As the presently hot topic of trade rears its head during virtually all of our client revue meetings of late, it becomes abundantly clear to me that many, if not most, folks sympathize with the narrative that the U.S. has been taken advantage of for years by its trading partners, the focus of late being on China.
By the end of many of these meetings I get the sense that my hopefully gentle nudging of their thinking beyond what they glean from their chosen news sources has opened a window of understanding that the narrative they’re being fed is in many, if not all, ways flawed.
The stock market soared Friday on news that China will present a plan that would eliminate our trade (current account) imbalance by 2024.
Now, I want you to think about this line from a Bloomberg article this morning:
“China’s waning current-account surplus leaves them less to recycle into Treasuries”
The entry on the “balance of payments” ledger that is, alas, forever left out of the equation presented to the general public is called the “financial account” (which is where investments into the U.S. are accounted for).
Allow me to rephrase that quote:
“America’s waning financial-account surplus leaves its trading partners less to recycle into Treasuries”
Now let’s think about what happens here at home when the outside world’s largest investor in U.S. treasuries hasn’t the fresh dollars with which to buy them; which is the promise of last Friday’s rally-inspiring news.
Yep, that’s right, less demand means a lower price. And when we’re talking bonds, a lower price means a higher interest rate. And when we’re talking U.S. treasury bonds, a higher interest rate means higher borrowing rates to consumers (and producers) in a consumer-driven economy. Not to mention the strain higher debt payments will put on U.S. government operations…
Should the powers-that-be get their way and trade in goods and services between U.S. and China become balanced (by the way, that virtually couldn’t happen in that time frame by market forces, given the different stages of the two countries’ development), the investment surplus that has been so critical to U.S. government operations, as well as to the health of the U.S. financial markets* and to the prosperity of the U.S. consumer will be gone. Not the ideal scenario, I assure you…
*P.S. In addition to treasuries, the leftover dollars Chinese folks hold after they’ve purchased their fill of U.S. goods and services find their way into the U.S. stock and corporate debt markets as well. Again, the halting of that investment flow due to government coercion is not at all the ideal scenario!