The trade deficit jumped by $1.8 billion in December, putting the monthly deficit more than $8 billion above its year ago level. This item got almost no attention from the business press. If there were articles on the rise in the WSJ and NYT, I couldn't find them. The Post did have a somewhat respectable piece, which ran in the business digest in the print edition.
It is remarkable how little attention is given to the trade deficit by people who routinely get nearly hysterical about the budget deficit. Just to remind folks of the basic accounting identity:
X-M = (S-I)+ (T-G)
This means that the trade surplus is equal to the sum of the excess of private saving over private investment (S-I) and the government surplus (T-G). Or, to take the reverse, when we have an annual trade deficit of $600 billion, as is the case now, the sum of private and public savings must be -$600 billion. This is an accounting identity, there is no way around this.
That leaves two choices. We can have large negative savings on the private side, as we did in the peak years of the housing bubble when there was a bubble driven boom in construction and the saving rate fell to zero due to a housing wealth driven surge in consumption. Alternatively, we can have large government deficits.
That is it; that is the full range of choices. This means that if the deficit hawks are upset about our large budget deficit, then they should be very concerned about the growth in the trade deficit. We should have front page stories, hysterical columns and editorials, and enraged pundits denouncing irresponsible politicians for allowing the trade deficit to explode. (Meet the over-valued dollar as the leading villian the story.)
But, we don't see this. Even people who are trying to find out about the economy by taking the time to read the major newspapers carefully will not get the fundamentals about the economy. That is sad.
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