For those with a minimum grasp of macroeconomics, you know that an incoming President cannot have an investment boom, small deficits with tax cuts. You need two things to accomplish these: time and a Reaganite grasp of how to shape public opinion.
The currents that run through this Presidency have yet to procure gains. We’re really only a few days past the artificial 100 day mark. Congress needs to instill near permanent traction on its own ledger before this President can begin to ease his stride. Given the perpetual turbulence that characterizes this Presidency, the Republic has run out of time given the eight years of naval gazing by the Obama Presidency. Nevertheless, team Trump must gain traction on the following.
American’s import more than we export. We get raw materials and furnished goods, they get paper. But that paper is returned to our Treasury as a bond that secures interest. The American economy needs the investments of dollar denominated assets. It is these assets that yield returns as dividends, interest or capital gains. All of it is taxed. So the best way to encapsulate our trade deficit is to envision it as a relation between rivals that both seek to grow, tying foreign political economies to the American maelstrom means we must have sound money, good functioning institutions and a regulatory, tax environment that openly promotes growth in equity-capital formation. That hasn’t happened under previous Presidents who sought the expropriation of civil society for the benefit of those that will not compete.
Here’s the good side of the macro equation, when America continues to run a current account deficit chiefly driven by balance of trade agreements, mercantilist regimes like China and others are tied to our Treasury. Its leverage that cannot be beat. Just ask Putin or Riyadh about the reach and scope of their authority. Having Putin, Erdogan and hosts of other autocrats hinged on short term interest from bond holdings gives our Executive enormous privilege.
So how should this exorbitant privilege be exposed?
America’s trade deficit has multiple channels, so the most coherent, synoptic framework to envision this cacophony is to understand the origin these multiple channels as components in a whole. That means U.S. consumers, government spending and net borrowing determines the U.S. current account. Any movement in our budget deficit or surges in private investment into the nation increase the trade deficit. To effectively manage this relation, the President needs productivity growth. This should be achieved by corporate tax reform in the repatriation of profits matched to a deregulatory agenda.
All of this would lead to dollar appreciation. This means entitlement reform if American citizens are to acquire equity, capital formation. Consequently, we should expect a real drop in savings commonly associated with high productivity rates.
No matter how you look at Trump-enomics, trade deficits are driven by investment booms.
We desperately need one.
William Holland
