Why Public Debt Is a Problem — And Trade Deficits Aren’t
As the U.S. trade deficit has been widening for the fourth month running, markets and business experts appear once again bewildered by the events and unsure how to react to them. On the one hand, they had vehemently opposed the increase in trade tariffs and the trade war that has made headlines this year. But on the other hand, they now find that U.S. trade deficit reaching its largest level on record — the precise deficit tariffs purported to narrow — is very worrying. Furthermore, as they scramble to adjust their costs and production plans to the increasing uncertainty of world trade relations — including here not only U.S.’s trade disputes with China, but also UK’s planned exit from the EU and the fraught relationships at the WTO — global companies are also paying less attention to the Fed’s and other central banks’ monetary policies.
It is not hard to see why they are confused. Political turmoil is bound to make navigation of global markets much more difficult, and smooth planning almost impossible. At the same time, the fallacy that trade deficits are detrimental to a nation in and of themselves is very deeply rooted in public opinion. By comparison, government deficits and easy monetary policies — the real culprit behind eroding wealth and falling purchasing power — get a lot less bad press than they deserve.
It is thus worth reminding ourselves that trade deficits themselves are not at all problematic. As Mises (2009, 448) explained:
While an individual’s balance of payments conveys exhaustive information about his social position, a group’s balance discloses much less. It says nothing about the mutual relations between the members of the group. The greater the group is and the less homogeneous its members are, the more defective is the information vouchsafed by the balance of payments.
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