President Trump Is Magnificently Right and Catastrophically Wrong

Back in 2002, when I ran the credit strategy team at Credit Suisse, I invited one of America's most prominent Reagan-era supply-siders to speak to our research team. The sickening decline of American industrial employment was just beginning, but no-one seemed to care. The famous economist (whose name I suppress because he is a friend) suggested that the United States didn't need ANY manufacturing employment at all. We would do the design and other folks would do the dirty work. Boy, did we need Donald Trump back then. Instead, we had George W. Bush. The U.S. borrowed trillions of dollars from foreigners against dodgy home equity loans to finance trillions of dollars worth of futile war in Iraq and Afghanistan.

America's trade deficit is like a giant benign tumor: It's troublesome and ultimately dangerous, but it's a symptom, not the cause, of the underlying problem. Cut it out with a rusty scalpel and the patient will bleed to death. Trump is entirely right to address the problem, but some of the advice he is getting may have disastrous consequences. For the time being, Trump is in Navarro-Navarro Land.

The United States has legitimate complaints against Chinese trade and technology transfer practice, but the Trump administration’s ineptitude threatens to turn what should be a tough negotiation into a trade war.

As I wrote in Asia Times today, Trump brings to mind the old joke about the ethnic Godfather: He's making China an offer it can't understand: "The fact that China often plays dirty has very little to do with the magnitude of the US balance on goods and services, or current account. Americans save less than the citizens of any other industrial country. The less they save, the more they buy from foreign countries. Countries as a whole save by selling goods and services to other countries and saving the difference. Countries with rapidly-aging populations (like all of East Asia as well as Germany) tend to save more, and do so by exporting more than they import."

U.S. savings as a share of household disposable income have plunged to barely 2%, around the all-time low. That means that the U.S. trade deficit will rise, especially because the U.S. has a massive deficit financing requirement in part due to Trump’s tax cuts.


Germany, the world's biggest exporter after China, displays exactly the opposite profile. During the past twenty years German households have saved more, which means that Germany exports more and saves the proceeds while buying less from other countries.

The Nobel Laureate Robert Mundell, the father of supply-side economics, long ago observed that countries with rapidly aging populations save more than they can invest at home, so they save the proceeds of their exports and invest them in countries with more young people. Germany and China have rapidly aging populations because they have so few children, and need to save more.