Trump’s Trade Deficit

A progress report (the deficit is increasing, if you were wondering…)

Figure 1: Trade balance in billions of dollars, SAAR (blue), and 12 month moving average (red). Orange denotes Trump administration. Source: BEA/Census December trade release, and FRED.

Notice the deterioration in the moving average of the trade balance starting around November. A longer perspective, normalized by GDP, is provided by Figure 2. In this figure, I depict a “non-petroleum” net exports series, to control

Figure 2: Net exports to GDP (blue), and net exports excluding petroleum products (red), both as a share of GDP. NBER defined recession dates shaded gray. Trump administration shaded orange. Source: BEA 2017Q4 advance release, NBER, author’s calcuations.

The non-petroleum deficit has increased over the past year, while the overall is roughly the same (as a share of GDP) as it was a year ago.

Since Mr. Trump has focused on manufacturing, it’s instructive to note that the manufacturing trade deficit has increased by $64.4 billion.

Now, things may change when Section 232 measures and other tariffs, duties and quotas are implemented. However, given saving and investment flows tend to drive the current account rather than the reverse, I’m not holding my breath for a big decrease in the trade deficit (unless a recession occurs as a consequence of a Trump-induced trade war — in which case the trade balance will improve).

82 thoughts on “Trump’s Trade Deficit

  1. Moses herzog

    Sitting here with Skittles and coffee (quietly fuming and seething it’s not a cheap bottle of vodka and cranberry juice) going thru old hardcopy NYTs. Tossing around the complexities of life due to a neanderthal figurehead in the WH, the permutations and computations of human interaction, and the passage of time. Anyone else miss the days you could walk into an airport, witness the magic of heavy pieces of man-made metal taking flight, and meander around without having your nether parts groped by TSA and taking your shoes off to model your socks off to strangers?? I mean we see flight in metro areas alot (some very near to you if you’re near an air base). But I mean watching them take off the ground from a large terminal window??

  2. Bruce Hall

    I’m not sure the trade deficit is of great concern or at least as much concern as this: . The massive tax cuts and massive spending increases seems to be the worst of both worlds when combined. Conservatives wanted tax cuts and spending cuts. Liberals wanted tax increases and spending increases, Now they have spawned a bastard child that no one wants.

    1. Moses Herzog

      You’re making a very BROAD generalization there. In fact the numbers and the record don’t support your words. The problem is, many people only know what they are spoonfed by TV and radio owned by Sinclair, newspapers owned by Tronk, And newspapers and TV owned by Rupert Murdoch, and the list goes on. WSJ is not the WSJ of 1984. It is a newspaper whose editorials and LACK of investigative reports represent the views of a half-senile Australian. Even Reagan’s record has been twisted, from Republicans repeating the same old line:
      “The sky is red!!!” “The sky is red!!!” “The sky is red!!!!” “The sky is red!!!!” No, the sky is not red, just because you said it 1,000 times.

      I’m going to ask you the percentage the US National debt increased under President Obama (during a severe recession that could have been as bad as the Depression, if not for the emergency spending) How much do you think, as a %, the debt increased under President Obama???
      ANSWER: 70%
      That’s “horrible” right?? Just “horrid!!!” if all you know how to do is cough back up whatever some idiot on FOX news just spoonfed you. How dare President Obama save the economy from going down the crapper. “Outrageous!!!”
      NOW—-I’m going to ask you how much the national debt went up under Reagan as a percentage increase, during a time some people remember as “boom” years and “happy” times??? Do you even have ANY F’ing idea?? I doubt it, because you never had some braindead blonde on FOX spoonfeed you that info like a nurse spoonfeeds the doddering old man at the hospice. How much % increase under Ronald Reagan???

      That’s DEFICIT spending BY and UNDER Reagan —because how dare Republicans like Mitt Romney pay more than 14% effective tax rate, while YOU pay for his roads, YOU pay for his bridges, YOU pay for his military, YOU pay for public schools, YOU pay his government pension, and on and on and on. They don’t like that “dirty” word. It’s an “eternal mystery” to Republicans that that dirty word “taxes” is government REVENUE which balances out the budget. But trust me, that hypocritical b*stard Romney isn’t going to refuse the “BIG GOVERNMENT” healthcare the Senate offers him, or the $174,000 “big government” salary he will get, making sure guys like his buddy Orrin Hatch DON’T pay from their OWN pocket what they receive from “big government”.

      This is Republican Chuck Grassley telling one of his constituents, HOW to get good health insurance. Remember—Grassley is the guy who thinks his own lower-income constituents go around boozing and whoring, the same as his Senate colleagues, if they have any discretionary income—-

      1. Bruce Hall

        I’d say anytime you cut taxes and increase spending, you are likely to increase debt. Are you arguing against that presumption? I don’t believe I held up anyone as a paragon of fiscal virtue in my first comment. But let me see if I understand your argument. If we tax less and spend more that’s extremely bad, but if we tax the same and spend more that’s really good. An increase in debt of 70% is a good thing? How about economic policy that generates growth and as a result more taxes while holding spending down a bit? Oh, can’t do that; wouldn’t be prudent.

        Ironically, those who argue for higher state level “rainy day funds” seem content with runaway federal government spending. . Well, yes, but states have to be fiscally responsible….

        1. 2slugbaits

          If we tax less and spend more that’s extremely bad, but if we tax the same and spend more that’s really good.

          The latter may not be “really good” but it is clearly better than the former. Republicans are the party of lower taxes and higher spending. The Democrats are the party of higher taxes and higher spending. That’s why structural deficits tend to shrink under Democratic governance and why structural deficits tend to increase under GOP governance.

          There’s a time and a place for fiscal stimulus. One such time would be when the economy is in a deep recession and interest rates are at the zero lower bound. The wrong time for fiscal stimulus is when the economy is at or near full employment and interest rates are above the ZLB. Trump’s deficits will not come with a free lunch. Short term growth is likely to increase because of increased demand; but longer term the economy will be weaker and face either higher inflation or higher real interest rates. But then again, much of Trump’s demographic base will likely be dead when the bill comes due.

          BTW, the Brookings paper was interesting. I think it is further evidence that he three major ratings agencies don’t have a clue about risk. One of the top twelve states that got great ratings defaulted on paying out tax refunds.

          1. Bruce Hall

            I’m afraid I have to agree with you, 2slug. There is an argument to be made for not letting spending and taxes get too far out of phase. At some point these bigger deficits are really going to hurt when higher inflation and higher interest rates drive up the cost of government borrowing and debt service while the economy moves into neutral. To my mind, now that the economy is humming along, keeping the tax rates roughly the same or a little lower while cutting government spending on programs would be the “magic” moment for cutting into that borrowing and debt while keeping inflation in check with much less “pain” in social net programs.
            U.S. Tax Revenue by Year
            Here’s a record of income for each fiscal year since 1960. There are links to more details about the revenue back to the FY 2006 budget. Tax receipts fell off during the recession, but started setting new records by FY 2013.

            FY 2017 (est.) – $3.460 trillion.
            FY 2016 – $3.268 trillion.
            FY 2015 – $3.250 trillion.
            FY 2014 – $3.021 trillion.
            FY 2013 – $2.775 trillion.
            FY 2012 – $2.45 trillion.
            FY 2011 – $2.3 trillion.
            FY 2010 – $2.16 trillion.
            FY 2009 – $2.1 trillion.
            FY 2008 – $2.52 trillion.
            FY 2007 – $2.57 trillion.
            Rather, the temptation is always to spend more when things are going well because… well, because there is money coming in.

        2. sherparick

          Compared to high unemployment and below trend growth, I take the debt, especially when real interest rates were at historically low levels. The obsession with the Fiscal debt of the Federal Government, which goes back to the 1790s and Hamilton’s confrontation with Madison and Jefferson, is always about something else really. Now, Trump’s fiscal stimulus is likely not to have a lot of multiplier to it as it is “pro-cyclical” and not “counter-cyclical” the way a good Keynesian would do it. Although there is still some slack in the labor market, there is not a lot, so most of that stimulus is going to leak overseas. Trump’s frustration with the trade deficit may have been the reason for this tantrum yesterday.

          The irony is that most of the growth benefits of the fiscal stimulus because of the structure of “tax reform” will leak abroad, but the FED’s monetary response will restrain growth here in the states, probably starting late 2018 and 2019.

  3. Moses Herzog

    These Skittles must be causing me to hallucinate. The VSG has been in office over 1 year now, so this headline CAN’T be true.

    Maybe it is true, and the VSG has just been preoccupied flirting with Putin?? PeakIgnorance, if you’re reading this, wait until your wife or significant other leaves the room because, Peak, I’m pretty certain this is going to give you a boner.

  4. pgl

    It is interesting to point out the real exports have basically flat lined over the past three years so the rise in the trade deficit tracks the rise in real imports. While US economic growth has not been yuuuge – at least our economy has grown. I wish the same could be said regarding some of our trading partners. Brad Setser has noted the same information on our trade deficits as he mulls the Keynesian implications of how our buying more of products from abroad will at least spill over into increased aggregate demand abroad.

  5. CoRev

    Since Mr. Trump has focused on (fossil fuel) production, it’s instructive to note that the trade deficit differential including oil (and other fossil fuels) has decreased. US export mix is changing.

  6. CoRev

    I almost forgot to mention, when world-wide climate is largely more equable, there is more and better crop production. That then leads to greater competition and lowering of prices. That too effects US trade export dollar amounts.

    1. pgl

      “there is more and better crop production. That then leads to greater competition and lowering of prices. That too effects US trade export dollar amounts.”

      What Menzie said in a post a while back. And what did we see from Bottom Trader? Deny, deny, deny.

  7. Anonymous

    I’m trying to match the two first two figures. Looks like your first figure is the version without oil. Correct? (This is not well explained.)

    In figure 2, I can see that the overall net exports “went up” (i.e. become less negtive) during the middle of 2017 and then came down finishing close to start. But the petroleum removed part is down (almost monotonically).

    1. Moses Herzog

      You’re not color blind are you?? There’s a blue line, and a red line. I’ve seen some things I wish had more detailed explanation on this site. THIS post is not one of them.

      1. Anonymous

        I see the colors but I am looking at the numbers.

        Look at figure 2, net exports overall (blue series) during yellow “Trump time”. It starts at about -0.03, jugs up to about -0.0275 in mid year, then finishes back at about -0.03 (almost right where it started).

        Neither of the graphs in figure 1 (raw data or smoothed) seems to correspond during the yellowed Trump time” to the blue line (net exports). They don’t finish near starting value.

        I realize there are some things going on with log transformations and smoothing but I still don’t see how a function that finishes at same value can correspond to one with a down trend even with some smoothing and plotting semilog. It looks like Menzie plotted the “control” (i.e. deducting the crude and products) in figure 1, instead of overall net exports. That curve (red in figure 2) looks more similar to the figure 1 plots.

        Glad to have explained to me how wrong, but not seeing it so far.

        1. Moses Herzog

          Why do I suddenly feel like I’m talking to commenter “PeakIgnorance”?? I know this is also a very difficult concept to grasp. But the measures of unit on the y-axis are different on the two figures. So most likely, if you’re using different units to make the measurements, the plotting of lines is going to be different. I might add, the GDP over each year is going to be different. GDP is not going to stay the same over a roughly 27 year period.

          If you’re “not seeing it so far” check the notes Menzie put immediately underneath the figures. It’s useful to check these when reading graphs or tables.

        2. Menzie Chinn Post author

          Anonymous: Figure 1 is in dollars. Figure 2 series are normalized by nominal GDP. There are no log transformations anywhere in this post. There is a little box in each of the graphs which denotes the units. The legend to each figure also indicates the units. What more do you want?

          1. Anonymous

            Thanks for giving me the explanation.

            It was not clear at first, since you are comparing figures and then more than one thing is changing at one time (the comparison to control, but now with different units versus previous figure). Thought it was your log thing, but see it is normalization now. (Yes, you had the note in box.)

            I still wonder if the second figure is using smoothed data or unsmoothed. Not that it affects the insight much, but just wonder since this was deemed important enough to show differences in figure 1. And it’s another unit thing.

            I’m also noticing now the y scale of figure 1 is not zero based (so apparent change smaller). Not accusing you of deception. Just saying didn’t notice that at first.

            Anyhow, looking at the charts now:

            1. Looks like dollar value of net imports increased by a little over 10% (smoothed or unsmoothed). Figure 1. Beginnning to end of Trump time. 510 to 565 smoothed. 575 to 637.5 unsmoothed?

            2. Looks like the GDP normalized net imports stayed about flat (beginning to end of Trump time.) start .03, end .03.

            2.1. IOW GDP went up 10% if you compare to insight from Figure 1. Can this be right??? Wouldn’t something more like 3% be the annual GDP increase?

            3. Looks like normalized crudeless net imports went up a little less than 10%. About .026 to .028.

            3.1. If I assume a 3% annual GDP increase, that would seem to fit with the Figure 1 changes.

            4. For both the crudeless control and regular net imports (normalized), looks like the ~ trend is similar in 2017 to hat we saw since 2013. Flat net imports overall. Net imports getting bigger (“worse”) if oil business is removed. IOW, business as usual. (Makes sense…the economy does not turn on a dime from politicians.)

            5. Looking at the whole figure 2, net imports seem pretty minor compared to overall economy. .01 means 1%, right? So we have seen net imports be as little as .5% in 1992. As high as 6% in 2006. And currently at 3%.

            6. A lot of (but not all) the change in net imports is driven by oil import quantities (and prices). From 2000 to present, crude-less net imports have danced some but really have started and ended the millenium at ~2.5%. So, for instance, the big change in 2006 was driven by oil (presumably by price more than volume, don’t think volume changes that fast).

            7. The financial crisis recession of 2009 seems to have had a huge lowering of net imports (less consumption?) however, the 2001 recession doesn’t seem to have had same impact (grey bars).

          2. Anonymous

            See points 1 to 3.1. I’m still worried that you are plotting the crude-less net imports (i.e. the control) in Figure 1.

            Just seems strange to see the $ based change in one year of ~10% turn into ~0% from normalizing by GDP.

            Again, quite possible I am wrong. These things are complicated. But could you please double check. And if I am wrong, explain why?

          3. Moses Herzog

            “Again, quite possible I am wrong. These things are complicated. But could you please double check. And if I am wrong, explain why?”

            Send my congratulations to your doctor. It appears your lobotomy operation was an all-around success.

  8. Paul Mathis

    Trade Deficit versus Federal Budget Deficit

    Keynes confronted this same problem 85 years ago:
    “It is often pointed out that, when loan-expenditure (deficit spending) was on a larger scale as a result of official encouragement, this did not prevent an increase of unemployment. But at that time it was offsetting incompletely an even more rapid deterioration in our foreign balance. The effects of an increase or decrease of £100,000,000 in our loan-expenditure are, broadly speaking, equal to the effects of an increase or decrease of £100,000,000 in our foreign balance. Formerly we had no visible benefit from our loan-expenditure, because it was being offset by a deterioration in our foreign balance. Recently we have had no visible benefit from the improvement in our foreign balance, because it has been offset by the reduction in our loan-expenditure.” The Means to Prosperity, p.16.

    If the federal budget deficit is inadequate to offset the trade deficit, there will be a contraction of aggregate demand which will create a severe risk of recession.
    Increasing the budget deficit further may be necessary to counteract the trade deficit.

  9. PeakTrader

    If Q4 real GDP growth is revised above 3%, the U.S will have three consecutive quarters of above 3% real growth, which never happened under the Obama Administration. The increase in the U.S. trade deficit may reflect U.S. growth was stronger than its trading partners.

    1. PeakTrader

      And, Bruce Hall is correct, Republicans want tax cuts, more defense spending, and smaller government. Democrats want tax hikes, more entitlement spending, and bigger government.

      The compromise is tax cuts, more defense spending, and more entitlement spending (many Southern Democrats also want more defense spending). So, we get bigger government with greater budget deficits.

      Looks like the annual budget deficit will be over $1 trillion in two years.

        1. PeakTrader

          You know nothing.

          Google crowding out and full employment.

          You support destroying potential output to reach full employment.

          You still have more work to do.

      1. Moses Herzog

        Strange, but I recall the first tax bill, passed around December 22, took away many tax deductions. Such as deductions for student loan interest, and deductions for tuition waivers for graduate students. And in 2019 you can say good-bye to tax deductions for many out-of-pocket medical expenses. Deductions lower your taxes. i.e. for the slow-witted PeakIgnorance, If Republican lawmakers take away those deductions, people’s taxes INCREASE. You know who fought for those deductions to remain?? Democrats. You know who INSISTED the deductions be eliminated by the bill??—Republicans. I know that’s confusing to folks like PeakIgnorance and BruceHall, because they never informed you of that on FOX news or Rush Limbaugh—-you had to READ it.

        Funny how that works isn’t it?? To know what the F___ is going on, you have to READ something and not JUST listen to what a Sinclair radio station spoonfed you, or repeat what Rupert Murdoch’s FOX tutored you by rote learning.

  10. Erik Poole

    All good fun.

    The current fiscal-monetary policy mix will likely contribute to an even greater trade deficit, at least in the near term. But all President Trump has to do is move the goal posts. He is after all a ‘winner’. ‘Winners’ are allowed to move the goal posts. That is why the Republicans did a 180 turn on fiscal sobriety.

    This is clearly a flashback to the early 1970s. The fiscal-monetary mix should be terrific for commodity prices. The big wild card is a potential trade war or two or three.

  11. joseph

    “Republicans want tax cuts, more defense spending, and smaller government.”

    Ha, smaller government? Defense spending is government. In fact defense spending is more than half of all discretionary spending for government — more than education. veterans, HUD, HHS, EPA, state department, foreign aid, energy, science, NASA, transportation, labor, agriculture, farm subsidies, welfare, food stamps, justice, commerce, treasury, interior, BLM, forest service, national parks — all put together.

    Smaller government? Republicans are a joke.

    1. pgl

      Remember back in 2012 when Paul Ryan said the Romney-Ryan fiscal plan was to limited total Federal purchases to only 3.5% of GDP. Of course Romney said Federal defense purchases would be 4% of GDP. How on earth could we run the rest of the Federal government with nondefense purchases set at negative 0.5% of GDP? I don’t know but I am sure Peaky boy has the answer!

      1. Moses Herzog

        My favorite part of that 2012 plan ( extreme sarcasm) was the voucher. Whenever Republicans bring up the voucher, you know they just took a whizz on a bunch of lower-income people’s heads. In essence, Republicans hand you a phony coupon worth roughly 50 cents that no doctor in their right mind would accept and say “Ok, that 50 cent voucher should cover your entire throat cancer cost!!! See!!! I told you Paul Ryan is a technocrat genius!!!!” And then Paul Ryan pockets whatever money he got from the insurance industry.

      2. Moses Herzog

        Republican Paul Ryan is neither a “technocrat” or a man even capable of doing the math to make a budget balance out. He is a MASTER of, as Daniel Shaviro so aptly put it, “the Washington rent-seeking industry”:

        Ryan can be bought “on the cheap” if you are in the insurance industry, finance, or any fat cat willing to bring him donations and “gifts” to his Congressional office.

    2. noneconomist

      Republicans—the same people who have lamented deficits and growing debt forever—(or as Orin Hatch once fretted “….trillion dollar deficits as far as the eye can see”) have happily hitched themselves to guy who referred to himself as “The King of Debt”, who followed that up with “I love debt.”
      The guy, incidentally, who suggested that deals—he is, after all, a terrific deal maker— might be made to redeem public debt issues at LESS than face value!
      Oh, and his favorite President is none other than Andrew Jackson, a hard money man who treated debt the same way he treated his political enemies. With disdain and disgust. And a dueling pistol, if needed.

        1. noneconomist

          Exactly WHO has embraced the King of Debt, if not the very same Republicans supposedly horrified by rising debt?

    3. PeakTrader

      Defense spending shrunk to 16% of the federal budget and 3.5% of GDP.

      All those other programs will be crowded out by Social Security, Medical, and Medicaid, and economic growth will also be crowded out.

      1. noneconomist

        Even that shrinkage means we’re still spending about 9X more than Russia and 40X more than Israel on the military.
        As Ron Paul has reminded us, there IS a difference between defense spending and military spending. Do we really need bases/installations/personnel in 180 countries/territories?

          1. pgl

            According to the BEA, defense spending in 2017 was $744.5 billion whereas GDP was $19,386.8.

            Peaky Boo says this ratio is 3.5%. Me thinks he needs to redo preK arithmetic as the ratio is 3.84%. And this is before the Trump build-up. NEVER trust any statistic Peaky Boo provides.


        1. PeakTrader

          The U.S., as the world’s only superpower, has a global empire to defend and deter our allies enemies. It can’t meet its commitments now, because trillions of dollars were wasted for a depression. We need a strong economy for a strong military, not further deterioration, for peace and stability.

          Moreover, U.S. military spending adds to GDP, boosts R&D spending, and provides valuable spin-offs for the private sector. Creating incentives not to work or work less to qualify for entitlements, along with excess regulations adding to price tag, has become way too expensive – it’s destroying the economy.

          We haven’t recovered from the severe recession, because we didn’t even have one year of 3% growth over the last eight years, while the military deteriorated.

          From UCLA Anderson forecast – 2013

          “U.S. real GDP is now 15.4 percent below the normal 3 percent trend. To get back to that 3 percent trend, we would need 4 percent growth for 15 years, 5 percent growth for eight years, or 6 percent growth for five years, not the disappointing twos and threes we have been racking up recently, which are moving us farther from trend, not closer to it. It’s not a recovery. It’s not even normal growth. It’s bad.”

          1. PeakTrader

            Also, you don’t know the counterfactual, if Saddam and his two sons remained in power. A leader, who used weapons of mass destruction, had trillions of dollars of oil, created enormous environmental damage attacking Kuwait, and had reasons to seek revenge on the U.S.. Sending Saddam and his two sons to Allah may have been a better choice for the U.S. and the Iraqi people than keeping them in power.

          2. baffling

            “because trillions of dollars were wasted for a depression”
            wel,l we had billions, if not trillions, wasted by the idiot bankers, in addition to their obscene salaries and bonuses leading up to the financial crisis they created. recouping those dollars could go along way towards paying for the depression they created. hey peak, why don’t you give back your ill gotten gains for the good of the country? it will ease your conscious, and help the country financially cover the cost of the depression.

            what makes you think our military has deteriorated? last i checked, we still had the best, most advanced military this planet had ever seen. why do you denigrate the us military? sounds treasonous.

          3. noneconomist

            A global empire? Well, what could go wrong with being a global empire? Even George III proved how easily manageable and profitable a global empire can be. He too accrued significant debt, but if you go big, you really have to go big. Or go home.

      2. 2slugbaits

        PeakTrader Why do you think DoD needs more money? Do you have some particular expertise in defense issues?

        1. PeakTrader

          Sen. John McCain (R-Ariz.), chairman of the Senate Armed Services Committee, said, “We are gambling with the lives of the best among us and we’re now seeing the cost — the tragic but foreseeable costs of an overworked, strained force with aging equipment and not enough of it.”

          1. pgl

            When caught in a lie (defense spending was only 3.5% of GDP???) what does Peaky Boy do? Change the subject and with dishonest spin. Trump looks up to you.

          2. pgl

            Of course our soldiers are overworked ever since George W. Bush made that incredible stupid decision in March of 2003 to invade Iraq. But leave it to Peaky Boy to come up with a lame fig leaf excuse for a really dumb war.

          3. 2slugbaits

            PeakTrader Sen. McCain is many things, but I’d be hard pressed to call him an expert. McCain has been arguing for larger DoD budgets since Noah’s Ark. He never saw a DoD budget that he didn’t think should be even larger. And McCain might believe we have aging equipment, but almost every serious analysis I’ve seen or worked on (and there have been plenty) has found that there is simply no truth to that myth. And if McCain believes we have a strained force, then why is he so hot to send US troops in every two bit war around the globe? If he believes the equipment is overworked, then why does he support increased TRM optempo budgets? Do you think McCain (or for that matter almost any general officer) understands what drives operational availability? Being chairman of the Armed Services Committee does not mean a senator has deep knowledge of defense issues. Sen. Carl Levin (MI-D) was chairman for years, but he was utterly clueless. Preparing a briefing for Congressional testimony means weeks of frustrating work dummying stuff down. But I take your non-answer to my question to be an admission that you have no particular expertise in defense matters.

            BTW, McCain is (or at least once was) a very brave man, but he’s not terribly bright. He would have flunked out of the Naval Academy except for his 4-star admiral dad. And McCain’s son was in my nephew’s class at the Academy. McCain’s son would not have been admitted to the Academy were it not for his father being a senator…and even at that his son barely graduated.

  12. Moses Herzog

    @ Menzie
    Menzie, your upload of the IS-LM stuff (or putting the links up) has been useful to me, I have learned a lot from it. Even if I haven’t FULLY understood some of the variables and math, I felt it still has increased my learning. But I have what you might think is either a highly intelligent question, a weird question out of left field, or BOTH. Do policy making “experts” (i.e. people such as janet Yellen, yourself, Larry Summers, Stanley Fischer) have ANY idea where the slope of the LM curve is now?? I mean not the exact equation, but in a GENERAL sense where the angle or slope of the LM curve is NOW?? I’m very curious your thoughts on this, as that would dictate (in large part) the amount or % of “crowding out”, YES?????

    1. pgl

      In some versions of IS-LM, the assumption is that the money supply is fixed so the slope depends in part on the elasticity of money demand. In other versions, the assumptions is that the monetary base is fixed so the issue of how elastic the money supply curve is factors in.

      A lot of models make neither assumption preferring to assume that the FED follows a Taylor type rule in setting the interest rate.

      So answering your question requires some specification of what the FED is doing.

  13. Spencer

    A nation has a TRADE DEFICIT when the cost of merchandise imports exceeds the receipts from merchandise exports. The CURRENT ACCOUNT balance encompasses merchandise, service items, commodities, and “current” financial transactions; while the BALANCE OF PAYMENTS includes the entire above plus capital flow items; all transactions involving foreign exchange.

    The foreign exchange value of any currency is determined by the supply of and the demand for that particular currency. In international financial analysis supply and demand take on an unique role; for what is demand from our point of view is supply from the standpoint of foreigners – and vice versa. All transactions that require the conversion of foreign currencies into dollars constitute a demand for dollars. These include exports, payments received for services rendered to foreigners, capital flows (interest and dividends collected from foreigners), etc. An increase in the volume of any one of these times will increase the demand for dollars and, ceteris paribus, the foreign exchange value of the dollar. The opposite types of transactions, imports, etc., which involve payments to foreigners increase the supply of dollars and thereby reduce the foreign exchange value of the dollar.

    Imports decrease the money supply of the importing country, while exports increase the money supply, and the potential money supply, of the exporting country. In foreign exchange supply always equals demand at the current rates of exchange. International debits equal international credits. The balance of payments always balances since there can be no credit transfer of funds.

    When the balance of payments is balanced by foreigners acquiring net holdings of our equities, bonds, and real estate, and capital outflows (interest, dividends, rentals, etc.) exceed inflows, we are either decreasing our net creditor position in the world, or increasing our net debtor position. Beginning 1985 it has been the latter. The trade deficits, plus the unilateral transfer of funds by the Federal Government to foreigners, transformed this country from this world’s largest creditor to the world’s largest debtor – for the first time since 1917. Since 1985 we now have a net debtor position exceeding 11 trillion U.S. dollars, but the principle villain (since 1973) has been our dependence on foreign oil.

    Trade deficits at any particular time for any given country can be beneficial or harmful; can represent economic strength or weakness. In the period before Worlds War I the U.S. had mostly trade deficits. We were a debtor country – and we thrived. Foreign investments accelerated our economic development and our standard of living rose faster as a consequence.

    By the end of World War I the U.S. was a creditor nation, but we refused to act like one. We opted for tariffs and other restrictions on imports, rather than free trade. Capped by the sky-high Hawley-Smoot tariff of 1931, U.S. trade policy was an important contributor to the world wide depression of the 1930’s. By 1933 there was not a single major nation on the gold standard except the U.S.

    The situation was further exacerbated when Roosevelt and his Treasury Secretary, Morgenthau, exercising the crisis powers delegated to the executive branch by Congress, took the U.S. off the gold standard in April, 1933 by making the dollar inconvertible into gold at a fixed price. And to make matters worse they periodically kept raising the price of gold from $20.67 per ounce to a final price in Dec. 1933 of $35. This had the effect of depreciating the exchange value of the dollar. All of this was done by a creditor nation operating with a chronic surplus in its balance of payments.

    The Bretton Woods Agreement of 1944 established, among other things, the International Monetary Fund and confirmed the previous international status of the dollar, that an ounce of gold was equal to $35 and that all dollars were to be freely convertible into gold bullion at that price to foreign and confirmed the previous international status of the dollar, that an ounce of gold was equal to $35 and that all dollars were to be freely convertible into gold bullion at that price to foreigners but not to U.S. nationals.

    In 1949, the U.S. dollar was not only as “good as gold”, but it was also preferred over gold. There were not enough dollars to finance the legitimate needs of the world economy. So, the chronic balance of payments deficits which began in 1950 were for a number of years beneficial to the world economy and to the U.S. Because of our large and chronic balance of payments surpluses after World War II, foreigners were unable to accumulate sufficient dollar balances to efficiently finance world trade. These balances were desperately needed because of the total dominance of the dollar as the reserve custodian, standard of value and transactions currency of the world.

    The Korean Conflict (1950-1953) temporarily solved the problem but, the longer term solution consisted in implementing our “containment policy” against the U.S.S.R. This involved the establishment of approximately 700 military bases, not only around the perimeter of the Soviet Union but throughout the world. We have paid hundreds of billions of dollars to foreigners to acquire the bases and to maintain a garrison of more than 400,000 military personnel abroad. With diminishing merchandise surpluses this policy proved to be financial overkill.

    The Korean War, which began in June, 1950, initiated the chronic balance of payments deficits that persist to this time and which will probably continue as long as foreigners are willing to increase their net investments in this country.

    The U.S. has had a net liquidity deficit in every year since 1950 (with the exception of 1957), Up to 1976 (when the private sector contributed its first trade deficit ) these deficits were entirely the consequence of excessive U.S. government unilateral transfers to foreigners (re: foreign policy – solely our far flung military bases and personnel). During all this time the private sector was running a surplus in all accounts: merchandise, services and financial. The Vietnam Ten-year War administered the coup d’etat to our gold bullion standard. By 1968, in an effort to keep the dollar at the $35 par, we had exhausted nearly two thirds of our monetary gold stocks, or approximately 700 million ounces to about 260 million ounces.

    Although the dollar ceased to be freely convertible in March, 1968, institutional (central bank practices) and attitudinal lags were sufficient to offset, until late 1970, the excessive expansion in the supply of dollars. In August 1971, all convertibility was ended. This further accelerated the decline in the exchange value of the dollar. All fluctuations in exchange rates prior to this time were the result of other currencies changing in value relative to the dollar. Changes in the exchange rates were negotiated by governments, usually through the offices of the International Monetary Fund.

    Since 1970, the “western” world has functioned within a system of essentially free exchanges. Before 1973, exchange rates were in terms of a “fixed target”. Now the dollar is a “moving target”.

    To think that in 2005 = 737 U.S. military bases and more than 2,500,000 U.S. personnel leaves one with the idea that the trend in the exchange value of the $ will continue to be down.

    1. pgl

      Table 4.1. Foreign Transactions in the National Income and Product Accounts can be found here:

      It combines exports of goods and services. It also combines imports of goods and services. Spencer defines the trade balance narrowly as the merchandise trade balance but other definitions of the trade balance includes exports and imports of services. Of course Trump is completely confused on these matters so any slip up by Spencer here is understandable.

  14. Spencer

    The world is now sated with US-$s (even as the E-$ has contracted) and US budget deficits are increasing at the same time the trade deficits are increasing (twin deficit hypothesis).

    To wit: “Traditional macroeconomics predicts that persistent double deficits will lead to currency devaluation/depreciation that can be severe and sudden.”

  15. pgl

    Trump is talking about us doing a lot more infrastructure investment – which would be a good thing. BUT he has cut the Federal budget for doing this. In particular he has slashed what was promised from the Federal government for our desperate infrastructure investment needs. Hey I rise the NYC subway system and I’m trying to figure out what this proposal means. Does it mean:

    (a) Our broken subway system will just get worse as the needed construction will not happen;
    (b) Our local taxes will have to go up; or
    (c) Trump will turn over the subway system to some crony capitalist buddy.

    Trump has not said. All options sound awful. But I bet this was ably explained on Fox & Friends so Peaky Boy will assuredly fill us all in.

    1. noneconomist

      Local Trumpers were out on Saturday with petitions urging repeal of the additional 12 cents/gallon added to California’s gas tax last November. The additional funds will be used to , yes, repair roads, bridges, tunnels, et. al., the very infrastructure the President is calling for states and cities to finance with some federal funds added.
      The local Trumpers thus appear to be at odds with their leader. No doubt their plan is to repeal the tax in the November election, then replace it with one more appealing to Trump. Maybe, say, an additional 12 cents/gallon to repair roads, bridges, tunnels…….

  16. Barkley Rosser


    Prices of corn and wheat, the two leading US export crops, have been basically stable for the last four to five years. Your claim that some outbreak of global good growing conditions due to “good climate” is responsible for the rising US trade deficit due to those prices falling is Fake News of a blatant sort. Sorry.

    Same for you Peak Trading. Just googled it and searched pretty hard. Maybe 4th Q 17 growth number will be revised upward, but I could find no report od that. Still at 2.6% according to all readily visible sources. If you want to make that claim, you had better provide a credible link. Otherwisr, more Fake News.

    1. Barkley Rosser

      BTW, I do not have an explanation of what is going on. That the US grew fairly rapidly last year is probably mostly it, but some of our important trade partners also so an increase in growth rates, notably the Eurozone and Japan. And while China’s growth did not accelerate, somehow our bilateral trade deficit with them also rose. Is this all due to no acceleration of growth in out NAFTA partners?

      Also, the value of the dollar fell. There is the J-curve phenomenon that in the short-run that increases trade deficits because price changes via forex rate changes tend to precede quantity changes, but by now the quantity changes from the lower USD should have kicked in, and they have not obviously done so. I am basically mystified.

    2. CoRev

      Barkley, you really do need to know more about agriculture production of a world-wide basis. Competition causing “Prices …US export crops, have been basically stable” is exactly the point.

      1. Barkley Rosser


        The issue is a rising trade deficit. The only way that something happening in agriculture would lead to that would be if prices of US ag exports fell or quantities fell. You suggested that prices of US ag exports fell due to good crops. They did not fall (and quantities have not yet much either, although they may soon due to China retaliating against Trump protectionism by imposing restrictions on ag imports from US). In short, you are simply wrong as well as contradicting yourself. Pathetic.

        1. CoRev

          Barkley, I had a discussion a couple of articles prior with 2slugs re: 2017 US crop production falling (especially wheat which you called out) and US corn yield setting records (although production didn’t). In a world-wide market reduced wheat production means less exported and record yields may reduce prices also resulting in lower export pricing. With prices being stable it means other suppliers mad up the slack increasing their exports. You are not expected to understand all my background comments on the subject, but you should understand the fundamentals of the export market to which you referred.

          I’ll repeat you and myself: ” In short, you are simply wrong as well as contradicting yourself. Pathetic.” and “Barkley, you really do need to know more about agriculture production of a world-wide basis.” While you are at it refresh your knowledge on Suppl;y and Demand and pricing especially for world markets, as they apply to exports of your specified products.

      1. Barkley Rosser

        Sorry, Peak Trader, you are pathetically wrong, which would have been obvious if you had provided a source, which you did not. I found where yo ugot your number. It was a projection made by the New York Fed on Dec. 15, 2017 before the quarter was over. There were a variety of competing estimates ans forecasts floating around then. The final number was reported by the BEA on Jan. 26, 2018, and it is 2.6%. You are wrong wrong wrong. Deal with it.

        BTW, with your hapless efforts to downgrade Obama, it is true he did not have three quarters back to back exceeding 3%, but he had two back to back that exceeded 4%, the second quarter of 2014 it was 4.6% and the third quarter was 5.2%. Needless to say, Trump has not come anywhere close to those numbers, although I guess we shall see. As it was those high growth quarters did not result in a particularly good electoral outcome for the Dems that fall, although it was not as bad as 2010.

        1. PeakTrader

          That’s not where the 3.4% came from – it came from the GDPNOW model in January.

          How can I be wrong saying GDP may be revised higher when it hasn’t been revised?

          How does that higher quarterly growth dispute the fact of Obama’s low annual growth?

          I didn’t downgrade Obama – You’re trying to upgrade him.

  17. baffling

    “I didn’t downgrade Obama – You’re trying to upgrade him.”
    peak, if obama were to cure cancer, you would gripe that he is destroying social security by allowing poor folks to live too long collecting their entitlements. i imagine you would not allow medicare to cover the cancer cure, as a means for controlling of entitlement spending. you could continue to berate obama and the poor all in one move.

    1. PeakTrader

      Baffling, you need accept responsibility.

      I know, you like to believe it’s a vast right wing conspiracy.

      But, it’s been a train wreck of poor government economic, foreign, and social policies.

      I don’t blame everyone taking advantage of them – it’s the rational thing to do.

      1. baffling

        Just cant come to admit idiot bankers such as yourself were major culprits in the financial crisis, peak. The world really would have been a better place if people like you were not involved.

  18. Barkley Rosser


    First of all, 2017 was basically the Obama-Yellen economy, not the Trump-Powell one, which is only now really getting going. However, if you want to play annual growth rate games, US GDP grew more rapidly in 2010, 2013, and 2014, than in 2017, and 2017 was only ahead of 2016 by a fairly small amount. You simply cannot admit that you have been wrong wrong wrong on this, Peak Trader. Try facing reality. The Trump economy so far has basically been a continuation of the Obama economy. Let us see what happens from here on.

    1. CoRev

      Barkley says: “…2017 was basically the Obama-Yellen economy, not the Trump-Powell one, which is only now really getting going…” Ignoring the obvious changes in confidence occurring directly after the election is a special kind of denial. you are correct, the core of the 2017 economy can be directed to the Obama/Yellen policies, but the changes can be directly attributed to Trump proposed and implemented policies. It is that clear attribution that causes the left’s angst.

      For years we’ve listened to left leaning economists wonder how best to impact wages/demand/inflation/exports/etc, and now that we have a real world answer that differs from Obama’s which suppressed these factor and which they had openly supported, they can not accept the positive changes.

      Focusing on inflation has been the issue for many left leaning commenters here, while it has remained essentially stable when compared to the FED goal of ~2.0%. All we have seeing is bogey man arguments, while denying their own previous comment issues.

  19. Barkley Rosser

    Oh gag, PT, this is even worse than I thought.

    The GDPNOW model is one at the Atlanta Fed. They ate not forecasting a revision last quarter’s numbers. They are currently forecasting a 3.2% rate for this quarter. But then as of two weeks ago they were briefly forecasting a 5,4% rate. Heck, why did you not push that?

    The bottom line is that you simply do not own up to outright lying you engage in. There you were declaring that last quarter was definitely over 3% and you were going on about how Obama failed to have three quarters in a row over 3% (that part was accurate). But then it turned out that you were simply dead wrong about last quarter’s numbers, so you shift to how they might get revised upward. Yes, they might, but they could also be revised downwards, just as likely. And then you had the temerity to jus t outright lie about what GDONOW is saying.

    I understand that a respect for truth has been completely degraded by Trump’s lying five times a day, with Fox News repeating half of them. So I guess we should not be surprised that Trump supporters like you just shamelessly lie and lie and lie and do not apologize or even admit what you are doing. But, frankly, Peak Trader, it is disgusting, and you are disgusting, you worthless and shameless repeat liar.

    1. PeakTrader

      Barkley, anyone can look at my prior statements above or anywhere else on this blog to prove you’re the liar.

      You’re either one dumb person or extremely politically (or both).

      You’re only arguing with yourself, since your lies have nothing to do with me.

      And, optimism soared under Trump, and after Obama left.

    2. 2slugbaits

      degraded by Trump’s lying five times a day, with Fox News repeating half of them

      I should correct you math. Fox News doesn’t just repeat half of them…Fox News takes Trump’s lies and raises them to 4th power. And that’s before Sean Insanity comes on the air.

    3. PeakTrader

      It’s amazing Barkley, you call me a “disgusting, shameless, repeat liar” when that’s exactly what you do!

      You think people are stupid!?

  20. Barkley Rosser


    What did I lie about ever here, not just on this post, Peak Trader. I do not believe that I have ever done so, certainly not knowlingly. It is possible that I may have misstated a fact (or even an argument) at some point, maybe even more than once. But if I have done so, when someobody has pointed it out, I readily agree I made a mistake and correct it. You never do and have not done so here.

    So, I challenge you: name one time I made a false statement that somebody pointed out and that I failed to accepts. Let us be clear, I am not talking about some ideological remark or general political opinion but a matter of hard cold fact, such as what was the annualzed growth rate of the US GDP in thee fourth quarter of 2017, which made a false statement about and have not fully ‘fessed up to, instead trying to change the discussion from what it actually was to how it might get revised. Stop lying, Peak Trader; it is time you stop lying here, once and for all.

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