Wednesday, August 11, 2010

The good news behind the June trade deficit

The trade deficit increased in June because the growth rate of exports has slowed. The market is interpreting that to be bad news, but it isn't.

To begin with, there's nothing wrong with a trade deficit. In fact, many healthy economies have trade deficits. A trade deficit is the flip side of a capital inflow—you can't have one without the other—and capital inflows are a measure of foreign investor's confidence in your economy.

Treasury is selling over $100 billion a month of T-bills and T-bonds, and foreigners are buying a good portion of that debt. That leaves foreigners with less money to spend on our exports. Our export growth has declined, but our sales of T-bonds to foreigners have risen. Since nobody is holding a gun to foreigners' heads and demanding that they purchase our debt (and low interest rates suggest they are quite happy to do so), one is forced to concede that foreigners have made a decision (to buy our bonds instead of our debt) that is in their best interest. If they didn't feel good about doing that, they could shun our debt, which might make interest rates rise, but they would be left with more cash to buy our exports.

The only bad thing about our trade deficit is that it's likely driven at least in part by our federal government's voracious need to finance its spending habits, which in turn means that we are likely squandering some of our capital inflows since they could be put to better use if they were available to the private sector rather than being gobbled up and spit out as transfer payments.

Meanwhile, the very strong growth in imports, which has been running at a 20+% pace for the past nine months, is a excellent sign that U.S. consumers are feeling much better about spending money (incomes are up, confidence is slowly returning, money hidden under mattresses is being spent), and that is unequivocally a good thing.

This last chart compares imports and exports to consumption. What it shows is that imports have represented about about 20-25% of our total consumption expenditures for the past decade or so—imports on average have grown at about the same pace as consumption. Meanwhile, our exports have grown faster than consumption, and exports are now only a shade below their all-time high relative to consumption. This means that our exports are financing a greater share of our consumption than at almost any time in history, and that represents a healthy diversification for our economy.

Another observation: the U.S. economy is now more than twice as integrated into the global economy than it was back in 1980, because our imports and exports have more than doubled in size relative to consumption. It's hard to see how this could be a bad thing.


Bill said...


Do you think we are in a secular bear market that started in 2000 and is likely to continue until the middle part of this decade due to poor fiscal/monetary policy?

Benjamin Cole said...

Boy, how to bring down federal spending.

David Stockman, the old Reaganite OMB top gun, has authored a truly insightful commentary on today's GOP and it's marriage to red ink.

I take a lot of heat as I say the R-Party is not worth voting for anymore. Read this, and then tell me if I am too cynical.

So, get used to deficit spending. And an overly tight Fed. Not a recipe for growth--though so creative and hard-working is the private-sector, we will probably see modest growth anyway.

Scott Grannis said...

Bill: I think it's hard to escape that conclusion. What we really need is an improvement in fiscal policy. I think it's coming. I don't think we will hve to wait 5 more years--what is happening today is unsustainable and that is forcing positive changes on the margin.

Mark Gerber said...

I missed posting on the Fed move yesterday, but thought I would share my 2 cents today.

I think the all the Fed did yesterday was to acknowledge we're at risk of rolling into a double dip. Instead of QE2, they merely cancelled their very slow motion exit strategy for QE1.

The problem for me is that we all know, and they repeatedly tell us, they are prepared for QE2 when it's needed. It seems to me the longer they wait for QE2, the bigger it will be, and the bigger the risk of pushing us over the tipping point towards hyper-inflation. So they are just adding fuel to the instability/uncertainty fire, and it looks like the risk markets are reflecting that today.

What amazing to me is given this uncertainty, and the most likley outcome that the fed will succeed in generating inflation one way or another, what are people thinking who are buying those bonds? This looks like the formation of the biggest financial bubble the planet earth has ever seen!

Benjamin Cole said...

Mark Gerber:


Can we even get to 4 percent inflation?

Most economists say the big threat is now deflation, although as Grannis points out, the phrase "most economists say" is not a confidence builder.

Still, unless we get an more-aggressive Fed...what is interesting is that Japan reached long-term deflation even while running big trade surpluses...jeez, what will happen to the US?

Buddy R Pacifico said...

Scott, I usally agree with your posts and always enjoy them. I disagree with your finding good news in the June trade deficit.

The top U.S. Exports should be high-value goods and services due to the evolution of the economy. The top three Exports to China are: 1] Scrap and Trash; 2] Oilseeds and Grains and 3) Grains.
This looks like a Second to Third World line-up. Why? Because Intellectual Property is acquired with-out payment and trade secrets are the entry into the Chinese market through forced joint-ventures.

Those of us the promoted trade with China have to question the control of the markets by the Chinses government now. Agree totally about U.S. fiscal restraint now.

Public Library said...


Banks and consumers around the globe will unwind the massive amounts of excess fractional reserve credit sloshing around for the past 3 decades and this trumps any credible amount the Fed can pump out on its own.

Inflating away will prove more disastrous especially considering that is how we got from point A to current point B.

Public Library said...


If those highlights are true, nice digging. The composition of the global markets is what matters, not the levels.

Just like the composition of the Fed's balance matters. Holding piles of cr*p marked at par when there is likely a 30-60% haircut, implies if the Fed sold off its positions, hundreds of billions would remain sloshing around in the system.

The Fed is becoming more and more of a joke in my opinion. They could quickly lose complete control of this already rudderless ship.

Benjamin Cole said...

A bearish view by a money manager:

America is a "Mickey Mouse economy" that is technically bankrupt, according to Jochen Wermuth, the Chief Investment Officer (CIO) and managing partner at Wermuth Asset Management.

"America today looks like Russia in 1998. Consumers, companies and the government are all highly indebted. America as a result is a bankrupt Mickey Mouse economy," Wermuth told CNBC.

Public Library said...


The law of physics applies to Americans just like everyone else. Granted, we've done our darnedest to inflate physics away with our beautiful fractional reserve system, but the Madoff's are now fully exposed.

John said...


So now we're Russia.

Lets see...we've been Rhodesia, Argentina, Japan, and probably several other countries with negative connotations.

People have been crying about consumption. If consumption is so bad, why are imports going up?

Macy's just reported excellent same store sales. According to management the best performing catagories were:

men's apparal

Only one company but the picture is not consistent with the one painted on TV by people comparing America to third world countries.

Disney reported earnings far ahead of expectations. People are still flocking to Disney World. Media was strong.

Boeing's 787 Dreamliner will begin deliveries soon. Hundreds are on order from airlines all over the world. To see one, go to

Pessimists love say we are nothing more than some third world banana republic and all we have to offer the world in trade is oilseed and maybe a little corn. It is SO a hoot.

Buddy R Pacifico said...

Public Library, My source of the figures is this articlewhich got its figures from the U.S. International Trade Commission.

Public Library said...


I would caution following the dumb money down the hole to Nordstroms. A junkie doesn't quit heroin full stop. He goes on oxycotin first.

Benjamin Cole said...


I find your optimism refreshing.

I just think we need a lot more monetary stimulus. Central bankers fear for their professional reputations far more than they fear deflation. No central banker was ever excused from the club for being "too tight."

I often say America's policy-making classes usually fight the last (as in previous) wars.

For liberals, it is ever Selma Alabama 1962 and underfed Americans (a reality in 1941--many draftees were 4F due to malnourishment).

For conservatives the Cold War, or at least the spending and foreign nation-building side of it, never ended.

Of course, there are now powerful interest groups and federal lard attached to both camps.

And so the Fed soldiers on against inflation.

These are all public movements or institutions. That means they can be wrong, outdated and expensive for decades upon decades, and there is no private sector mechanism for improving performance.

When will the Fed stop fighting inflation? Japan's central bankers still issue press releases indicating there concerns about inflation and the need for price stability.

Oh boy we may have a long wait.

Public Library said...


CSCO off in after hours 8%.

John said...


Yes. The revenue miss was $40 million in a revenue stream of nearly $11 Billion. Earnings were ahead of estimates. The market trades on psychology and expectations.

Chambers is acknowledging what everybody knows..the order flow is slowing..not declining, slowing.

Cisco has no debt, and cash and equivalents exceed 30% of the market cap..something like $7 a share. Back that out of the $22 after hours quote and you have a bellweather tech company selling for less than 9X earnings. Cisco's board ought to seriously consider taking the cash, doing a bond offering at these ridiculous rates and take the whole thing private...but they won't.

We're getting that correction I have been looking for. Bargains are returning.

Public Library said...


The disappointment is more how quickly the pop from massive pent-up demand is fizzling coming out of an economic trough.

Days sales outstanding went from 27 to 41. Businesses are taking longer to pay them back too.

Buying CSCO means buying growth since they do not pay any dividends.

Mark Gerber said...


I think deflation is a risk at this point, and since deflation is the Feds #1 enemy, I expect them to try to stop it with QE2. It's that QE2 that I think has a high chance of eventually triggering hyperinflation. I'm not saying that is what the Fed should do, but I think that's is what they will do.


John said...


A couple more things re CSCO:

yr/yr numbers:

rev +27%
inc +36%
expenses +15% (higher #of employees..CSCO is hiring)
gross margins 64.1% (this was down slightly from 64.8%

emerging mkts orders up 35%
Europe up 25%
asia/US up 20%
productivity per employee up 20%

These are yr/yr numbers but are still impressive. Guidance was a little lower than expected...keeping the bar low for later clearance. Market didn't like it though. Back near the July lows just under $22 the stock is cheap. IMO there is good value here.

I agree not paying a dividend makes the company less appealing.