According to the International Trade administration “the United States has been running consistent trade deficits since 1976 due to high imports of oil and consumer products. In 2017, the biggest trade deficits were recorded with China, Mexico, Japan, Germany, Vietnam, Ireland and Italy and the biggest trade surpluses with Hong Kong, Netherlands, United Arab Emirates, Belgium, Australia, Singapore and Brazil. Mexico is the United States' 2nd largest export market and the 3rd largest supplier of imports.”
One school of economics supports the notion that if “the United States runs a large trade deficit, foreign sellers simultaneously accumulate large amounts of U.S. dollars. These dollars cannot be spent inside their own countries, so they need to be invested somewhere. Much of this trade deficit-driven accumulation of dollars is used to purchase American stocks and bonds, pieces of American companies, and other U.S. assets.” China and Japan are a good example of the notion.
The impending reality for instability arises when foreign investors in U.S. assets begin to worry that a permanent trade deficit is going to make the U.S. dollar less valuable relative to other reserve currencies. If this issue prompts a group of foreign investors to sell their U.S. assets at the same time, then the value of the U.S. dollar could fall substantially in a short period of time triggering a potential panic in financial markets.
the Federal Reserve is independent of the Treasury Department, and is not required to purchase federal securities whenever there is a deficit. If the Fed does not do so, deficits may be completely bond-financed. On the other hand, the record indicates that deficits are not completely financed by printing money alone as it appears that the Fed monetizes fractions of the deficits.
The historical record of fiscal policy indicates that from “1790 to the introduction of the federal income tax in 1913, government spending was just 2.3% of GDP. During the century after 1913, government spending as a share of GDP increased to 16.7%. It reached 20% in the years after World War II. And by 2011, federal spending was 24% of GDP.” The only meaningful solution for a fiscal deficit is to spend less and set tax rates to generate sufficient revenue over the business cycle to fund government spending. Moreover, the tax rate should be permanent to lessen uncertainty and allow individuals and businesses to plan for the future. A lees unsavory solution would be to run the US economy as an empire and charge the “colonies” assessments to compensate fiscal deficits generated by being the “protector” of the global status quo.
Lance Roberts, a portfolio manager recently wrote: “Currently, the market is pushing towards 4-standard deviations (99.9 percentile) above the 52-week mean…this is ‘rarefied air’ for the market historically.” Roberts notes that this statistical aberration hasn’t occurred since 1981. The market is at levels that are, to put it bluntly, statistically stupid and he adds: “Previously, large deviations from a long-term mean have coincided with mild to severe market corrections and crashes. Given the current extreme deviation, one can only assume a negative outcome in the future.”
Central bankers agree that a reserve currency status isn't without its downsides and the Federal Reserve must constantly adjust its balance between current domestic economic politics and the realities of global financial markets. The financial crisis of 2008 was exacerbated by budget deficits and large debt to GDP ratios.
Monetary policy used by the Feds includes “quantitative easing” which really means printing more money into the economy to keep money supply abundant and interest rate low. The method is however a temporary solution until growth and capital gains return to the overall economy otherwise inflation can set in as the value of the dollar shrinks. Economic politics can nevertheless upset sound monetary policy such as the recent tax cut of a trillion dollars Trump just sign into law.
Trump, the "stable genius" ordered the acceleration of the money printing press to pay for his tax cuts. “The United States reported a government debt equivalent to 106.10 percent of Gross Domestic Product in 2016. Historically, US Government Debt to GDP in the United States has averaged 61.14 percent from 1940 until 2016, reaching an all-time high of 118.90 percent in 1946—at the end of WWII-- and a record low of 31.70 percent in 1981.” This issue alone could encourage foreign savers in Dollar to look for a more stable reserve currency like the Euro with a current ratio that according to Eurostat, the European Union decreased from 84.9 per cent of GDP in 2015 to 83.5 per cent last year.
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