Trade And Debt And Borrowing…

It feels like we are about to slide into the great trade debate on the national stage. An often-stated objective of the new administration has been to alter the global trading landscape. A study commission on the trade deficit has been requested, and proposals for tariffs, import restrictions, and other measures are circulating around and through the Washington, D.C. talk circuit.

These various restrictive concepts don’t make much sense to me – the math of global trade clearly works for U.S. consumers – but I’ll set that debate aside for real proposals to emerge. Maybe they’ll be great.

Instead, I’d like to point out a few items that flow one into another that cause me to think that over the next couple of years, the U.S. dollar might head lower once again.

The U.S. Current Account Balance, roughly the difference between what we export and import as a nation, has been negative since 1975, according to the U.S. Federal Reserve.1 Glancing at the graph in Figure 1, this trend accelerated in the late 1990s and early 2000s as the wealth effect in the U.S. drove higher consumer spending, government policy shifted to encourage this behavior and, of course, the manufacturing of quality Asian products took off. People here in the U.S. have found, for example, that it is a better deal to buy kids’ shoes for $20 instead of for more than $80, thereby accelerating the trend.

Fig. #1
Current Account Balance
Total Trade of Goods for the United States
01/1975 – 10/2013

Source: Organization for Economic Co-operation and Development, Current Account Balance: Total Trade of Goods for the United States© [BPBLTD01USQ636N], retrieved from FRED, Federal Reserve Bank of St. Louis;, April 5, 2017.

If a country uses a currency backed by hard assets such as gold, this would involve having or borrowing some gold, and putting it on a ship to the net exporting country and then probably backing down on importing until the reserves built up again.

Today, the U.S. finances these purchases – along with the fiscal deficit and household debt – by borrowing. The resulting net liability to people and entities outside the country is called the “U.S. Net International Investment Position.”

A quick look at this position (Figure 2) shows that foreigners now hold just under 50% of U.S. Treasury, Corporate and other debt as a percentage of gross domestic product (GDP).2 While the fiscal deficit holds the attention of some politicians, this total holdings figure is rarely discussed or even mentioned.

Fig. #2
U.S. Net International Investment Position
01/2006 – 10/2016

Source: U.S. Bureau of Economic Analysis, U.S. Net International Investment Position [IIPUSNETIQ], retrieved from FRED, Federal Reserve Bank of St. Louis;, April 5, 2017.

In a Wall Street Journal blog post, Joseph Gagnon, a senior fellow at the Peterson Institute of International Economics, notes that: “Never in history has one country owed so much to the rest of the world.” He goes on to say: “No economies of even a modest size have had a borrowing deficit above 60% of GDP without a major reversal in their trade balance, often accompanied by severe financial stress.” 3

As a worrywart banker, I tend to latch on to items like this and, well, worry. Maybe it’ll be different this time; ever heard that before? Combined with an expectation that there will be a stimulus package proposed sometime this spring, some trade restrictions put in place, and Americans’ apparent preference to purchase goods and services at lower rather than higher prices suggests to me that the U.S. dollar may head lower as this plays out.

But, then maybe we want foreigners to be holding our debt. Recent statistics show that the credit quality of American borrowers is declining somewhat and that delinquencies may be headed back up – in auto and student lending, in particular. The declines in other categories seem to be flattening out. We know that median income isn’t keeping up with the price of living, so this makes sense. Will we get GDP growth acceleration to bail us out? Time will tell.

On that front, it appears that the consensus is for about 2% average annual growth for the next many years. As we have discussed many times in the Daily Pfennig® newsletter, the bond market seems to agree with that assessment. One glimmer of optimism is that these forecasts are often off base. I sure hope that the U.S. grows more quickly. Until it does, I am starting to think that the U.S. dollar will return to a pattern of decline later this year. Think about how that might fit in your portfolio.

Do you think the economy could grow faster than 2% annually? Share your views with us by visiting our blog and leaving your thoughts in the Comments section.

Until the next Daily Pfennig® edition…

Onward and upward,

Frank Trotter
EVP & Chairman
EverBank Global Markets Group