S. exports and imports from 1930 through 2017 contains data that are consistent with Professor Irwin’s argument. The correlation is positive between the dollar changes in U.S. exports and imports and its value is 0.92 out of a possible 1.00 high. 

In sum, if a policymaker’s goal is to simultaneously strengthen an economy’s currency in the foreign-exchange market and decrease the economy’s exports, then, by all means, the policymaker should impose tariffs on imported goods.

Paul L. Kasriel
Founder, Econtrarian, LLC
Senior Economic and Investment Advisor

Monday, July 16, 2018

Unless the Fed Changes Course, a 2019 Recession Collision Is the Most Likely Outcome

July 17, 2018

Unless the Fed Changes Course, a 2019 Recession Collision Is the Most Likely Outcome

The current level of the federal funds rate is 1.92%. As of June 13, 2018, the median estimate of Federal Open Market Committee (FOMC) members of the appropriate federal funds rate by the end of 2081 was 2.40%. This implies that the Federal Reserve has “penciled in” two more 25 basis point increases by the end of this year. If, in fact, the Fed holds this rate-increase course, I believe a recession will occur sometime in 2019. How do I know? The yield curve tells me so.

Cast your eyes on Chart 1, which shows you the behavior of the quarterly average percentage point spread between the yields on a 10-year Treasury security and 1-year Treasury security from January 1955 through June 2018. The shaded areas in Chart 1 represent periods of recession. Notice that every recession starting with the 1957-58 recession was precededby a narrowingin this yield spread to a degree that the value of the spread went negative. That is every recession starting with the 1957-58 one was precedednegativespread between the yield on the Treasury 10-year security and the Treasury 1-year security. During the January 1955 through June 2018 period, there was only oneoccasion when this negative yield spread gave an incorrect recession signal. That was from December 1965 through February 1967. During this period, the pace of real economic activity slowed sharply, but not sharply enough or long enough to result in being designated a recession by the arbiters of such, the National Bureau of Economic Research. To wit, in the four quarters ended Q2:1967, real GDP grew by 2.6%, down from 7.5% in the four quarters ended Q2:1966. As economic growth weakened, the Fed shepherded the federal funds rate down from 5.75% in December 1966 to 3.50% by June 1967, thus pulling the economy out of its nosedive. As of July 13, 2018, this yield spread stood at 0.48 percentage points. If the Fed were to hike the funds rate another 0.50 percentage points by yearend, the yield on the Treasury 1-year security were to rise by the same amount and the yield on the Treasury 10-year security were to remain the same, the Treasury 10-year – 1-year yield spread would move into negative territory.

Chart 1
The seminal and best research on the yield spread as an indicator of monetary policy and as a predictor of recessions was done by the Nikola Tesla of monetary economics, the deeply missed Robert D. Laurent. The logic behind the yield spread as an indicator of the degree of restrictiveness or accommodation of monetary policy is as follows. Assume that the Fed raises the federal funds rate in an environment in which the overall demand for credit is unchanged. In order to push the federal funds rate higher, the Fed has to reduce the supply of reserves (part of the monetary base) relative to the demand for reserves. So, all else the same, an increase in the federal funds rate entails a slowdown in the growth of the monetary base. Recall that the monetary base is – get ready – a component of thin-air credit. Ding! Ding! Ding! The federal funds rate is the base interest rate at which banks can obtain funds. As this base funding rate rises, banks will be induced to raise the interest rates at which they will loan funds. As bank loan interest rates rise, the quantity demanded of bank credit will decline. And what is the other and biggest component of thin-air credit? Bank credit. So, a Fed-induced rise in short-maturity interest rates relative to longer-maturity interest rates will lead to a slowdown in the growth of thin-air credit, which implies a slowdown in the growth of aggregate spending. Ah, the circle is completed. This is illustrated in Chart 2 in which is plotted the quarter-to-quarter annualized percent change in the sum of commercial bank credit and the monetary base vs. the quarterly average yield spread in percentage points between the Treasury 10-year security and the Treasury 1-year security. Notice that as the yield spread has been narrowing since 2014, growth in thin-air credit has been slowing.
Chart 2

But how can I be talking about a recession in 2019 when the economy seems to be bursting at its seams now? The Atlanta Fed’s Q2:2018 real GDP annualized growth forecast as of July 16 was a whopping 4.5%. If second quarter real GDP growth were, in fact,  to turn out to be 4.5%, this would represent the fastest quarter-to-quarter growth in real GDP the world has ever seen – that is, since the 5.2% growth in the third quarter of 2014 when you know who was president. Just as pride goeth before the fall, coincident indicators go up before a recession. In the past nine NBER business cycles, only three expansion peak quarters exhibited a contraction in real GDP. The largest peak-quarter real GDP growth was 4.7% (Q3:1981). The largest peak-quarter contraction was -1.7%. I suggest this country and western song title for economic forecasters – “How You Gonna See the Turn in the Road if You Keep Lookin’ Out the Side Window?”

With the real economy currently booming and the rate of consumer inflation trending higher, the Fed, in all likelihood, will not be able to constrain itself from raising the federal funds rate another 25 basis points at the end of its September 25-26 meeting. If the Fed holds its fire thereafter, the U.S. economy just might be able to avoid a 2019 recession, although real economic growth will have slowed to a crawl. If the Fed goes ahead an raises the federal funds an additional 25 basis at its December 18-19 meeting, batten down the recession hatches in 2019. 

Paul L. Kasriel
Founder, Econtrarian, LLC
Senior Economic and Investment Advisor

“For most of human history, it made good adaptive sense to be fearful and emphasize the negative; any mistake could be fatal”, Joost Swarte

∆ + 6 = A Good Life



Monday, April 16, 2018

Thin-Air Credit Growth Slowdown Augurs Poorly for 2018 Domestic Demand Growth

April 16, 2018

Thin-Air Credit Growth Slowdown Augurs Poorly for 2018 Domestic Demand Growth

A majority of my readers (two) have asked me to update the discussion about the behavior of thin-air credit or a variant thereof, namely the sum of commercial bank credit (loans and securities) and the monetary base (bank reserves at the Fed and currency). To paraphrase the motto of the former iconic Chicago department store, Marshall Field’s, give the customers what they want. To give the “customers” a preview of what they are going to get, let me state that thin-air credit growth has slowed to a rate that is low both from a long-run and short-run perspective. The slowing growth in nominal thin-air credit in conjunction with the acceleration in consumer price inflation has negative implications for growth in real U.S. aggregate domestic demand in 2018. In turn, if growth in real aggregate domestic demand “surprises” on the downside in 2018, then the Fed is unlikely to hike the federal funds rate the full 50 basis points this year that the market currently expects. Alternatively, if the Fed is hell-bent on raising the federal funds rate 50 basis points or more over the remainder of 2018, it would be sowing the seeds of a 2019 recession unless there is an acceleration in the growth of nominal and real thin-air credit. An acceleration in the growth of thin-air credit would be unlikely in the face of a rising federal funds rate.

As shown in Chart 1, year-over-year growth in thin-air credit has trended lower from its 9+ percent observations from Q4:2013 through Q3:2014. As of Q1:2018, year-over-year growth in thin-air credit was 2.7% -- low growth in terms both of a long-run and short-run historical perspectives.
Chart 1
Plotted in Chart 2 are the year-over-year percent changes in the quarterly observations of, again, thin-air credit (the sum of commercial bank credit and the monetary base) along with the percent changes in each of its major components – commercial bank credit and the monetary base – by themselves. The slowing growth in thin-air credit (the red line) in 2015 and 2016 was primarily due to the Fed’s cessation of quantitative easing (QE), i.e., large outright purchases of government securities and quasi-government mortgage-backed securities, which resulted in the year-over-year contractions in the monetary base (the green bars). Surprisingly, at least so to me, was the rebound in year-over-year growth in the monetary base in the past three quarters inasmuch as the Fed had started to reduce, albeit marginally, its outright holdings of securities and the Fed had been hiking the federal funds rate. Starting in 2017 and continuing through the first quarter of 2018, growth in commercial bank credit the blue line) has been trending lower, which has restrained the growth in thin-air credit.
Chart 2
Not only has growth in nominal thin-air credit slowed, but so, too, has growth in real thin-air credit, i.e., nominal thin-air credit deflated by the Consumer Price Index (CPI). In Q1:2018, the year-over-year percent change in real thin-air credit was just 0.5%. The importance of this is that there is a relatively high correlation between the year-over-year growth in real thin-air credit and real final sales to domestic purchasers. Starting in Q1:2011, the correlation coefficient between the year-over-year percent changes in real final sales to domestic purchasers and the year-over-year percent changes in real thin-air credit, advanced two quarters, is 0.68 out of maximum possible 1.00. This is shown in Chart 3.


Chart 3
As one of my readers (the other one?) has correctly pointed out, correlation does not necessarily imply causation. However, when I tested the lead-lag relationships between these two series, I found that the correlation coefficient was highest when thin-air credit growth leads growth in real final sales to domestic purchasers by two quarters. When growth in real final sales to domestic purchasers leads growth in real thin-air credit, the correlation coefficient declines. This does not prove that growth in thin-air credit causes growth in real final sales to domestic purchasers, but it sure does support the hypothesis.

In sum, the slowing in the growth of both nominal and real thin-air credit augurs poorly for the growth in aggregate domestic demand in 2018. But wait, won’t this year’s federal tax cuts stimulate demand? Not unless the resulting increased deficits are financed with the creation of thin-air credit. (See my January 22, 2018 blog post “No Sugar High from Tax Cut Unless the Fed and the Banking System Provide the Sugar” for an explanation of this). And, so far, at least, growth in thin-air credit has slowed, not accelerated. The market currently expects the Fed to hike the federal funds rate at least another 50 basis points this year. If I am right that growth in domestic demand slows this year, a further 50 basis point increase in federal funds rate might be sowing the seeds of 2019 recession. Available data, such as annualized growth in Q1:2018 nominal retail sales of 0.8% vs. 10.4% in Q4:2017, suggest a slowing in the growth of Q1:2018 final sales. Rumor has it that the Fed believes this slowing in aggregate demand growth is mainly due to “faulty” seasonal adjustment factors. The Fed ought to take a look at the behavior of thin-air credit growth before dismissing the weakness in first quarter final sales growth.

Paul L. Kasriel, Founder, Econtrarian, LLC
Senior Economic and Investment Advisor
“For most of human history, it made good adaptive sense to be fearful and emphasize the negative; any mistake could be fatal”, Joost Swart                                            ∆ + 6 = A Good Life


Sunday, April 1, 2018

As of this Past Fourth Quarter, the S&P 500 Remained Relatively Cheap

April 2, 2018

As of this Past Fourth Quarter, the S&P 500 Remained Relatively Cheap

Now that the first quarter of 2018 has just ended, what could be more fitting than to look back at the relative valuation of the S&P 500 stock index as of last year’s fourth quarter? After all, isn’t that what we economists do best, look back? This commentary is an update to my November 29, 2017 commentary, “The S&P 500 Is Not Expensive According to the Kasriel Valuation Model”. Before reviewing my methodology for estimating the over/under valuation of the S&P 500 stock market index, let me give you the Q4:2017 results upfront. According to my methodology, the S&P 500 index in Q4:2017 was overvalued by 7.4% compared with a revised 4.1% overvaluation in Q3:2017. Given that the median value of over/under valuation of my methodology in the period Q1:1964 through Q4:2017 was 35.5% overvaluation, the 7.4% overvaluation of the S&P 500 in Q4:2017 seems trivial. The continued low level of the corporate bond yield is the principal factor keeping the S&P 500 from being more materially overvalued.  Now for the important disclaimer. My relative valuation methodology involves only three observable variables – smoothed annualized reported earnings of corporations included in the S&P 500 equity index, the level of the corporate BAA/A-BBB bond yield and the actual market capitalization of the S&P 500. My methodology does not take into consideration expectations of corporate earnings or of bond yields. Nor does it take into consideration exogenous “shocks” including but not restricted to the likelihood of changes in the U.S. tax code, of geopolitical conflicts or of the imposition of U.S. trade protectionist policies. Of course, if I had a high degree of certainty about these exceptions to my “model”, I would be an extremely wealthy person and would not be inclined to share my “wisdom” with you!

To refresh your memory about my methodology, I calculate a quarterly theoretical market capitalization for the S&P 500 by discounting (dividing) smoothed annualized reported earnings of S&P 500 corporations by the yield on the lowest-rate investment-grade corporate bonds (BAA/A-BBB). I then compare my calculated theoretical market capitalization value with the actual market capitalization value. The percent of over/under value for the S&P 500 is calculated as follows:

((Actual Market Cap/Theoretical Market Cap)-1)*100

The technique I use to smooth reported corporate earnings is some high-falutin’ econometric technique called the Hodrick-Prescott filter. (Edward Prescott is a Nobel Prize winner in economics.) This smoothing technique is designed to remove the cyclical variation from a trending series. Another economics Nobel Prize winner, Robert Shiller, uses a 10-year moving average to smooth the S&P 500 price-to-earnings ratio in his stock market valuation research. He calls this the cyclically-adjusted P/E. It seems to me that a 10-year moving average is an arbitrary tool to use to remove the cyclical component from a time series. Why not use a technique specifically designed to remove cyclicality? While I’m on the subject of the Shiller cyclically-adjusted P/E, aside from the arbitrariness of using a 10-year moving average, a P/E in isolation tells you nothing about the stock market’s over/under valuation without taking into consideration the level of bond yields. A low P/E could be an indication of an overvalued stock market if the bond yield is relatively high. Conversely, a high P/E could be an indication of an undervalued stock market if the bond yield were relatively low, as has been the case for several years now.

Let’s go to the data. Plotted in the chart below are the quarterly observations of the percent over(+)/under(-) valuation of the S&P 500 calculated with my methodology discussed above. Also plotted in the chart are quarterly observations of the year-over-year percent change in the S&P 500 equity index. If my methodology has any legitimacy, there should be a negative correlation between the over/under valuation variable and the year-over-year percent change in the S&P 500 index. That is, if the S&P 500 is overvalued as calculated by methodology, then I would expect the S&P 500 equity index to be increasing at a slower rate or even declining. I found that the highest absolute value of a negative correlation coefficient, minus 0.20, is obtained when the over/under valuation is advanced by five quarters in relation to the year-over-year percent change in the S&P 500 index.  (With the low value of the correlation coefficient at minus 0.20, there obviously is a lot missing from this “model” in terms of explaining the behavior of the stock market, as I admitted at the outset.) So, the last data point plotted in the chart for the over/under valuation variable at Q1:2019 is actually the observation for Q4:2017 (advanced five quarters). The median value of over/under valuation is 35.5%. So, interpreting whether the S&P 500 is over or undervalued, it is better to look at the percent over/under valued in terms of 35.5% rather than zero.


As of Q4:2017, then,  my “model” indicated that the S&P 500 was overvalued by 7.4% -- a relatively low reading in comparison to the 35.5% median value for over/under valuation during the entire sample period. The yield on the BAAA-BBB corporate bond yield appears to have averaged about 4.45% in Q1:2018, up about 18 basis points from its Q4:2017 level. The market cap of the S&P 500 was about $22.5 trillion. If annualized smoothed S&P 500 reported earnings remained at their Q4:2017 level of $906.7 billion, then the S&P 500 would be 10.4% overvalued in Q1:2018 – still well below the median overvaluation of 35.5%. What if the BAA corporate bond yield had risen 100 basis points in Q1:2018 to a level of 5.27% and annualized smoothed reported S&P 500 earnings remained the same as they were in Q4:2017. In this case, in relation to the actual S&P market cap in Q1:2018, the S&P 500 would have been 31% overvalued. Of course, if the bond yield had risen by 100 basis point in Q1:2017, it is likely the actual S&P 500 market cap would have been significantly lower, and thus, the overvaluation of the market would also have been lower.

In sum, given S&P 500 annualized smoothed reported earnings and the current level of corporate bond yields, the S&P 500 stock market does not appear to be excessively overvalued. The continued low level of corporate bond yields is the principal reason that the overvaluation of the S&P 500 remains low in an historical context. Corporate earnings are growing, but at a subdued pace. In full disclosure, my portfolio is devoid of equities even though I do not believe that the S&P 500 is grossly overvalued.  Why? Because of those other factors that I mentioned earlier in this commentary. As evidenced by the quote I put at the end of my commentaries -- for most of human history, it made good adaptive sense to be fearful and emphasize the negative; any mistake could be fatal – I am congenitally risk averse. The S&P 500 equity index exhibited increased volatility in Q1:2018. I believe that this increased volatility was due primarily to exogenous “shocks” mentioned earlier in this commentary rather than the behavior of corporate earnings and/or corporate bond yields.

Paul L. Kasriel
Founder, Econtrarian, LLC
Senior Economic and Investment Advisor

“For most of human history, it made good adaptive sense to be fearful and emphasize the negative; any mistake could be fatal”, Joost Swarte

∆ + 6 = A Good Life







Monday, March 5, 2018

The Expected Widening in the U.S. Federal Budget Deficit Has Trade Protectionist Implications

March 5, 2018

The Expected Widening in the U.S. Federal Budget Deficit Has Trade Protectionist Implications

With the recent U.S. congressional passing and presidential signing of the Tax Cuts and Jobs Act of 2017 and the Bipartisan Budget Act of 2018, the federal budget deficit is projected to increase in the next few years. According to projections by the nonpartisan Committee for a Responsible Federal Budget, the U.S. federal budget will rise from $665 billion in fiscal year (FY) 2017 to $753 billion in FY 2018 and $1.1 trillion in FY 2019. Unless these increased federal budget deficits are financed out of increased U.S domestic saving, they imply increased financing from the rest of the world. Increased lending to the U.S. from the rest of the world implies a widening U.S. trade deficit. President Trump appears to have viewed the persistent U.S. trade deficit a result of “unfair” trade practices on the part of some U.S. trading partners. (I presented a counter argument to this view in my November 17, 2017 commentary entitled
At Least We Can Be Thankful to the ‘11’ Fair Traders”.) The Trump administration has imposed import tariffs on solar panels and washing machines recently and has announced its intention to impose import tariffs on steel and aluminum because of perceived unfair trade practices on the part of trading partners. If past is prologue, a widening in U.S. trade deficits resulting from widening U.S. federal budget deficits in the next couple of years could trigger more protectionist actions by the Trump administration.

Let’s look at some data to build a case that U.S. federal budget deficits are related to U.S. trade deficits. Plotted in Chart 1 are annual observations of U.S. net exports of goods and services from 1970 through 2017. Net exports are exports minus imports. So, if net exports are negative, it means that the value of goods and services imported by a country are is greater than the value of its exports. If net exports are negative, it means that a country is running a trade deficit. The data in Chart 1 show that the U.S. has consistently been running trade deficits from 1976 through 2017.
Chart 1
When a country runs a trade deficit, it means that the residents of that country are spending more on goods and services than they are producing. To see this, let’s look at the identity for GDP:

(1)   GDP = Goods & Services Spending + (Exports – Imports)

GDP is the value of goods and services produced in an economy. Goods and Services Spending is the aggregate spending by households, businesses and government entities.   Imports enter the GDP identity with a negative sign in order to avoid double counting. That is, imports account for some of the Goods & Services Spending.  Because GDP represents the value of goods and services produced in an economy, imports need to be subtracted from Goods & Services Spending. Because exports are not part of domestic Goods & Services Spending but are produced in the economy, exports are added to Goods & Services Spending.

By rearranging the terms in identity (1), we get:

(2)   GDP – Goods & Services Spending = (Exports – Imports)

If the term (Exports – Imports) is negative, that is, a country is running a trade deficit (net exports are negative), then GDP minus Goods & Services Spending also must be negative.  So, a country that is running a trade deficit, by definition, is spending more on goods and services than it is producing. The only way a country can spend more on goods and services than it produces is to receive goods and services from other countries. Unless the residents of those countries providing goods and services to the country running a trade deficit are gifting those goods and services, the residents of the trade-deficit- running country are either incurring debt or are selling off assets to the residents of the country providing the goods and services. In sum, a country running a trade deficit is, in effect, a net borrower from the rest of the world.

Plotted in Chart 2 are annual observations of U.S. net exports, the same as in Chart 1. But also plotted are the annual observations of net financial lending or borrowing by the combined U.S. nonfinancial sectors – households, nonfinancial business and government entities. The positive correlation between these two series for the period 1970 through 2016 is 0.81 (looks like 0.61 in Chart 2, but is 0.81). Recall, if the correlation were “perfect”, its value would be 1.00. So, the data in Chart 2 are supportive of the notion that as a country runs a wider trade deficit, its net financial borrowing increases, too.
Chart 2
Chart 3 shows from whom most of the borrowing comes when the U.S. runs a trade deficit – the rest of the world, obviously. The negative correlation between U.S. nonfinancial sector net borrowing and the rest of the world’s net lending to the U.S. is minus 0.78 for the years 1970 through 2016.
Chart 3
Okay, what does all this have to do with widening U.S. federal government budget deficits resulting in wider U.S. trade deficits? The data in Chart 4 have a bearing on this question. Plotted in Chart 4 are annual observations of net lending/net borrowing of the entire U.S. nonfinancial sector, including the federal government sector, and the net lending/net borrowing of the federal government sector by itself. The correlation between these two series is a positive 0.64. This suggests that the federal government budget deficit plays an important role as to whether the entire nonfinancial sector is in a net lending or net borrowing position. And again, if the entire nonfinancial sector is in a net borrowing position, there is a high probability that the U.S will be running a trade deficit, with the magnitude of the trade deficit positively correlated with the magnitude of the net borrowing position of the nonfinancial sector, as shown in Chart 2.








Chart 4


So, we have established that the magnitude of the U.S. trade deficit is highly correlated with the magnitude of the U.S. nonfinancial sector net borrowing position. The magnitude of the U.S. nonfinancial sector borrowing position is correlated with the magnitude of the U.S. federal government budget deficit. Nonpartisan analysts are projecting higher federal government budget deficits in the next two years. Thus, there is a high probability that the magnitude of the U.S. nonfinancial sector net borrowing position will increase in the next two years and with it, an increased magnitude in the U.S. trade deficit.

There is a possibility that the likely widening in the federal budget deficit would not result in a widening U.S. trade deficit. That possibility rests on whether the nonfinancial sector, excluding the federal government, increases its net lending to the federal government to prevent the total nonfinancial sector, including the federal government, from slipping further into a net borrowing position. This is unlikely to happen if the federal budget deficit reaches $1 trillion+ in FY 2019. That would be a $335+ increase in budget deficit vs. FY 2017. In the three quarters ended Q3:2017, net lending by the nonfinancial sector excluding the federal government amounted to $415 billion. So, net lending by the nonfinancial sector excluding the federal government would have to increase by about 80% to prevent total nonfinancial sector net borrowing from widening and, thus, the U.S. trade deficit from widening. Possible, but not probable.

At the outset of this commentary, I noted that President Trump interprets the persistence of U.S. trade deficits as evidence of “unfair” trade practices on the part of some of our trading partners. If the federal government budget deficit widens as credible analysts project, there is a high probability that the U.S. trade deficit also will widen. This could prompt the Trump administration to adopt even more protectionist trade measures given its view of the cause of trade deficits.


Paul L. Kasriel
Founder, Econtrarian, LLC
Senior Economic and Investment Advisor

“For most of human history, it made good adaptive sense to be fearful and emphasize the negative; any mistake could be fatal”, Joost Swarte

∆ + 6 = A Good Life