Trade deficits used to be an important market mover. In fact , many blame the particular 1987 stock market crash on a much worse than anticipated trade deficit.
That led to vulnerable dollar and bond markets that bled over to the stock market.
But today, traders mainly ignore the trade deficit. Actually the US trade deficit fixed another record in Sept and the markets didn’t blink. Peter Schiff talked about this in his podcast.
The goods industry deficit increased 9. 2% to $96. 3 billion in September, according to the Commerce Department. That broke the previous record emerge August, which was revised up to $88. 2 billion Items exports dropped 4. 7%, while imports gained 0. 5%. In other words, we’re importing far more and exporting less.
Peter called one of the worst trade loss he’s ever seen. Yet the markets didn’t bat a watch.
“ It was a complete yawn. No one spoke about it. Nobody cared for. ”
There was virtually no reaction in the foreign exchange markets, the bond market, or the gold market.
“ You would not even know that any data came out. Because the data no more moves the markets. ”
That doesn’t imply the data isn’t significant. It matters as much today since it did in 1987. Yet we’ve had high business deficits for so long without having any apparent ill-effects, everybody is usually convinced it doesn’t really issue.
“ People have been lulled in to a false sense of security that it doesn’t matter anymore. Well, the reality is it issues more than ever. It’s precisely because the markets have decided, based on Fed intervention, that trade deficits don’t matter, that they right now matter more than ever because most are larger than ever. ”
The lack of worry has removed any semblance of market discipline. If a country runs a large business deficit, market forces should reduce the value of that state’s currency and push upward interest rates. This leads to less investing, less borrowing and more savings in that country. That will eventually drive more production, and this reduces the trade debt.
“ But that didn’t take place. Because the markets never self-discipline our reckless consumption, we continue to consume more recklessly than ever. The dollar didn’t lose any value. Therefore , we were able to import increasingly more stuff that we couldn’t pay for and didn’t make using the dollars that we printed. And interest rates didn’t go up. Actually they went down. They were unnaturally suppressed, which made it possible for Americans to borrow much more money to buy even more imported goods, driving the industry deficits even higher to the level that we got the record deficit for September. ”
The particular mainstream blames the big fall in exports on congestion at the ports. But Peter raises a good point. In case port congestion is the issue, how are more imports getting into? Why is it just a good export problem? Shouldn’t it be the other way close to?
“ It’s not a problem with blockage at the ports. The problem is we’re not making stuff. The issue is at our factories — or our lack of industrial facilities. We’re not producing things to export. All the congestion is surrounding the massive quantities of stuff that we’re adding that we no longer produce. That is the problem. ”
Peter called the industry deficit a “ horrific number” and said it evidences the weakest economic climate in US history.
“ Really weak because we’re more dependent than ever on the effective capacity of the rest of the globe. We are living on the charitable organization of the world because all of us did not pay for $96. several billion worth of goods that we imported. We just published money. ”
You will hear people in the mainstream claim this is a sign of a strong economy. They’ll say, “ Take a look at all the stuff we’re buying. ”
“ No . It just displays how strong the rest of the tour’s economies are because look at all the stuff their making. These kinds of are making all this stuff and letting us have it free of charge — because all all of us did is print cash. If we really had a strong economy, we would be generating the stuff that we’re adding. We wouldn’t have trade deficits. Strong economies possess trade surpluses. We are a bubble economy. We’re only consuming and importing since we’re printing. And we are going to getting away with it because the world still values the currency. ”
Again — the fact that nobody cares about industry deficits is a big area of the reason they’ve been able to have this bad.
“ Nobody is going to worry about it until they do. It’s not going to be a problem until it’s a crisis, and then it’s too late. So , one of these days we will suffer from the accumulation of these massive trade deficits. ”
In the meantime, the US government continues to spend money report and a record pace, running record budget deficits . The twin deficits — trade and budget — have never been even worse. And government spending contributes to the trade deficit.
“ Once the government just hands out money to people who failed to produce anything, not only really does that mean that we have bigger budget deficits, but we also have bigger trade deficits. Becuase the people who got govt money for free, they want to purchase stuff. Well, what’s the stuff that they’re buying? All the stuff that’s being made in various other countries. So , bigger budget deficits drive bigger industry deficits. And so, it rss feeds on itself in this destructive loop that ultimately will certainly lead to a currency crisis. ”
In this podcast, Peter also talks about government taxing strategies and Biden’s new daycare plan.