The Bigger the Better

By, 09/13/2007

Our burgeoning trade deficit returned to headlines this week as Mr. Bernanke called on developed nations "to right a skewed pattern of trade and investment around the globe." His view is perfectly balanced trade would lead to greater "economic stability."

Bernanke Urges Trade Imbalance Fix
By Jeannine Aversa, ABC News

No offense to Mr. Bernanke, a perfectly fine Fed head thus far, but our response is, "Hogwash." A trade deficit for developed nations isn't a problem—in fact, it can be symptomatic of economic health.

Seem counterintuitive? It's not. Consider your own household. You're likely responsible for a personal trade deficit. How? If you work, you receive monetary compensation. You then trade said compensation for life's necessities (milk, Diet Coke, automobile tires) and even non-essentials (Wiis, flat screen TVs, Jimmy Choos). Unless your compensation is derived from goods you personally produce (you're a subsistence farmer or make whimsical crafts from Popsicle sticks), you likely consume more goods than you produce and sell—many of which are produced overseas!

We buy from Safeway and Nordstrom's, but we (most of us) don't sell them anything at all! Oh no! Does this mean our household income will shrink next year? Will we lose our jobs? Will the value of our bank accounts decrease relatively?

Of course, that's a silly way to think. You aren't paid in chickens and beads which you barter for goods and services. Yet, why is that the way most everyone thinks about our balance of trade? Very rationally, we all understand we trade our personal time and effort for money, which we then spend and save as we choose. And we needn't produce and sell gizmos to offset the stuff we buy.

Some folks would argue that's too simplistic. Fair enough—look at it another way. Company X, an electronic widget company, produces components overseas. (Oh no! Outsourcing!) When Company X imports its components, it creates a trade deficit. But X decreases its per unit costs with foreign-made components, increasing its profit margins. That profit margin contributes to growing earnings and increasing shareholder value. But that's not all. A company with growing earnings can do things like pay higher wages and better benefits and maybe hire even more employees! Awesome! They can also expand their product line, perhaps requiring more foreign-made components—employing more people in poorer nations, helping lift them out of poverty. Adam Smith would be delighted. And, consumers like you and me get goods and services at more competitive prices, meaning we have more money to spend or save elsewhere.

That trade deficit means Company X's value grows, helping shareholders, employees, consumers—pretty much everyone! In aggregate, a healthy company with a trade deficit is a net economic positive. And our nation's economy works much the same way. We aren't reliant on selling widgets and commodities because we have a dynamic, diversified economy. Company X dreaming up new and exciting electronic goodies, new fashion trends, or even creative ways to finance projects here and abroad helps drive our economy as much if not vastly more than selling Kansan wheat to the French. But our government bean counters don't have a way to measure that, so when they stack up the chips, we have a trade deficit. Big deal.

Still not convinced? Look at the balance of trade in developed nations historically. For the last 25 years, the US has had a big and growing trade deficit. But so has the UK! (Lots of folks don't realize that.) Meanwhile, Germany and Japan have sported surpluses. But the US and UK have had, on average, superior economic growth and market returns over that period. Why would we want a surplus? It didn't help Germany or Japan outpace the Brits and the Yanks. Why? Because both Germany and Japan exert government controls on trade, forcing a trade surplus believing it's good for their economies. Wrong! Totally backward. It's the government control that stifles growth. If they let their economies do what they do, they might very well have deficits too and better growth—like us. USA!

Those who argue a big trade deficit is bad for the dollar simply don't know their history. The UK has had one of the strongest currencies of late with a big trade deficit—balance of trade in developed nations doesn't dictate currency strength. What's more, weak or strong, the dollar's strength doesn't matter for stocks. (For more, read MarketMinder commentary "Pound of Flesh" http://marketminder/commentary/commentarypage.aspx?articleID={0E0600DE-94DF-4233-8104-D2469FD31E0D}&sectionID=\commentary\daily.)

Scratch the trade deficit off your list of market worries. The thing to fret is government efforts to reduce our deficit. Yikes! If Mr. Bernanke really wanted to help the world, he'd suggest other developed nations drop their wrong-headed mercantilistic ways and pray they can be so lucky as to have a big, growing trade deficit.

*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.


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