Strategy & Quantitative Research
Special Figure: The Fundamental Trumponomics
Contradiction
01/03/2017
Key takeaways:

Trumponomics is a combination of deregulation (energy, healthcare, finance),
reducing trade deficit (“fair trade”) and increasing fiscal deficit (increase
infrastructure and military expenses and tax cuts).

The current account – that is, the change in asset holdings of the US with the rest of
the world – is mainly composed by the trade balance (Figures 1 and 2).

Trying to reducing current account / trade deficit while increasing fiscal deficit
(the twin deficits) is like Don Quixote’s vain fight against windmills, since one
reflects the other. Or at the cost of damaging household consumption and/or
investment.

Trying to reduce large emerging market, Japanese or German current account
surpluses through renegotiating bilateral trade deals is likely to be futile (Figure 3).

The US current account deficit reflects an excess of domestic (private and federal)
investment and consumption over (private and federal) domestic saving, and
inversely for the countries in surplus vis-à-vis the US (Figure 4).

One the two objectives will be relaxed: probably the reducing trade deficit one.
Decreasing taxes is more consensual for the republican Congress.

Fiscal stimulus will be in favor of exporters to US such as China, Mexico, Canada,
Japan, Germany and other emerging countries.
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What are the twin deficits?
The concept of twin deficits is defined as one in which a country experiences a federal
budget deficit and a current account deficit at the same time. When a country spends more
than it saves, it is forced to finance part of its investments and consumption through
borrowing from abroad.
The National Income identity:
Indeed, the current account surplus (X – M) is equal to the net private saving (S – I) plus the
federal net saving (T-G). It comes from the National Income identity:
Y=C+I+G-T+X-M
or
(X–M) = (S – I) +( T-G),
Y = incomes, C = consumption I=investment, S=private sector savings or (Y – C), T=tax
receipts, G=government spending, M=imports, X=exports.
In the system of National Income and Product Accounts (NIPA, a nation’s economic
accounting), a trade deficit automatically implies that the country is saving less than it’s
investing. Another way to understand this is that the rest of the world is investing in that
country, thereby contributing to its production capacity.
The trade bBalance and the current account
The trade balance is the amount of exports minus imports. While the number generally
reported in the media pertains to goods (that is, physical gizmos that are counted as they
cross the border), there’s also trade in services such as software, consulting, and
tourism.The current account comprises the trade deficit (if we import more, we owe more)
plus transfers of income across boundaries. The latter can be important for some developing
countries that have a lot of foreign workers sending remittances back to their families. For
more-developed economies, dividend and interest incomes are more important.
A trade balance deficit isn’t necessarily a sign of a poor economy
Is it bad to have a trade account deficit? If this means that your economy is booming and
local production cannot keep up with demand, then no. If it implies that there is a current
account deficit and, hence, foreigners are investing in your country, then also no. If this
means that you can have more investment without having to save more, because the rest of
the world is picking up the slack, no again. If you are worried that in the future dividends will
flow abroad, then yes. But that will happen only if your economy is in good shape in the first
place and will be able to afford paying such dividends.
The incoherence of Trumponomics
It’s impossible to improve X - M while degrading T – G except stimulating strongly S – I that
is damaging C (consumption) and I.
If the US managed to make imports into the US more expensive and exports more
competitive through tariffs or a VAT-like destination corporate income tax, the U.S. dollar
would simply appreciate to erase the tax- or tariff-induced gain in competitiveness because
the underlying saving and investment pattern in the rest of the world wouldn’t change.
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And so the current account deficit of the US and the surplus of other countries wouldn’t
change. To be sure, affecting sectoral and bilateral surpluses and deficits is possible through
trade or tax policies, but trying to change the overall aggregates is like Don Quixote’s vain
fight against windmills.
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Figure 1: US Balance of Current Account (Bill. of $) and Trade Balance (Mill. of $ x12).
100000
100000
0
0
-100000
-100000
-200000
-200000
-300000
-300000
-400000
-400000
-500000
-500000
-600000
-600000
Balance on Current Account
-700000
-800000
-700000
Trade Balance: Goods and Services (Balance
of Payments basis)
-800000
-900000
1950
-900000
1960
1970
1980
1990
2000
2010
Source : FRED database, monthly and quarterly data from January 1947 to July 2016. Computations by AAIS
Quantitative & Research Strategy.
Figure 2: Rest of the world lending (+) or borrowing (-) to US and US Balance on Current
account
1000000
800000
600000
400000
200000
0
-200000
-400000
-600000
-800000
-1000000
1950
Rest of the world; net lending (+) or borrowing (-)
(capital account), Flow, Millions of Dollars
Balance on Current Account, Bil. of $*1000
1960
1970
1980
1990
2000
2010
Source : FRED database, quarterly data from January 1950 to July 2016. Computations by AAIS Quantitative &
Research Strategy.
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Figure 3: 2016 Main US Trade deficits by (surplus) countries, billions of dollars
-350
-319,3
-300
-250
-200
-150
-100
-62,4
-59,6
-58,8
-50
-32,7
-29,3
Ireland
Vietnam
0
China
Japan
Germany
Mexico
Source : Data are goods only, on a Census Basis, in billions of dollars, unrevised from January 2016 to November
2016. Computations by AAIS Quantitative & Research Strategy.
Figure 4: 2016 US Imports by exporter countries, billions of dollars
2500
2000
1500
1000
500
0
All countries
Top 15
countries
China
Mexico
Canada
Japan
Germany
Source : Data are goods only, on a Census Basis, in billions of dollars, unrevised from January 2016 to November
2016. Computations by AAIS Quantitative & Research Strategy.
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