Watts Up With That? by Eric Worrall 11/6/2020
One thing which wasnâ€™t made clear during the recent US election was how important domestic US energy production and fracking is to reducing the trade deficit, which in turn feeds through to inflation, interest rates and the continuance of affordable home loans.
The following is from 2019, but it is just as relevant today.
Growing U.S. trade deficit points to suppressed inflation:
By John Kemp
MARCH 7, 2019
LONDON (Reuters) â€“ The United States ran a trade deficit on goods and services of $621 billion in 2018, up more than 12 percent compared with the previous year, but still below the record $761 billion set back in 2006.
The steadily worsening merchandise deficit is a sign domestic demand is outstripping the economyâ€™s productive potential, with excess demand leaking abroad through a widening trade gap and a higher exchange rate.
The deteriorating external position is being masked somewhat by the shale revolution and the associated surge in domestic oil and gas production, which has slashed the bill for petroleum imports.
The petroleum deficit was just $53 billion last year, down from a peak of $386 billion in 2008 and $271 billion in 2006 (â€œU.S. international trade in goods and servicesâ€, Census Bureau, March 6).
Increasing deficits are a sign of suppressed inflation, as domestic consumption and investment outstrip the growth in the economyâ€™s productive capacity.
The federal government has significantly loosened fiscal policy over the last two years, cutting taxes while government spending has continued to increase at more than 4 percent per year.
The Federal Reserve has responded by tightening monetary policy to keep inflation in check, pushing up the exchange rate and exacerbating the trade gap.â€¦
The point is, the trade deficit is a major driver of inflation, which in turn puts upward pressure on interest rates.