StimulusdelayandanalternativeapproachtowardsTradeDeficitmath

All the enthusiasm displayed by the equity markets yesterday on US President’s triumphant return from the covid hospital came crashing as he announced on Twitter that he is ending negotiations with Democrats on the corona virus relief bill and will look at the bill only once he is re-elected. Though in a later tweet he wrote that he is ready to sign the USD 1200 relief cheques for American families. The Dow Jones ended down by 1.34%. The Hang Seng and Nikkei trade was mostly unchanged in the morning trade today. Fed Chief Jerome Powell said in a statement that the US recovery will be too weak if the fiscal support from congress doesn’t come. He added that the risk associated with overdoing it is far lesser compared to underdoing it, referring to fiscal support.

In the data released the US trade deficit data for the month of August came in at USD 67 bn which is the highest figure in 14 years. The number highlights the fact that the anti-trade rhetoric has failed to materialize on the ground. Readers would remember that during the last presidential elections, wiping out the trade deficit was one of the most important issues and the subsequent wrangling with China, NAFTA and the EU were a follow up to that. We will return to this point.

Looking at the other global market parameters, the dollar index rose half a percent, US treasury yields inched up slightly, gold dropped and Brent crude remained mostly unchanged. With Brexit negotiations continuing, the impact was seen on both the euro and sterling with the pound retreating to 1.2880 levels from 1.2980 seen yesterday. Brexit, which is supposed to take place early next year, is still in a volatile zone as negotiations continue to avert a hard Brexit.   

Coming back to the point of trade deficits. Economist Stephanie Kelton, who is an MMT supporter, writes in her book The Deficit Myth that the whole debate on reducing trade deficits is misplaced. She writes that as long as the trading partners are accepting US dollars for providing their goods and services, it is beneficial for the US to run a high deficit number. This is a reserve currency privilege for the US - other countries don’t have such a luxury. Others have to fund the deficit in currencies other than what they can issue at will. They need to buy the US Dollar (or Euro or Yuan or Yen) to make the payments which in turn depreciates their currencies and makes imports even more costly.

Kelton writes that the real issue in this case is not deficit but the jobs which get displaced because of the production shifting to the exporting nations. A cursory look at the trade deficit composition reveals that the US exports farm products but imports manufacturing goods which in turn has resulted in a huge migration of manufacturing jobs out of the US. Readers can see that the developing countries with a trade deficit run a dual risk of both job loss as well as currency meltdown.

Domestically, after the announcement of the new MPC members, the next policy meeting date has also been announced: 7 to 9 October. The bond yields moved right slightly in yesterday’s trade with 10 year benchmark bond closing around 6.02. The rupee, which opened strong yesterday, retreated in the later trades as a lot of dollar buying was seen by domestic banks. The rupee trades at 73.46 currently.