The Only Three Questions That Still Count: Investing By Knowing What Others Don't, 2nd Edition

Let’s Trade This Deficit for That One

So maybe the debt and budget deficit aren’t the demons many fear them to be. But there are other headline-making, panic-inducing deficits giving investors frights—like the current account and trade deficits. Let’s dispense with the current account deficit here and now. It’s by and large comprised of the trade deficit. When folks tell you they’re worried about it, they mean they’re mostly worried about the trade deficit. What’s more, the current account deficit is always, and by definition, perfectly offset by the capital account surplus. It balances! Has to. Anyone exercised about the current deficit is telling you more of what they don’t know than what they do.

As for the US trade deficit, it hit $500 billion in 2011!6 (EGAD! Huge number!) Freaks folks out—particularly those fearful of a weak dollar. Disapproval of the trade deficit and a desire to reverse it are exceptionally widely and passionately held. You don’t read anywhere that you shouldn’t worry about it at all. That is always a great time for a Question One. Is it true trade deficits are bad for our economy, stock market and dollar? While we’re at it, throw in a Question Two: Is it possible the trade deficit might be something good rather than bad? If so, how?

Again, here is an investing concern bred seemingly from common-sense analysis, confirmation bias and an inability to scale (all errors combatable via Question Three). A trade deficit seems to signal we spend more on imports ...