Deficits: Mountain or Molehill?
By Liz Ann Sonders
Chief Investment Strategist
Charles Schwab & Co., Inc.
Debates continue to rage about America’s triple deficits—budget, trade and current account. It is also one of the most popular subjects about which I get questions from clients. The broadest and most-debated deficit is the current account, which has been deeply in deficit in recent years. By definition, an economy running a current account deficit has an overall “net capital inflow”—as foreigners buy U.S. companies, stocks, bonds, Treasuries and currency, and also make bank loans, in exchange for U.S. purchases of imported goods and services.
One side of the debate suggests a large deficit means the United States is living beyond its means as consumption and investment exceed savings. The other side of the debate suggests the United States is an oasis of prosperity, attracting investment from around the globe thanks to our economy delivering higher investment returns at lower risk than other investments.
I lean on the side of the latter view, believing current imbalances are not necessarily inherently bad. Today’s deficits may represent natural adjustments taking place in our global economy. What’s more, these imbalances are currently shrinking. Maybe what investors should worry about more are the “cures” offered by the pundits. Among the most dangerous: higher taxes and/or trade sanctions.
