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If trade wars are easy to win, as Donald Trump assures us, what will victory look like? And how long do we have to wait for its announcement? Trump does not pretend to be a high-powered and sophisticated theorist about international financial relations. He sees trade in simple terms, as if the United States of America were a business conglomerate with profit- and loss-making subsidiaries. A plus sign means a surplus and is good, and a negative sign means a deficit and is bad.

In 2017 the US had a deficit on trade in goods of $568.4 billion (about 3 per cent of output) and a deficit on current account transactions of $449.1 billion. In Trump’s view, both numbers are bad and something must be done. As Brigadier Ritchie-Hook explained in Evelyn Waugh’s Sword of Honour trilogy, foreigners are there to be biffed. Tariff increases constitute the weapons in the “war” Trump is now conducting. Their purpose is to make foreign goods more expensive in the US, so that higher prices reduce the amount that Americans buy, payments to foreigners fall and the deficits become surpluses. Victory can be declared when the US’s surpluses on its international payments are well-established and consistent.

How long will we have to wait? The short answer is, “indefinitely”. The problem is that American economic policy under Donald Trump has more than one dimension and suffers from contradictions. Even if it were true that tariff increases would by themselves have positive effects on the deficits, his government’s other actions are certain to expand external borrowing on an enormous scale. In 2017 it was able to secure the passage through Congress of the Tax Cuts and Jobs Act, with large tax cuts for companies and the middle classes. The overall effect is to be an increase in public debt over the next decade of $2,000 billion more than would otherwise have been the case.

The phrase “than would otherwise have been the case” carries a nasty sting. The point is that — if the Tax Cuts and Jobs Act had not become law — American public debt would already have been on a strongly upward path. Before the Obama presidency, gross government debt was roughly two-thirds of US national output. But Obama responded to the Great Recession with Keynesian public works and red ink, which took the figure to almost 110 per cent of national output in 2016. The ratio of public debt to output was still climbing as Trump was elected president. The tax cuts will now accelerate the increase. A figure of 117 per cent will be reached by 2023, according to the International Monetary Fund.

Let it be admitted that domestic public debt and international debt are not the same thing. The relationship between a nation’s budget deficit and its current account deficit is not a mechanical one-to-one match. Every country has private savers as well as the government. It is conceivable — or anyhow conceivable theoretically — that the American private sector will absorb all of the extra public debt being issued because of Obama’s and Trump’s fiscal profligacy. However, abundant experience — from both the US and elsewhere — is that the private sector’s financial behaviour is quite stable over the decades. A big jump in the rate at which the US private sector acquires financial assets is not a likely sequel to the Tax Cuts and Jobs Act.
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September 9th, 2018
11:09 AM
I'm not sure how you reconcile the reality of virtually every state running ever bigger "deficits" to provide the little luxuries (think the U.K.'s NHS for one) that the citizenry are entitled to, without acknowledging the identity of the counter-party to all this free-loading. This is the U.S.A. and its ever-increasing deficit. If the U.S.A. were ever to start making serious inroads into reducing the deficit, this simpleton does not want to contemplate the outcome. Perhaps President Trump is doing the right thing without knowing? I won't bother with the biggest consequence of this torrent of dollars, the near decade of cost-free capital, nor the stupidity of central bankers trying to pretend they can restore things to the status quo ante.

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