June 25, 2015
Economists and politicians alike are growing concerned about the rising trade deficit’s impact on the U.S. economy. The latest solution is new legislation that would give President Obama enhanced authority to negotiate big trade deals with Europe and Asia. But is a climbing trade deficit actually bad news for the economy? Over the past 40 years, the trade deficit and the stock market—and the overall economy—have actually tended to move in the same direction. That means that rising deficits are actually associated with economic growth and an ascending stock market. So why is the relationship the opposite of what you learn in Econ 101? As Chuck Thompson explained in the November 2010 Socionomist, it all starts with social mood:
As mood waxes positive, stocks rise and consumers buy more. Because imports make up an increasing percentage of American goods purchases, and because non-U.S. providers of those goods are willing to hold U.S. debt, the trade deficit has risen as U.S. consumers have purchased more goods, which happens when social mood and the economy are positive, and vice versa. Stocks, spending, and the trade deficit are all impelled by mood and therefore tend to move together.
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