Trade deficits used to be an important market mover. In fact, many blame the 1987 stock market crash on a much worse than expected trade deficit. That led to weak dollar and bond markets that bled over into the stock market. But today, traders mostly ignore the trade deficit. In fact, the US trade deficit set another record in September and the markets didn’t blink. Peter Schiff talked about it in his podcast.
The goods trade deficit increased 9.2% to $96.3 billion in September, according to the Commerce Department. That broke the previous record set in August, which was revised up to $88.2 billion Goods 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 deficits he’s ever seen. And yet the markets didn’t bat an eye.
It was a complete yawn. Nobody spoke about it. Nobody cared.”
There was virtually no reaction in the foreign exchange markets, the bond market, or the gold market.
You wouldn’t even know that any data came out. Because the data no longer moves the markets.”
That doesn’t mean the data isn’t significant. It matters as much today as it did in 1987. But we’ve had high trade deficits for so long without any apparent ill-effects, everybody is convinced it doesn’t really matter.
People have been lulled into a false sense of security that it doesn’t matter anymore. Well, the reality is it matters more than ever. It’s precisely because the markets have decided, based on Fed intervention, that trade deficits don’t matter, that they now matter more than ever because they’re larger than ever.”
The lack of concern has removed any semblance of market discipline. If a country runs a large trade deficit, market forces should reduce the value of that country’s currency and push up interest rates. This leads to less spending, less borrowing and more savings in that country. That will ultimately drive more production, and this reduces the trade deficit.
But that didn’t happen. Because the markets never discipline our reckless consumption, we continue to consume more recklessly than ever. The dollar didn’t lose any value. So, we were able to import more and more stuff that we couldn’t afford and didn’t make with the dollars that we printed. And interest rates didn’t go up. In fact, they went down. They were artificially suppressed, which made it possible for Americans to borrow even more money to buy even more imported goods, driving the trade deficits even higher to the point that we got the record deficit for September.”
The mainstream blames the big drop in exports on congestion at the ports. But Peter raises a good point. If port congestion is the problem, how are more imports getting in? Why is it just an export problem? Shouldn’t it be the other way around?
It’s not a problem with congestion at the ports. The problem is we’re not making stuff. The problem is at our factories — or our lack of factories. We’re not producing things to export. All the congestion is surrounding the massive quantities of stuff that we’re importing that we no longer produce. That is the problem.”
Peter called the trade deficit a “horrific number” and said it evidences the weakest economy in US history.
It’s weak because we’re more dependent than ever on the productive capacity of the rest of the world. We are living on the charity of the world because we did not pay for $96.3 billion worth of goods that we imported. We just printed money.”
You will hear people in the mainstream claim this is a sign of a strong economy. They’ll say, “Look at all the stuff we’re buying.”
No. It just shows how strong the rest of the world’s economies are because look at all the stuff their making. They’re making all this stuff and letting us have it for free — because all we did is print money. If we really had a strong economy, we would be producing the stuff that we’re importing. We wouldn’t have trade deficits. Strong economies have trade surpluses. We are a bubble economy. We’re only consuming and importing because we’re printing. And we’re getting away with it because the world still values our currency.”
Again — the fact that nobody cares about trade deficits is a big part of the reason they’ve been able to get this bad.
Nobody is going to care 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 are going to suffer from the accumulation of these massive trade deficits.”
Meanwhile, the US government continues to spend money record and a record pace, running record budget deficits. The twin deficits — trade and budget — have never been worse. And government spending contributes to the trade deficit.
When the government just hands out money to people who didn’t produce anything, not only does that mean that we have bigger budget deficits, but we also have bigger trade deficits. Becuase the people who got government money for free, they want to buy stuff. Well, what’s the stuff that they’re buying? All the stuff that’s being made in other countries. So, bigger budget deficits drive bigger trade deficits. And so, it feeds on itself in this destructive loop that ultimately will lead to a currency crisis.”
In this podcast, Peter also talks about government taxing schemes and Biden’s new childcare plan.