What Nobody Seems to Understand About the Trade Deficit!!!!

QUESTION: Mr. Armstrong, you have said that we have lost manufacturing because of taxes rather than tariffs. I believe you also said that a trade deficit is not a bad thing under your capital flow analysis. Can you please explain this? The press seems to say the opposite, but they are political fake news.

Thank you

GG

ANSWER: There are two account balances: the capital account and the trade/current account. Just because we have a trade deficit does not mean that it is negative for the economy. That is offset by the capital account, which is money coming in that is (1) foreign capital investing in the USA, from treasuries, shares, to real estate, and (2) US companies bringing capital home. Under Ronald Reagan, we had a rising trade deficit, but the economy was booming.

Volcker’s insane interest rates attracted foreign capital, causing the dollar to rise dramatically and sending even the British pound to nearly par in 1985. As the dollar rose, that brought down inflation, but it attracted foreign capital inflows. Interest expenditures flow through the current account when they flow outside the USA. That had nothing to do with goods or even services. It was interest payments on the debt.

The corporate tax rate in Michigan is a flat rate of 6% on federal taxable income (with certain adjustments) for C-corporations under the Corporate Income Tax (CIT), which replaced the Michigan Business Tax in 2011. The City of Detroit imposes a corporate income tax on businesses operating within its jurisdiction, a 2% tax on net income for corporations, and Michigan’s state corporate income tax rate of 6%.

If you look at where the US manufacturing hubs were, the local and state income taxes on top of federal taxes were the primary cause for manufacturing fleeing the USA. Add the fact that the Supreme Court ruled that because the federal income tax did not expressly exempt overseas income, that stupid decision meant Americans were subject to worldwide income on every level. I left New Jersey because if I held a conference in Hong Kong, I had to pay New Jersey 10% on top of the Feds for what? We held a conference in Philadelphia, and never again would I ever hold one there, for then I had to pay Philadelphia taxes, although I did not live or work there.

The Democrats make it sound like these corporations are greedy, and they go offshore because they get to pay $10 an hour instead of $20. That is the LEAST of the problem. It is always the taxes. You need accountants, and then lawyers, all to make sure to have crossed every “t” and dotted every “i” and all of these expenses are far more than anything you pay an employee. Now the latest is auditing you to see if you have “contract” employees instead of employees, since you do not take out taxes and match taxes on a contract employee. I just went through that audit, and it cost me $25,000 IN LEGAL AND ACCOUNTING FEES to prove I did not owe anything.

When the government looks in the mirror, it sees itself as all-powerful. It has no idea about humanity. It’s always about them and never the people. Just look at all the states where manufacturing used to be. They left, and it was not because they were paying someone else cheaper wages. The Democrats have blamed the “rich” and corporations for the damage that they have done to society, all for their corruption and greed.

The current account of the United States is a critical component of its balance of payments, reflecting the nation’s economic interactions with the rest of the world. It comprises four main elements. As you look at this list, you will see what I am talking about that this is by no means simply goods and services. All dividends, interest, and profits from multinational corporations that flow out to foreign investors. Thus, selling US Treasuries to foreigners expands the “trade” deficit as interest is paid. Since China has 10% of the US national debt and interest expenditures of $1 trillion, in theory, we send them $100 billion in interest. Tariffs are not going to reduce that, but they could result in selling domestic assets and returning that investment home, which would then go through the Capital Account, reducing the Trade/Current Account Deficit. The Press and even most Congressmen do not understand this.

1. Trade in Goods and Services (Net Exports)

• Goods:
  • Exports: Physical products sold abroad (e.g., machinery, aircraft, agricultural goods).
  • Imports: Physical products purchased from other countries (e.g., consumer electronics, oil, automobiles).
  • The U.S. typically runs a trade deficit in goods due to high imports.
• Services:
  • Exports: Financial, educational, tourism, and intellectual property services provided globally.
  • Imports: Services purchased from abroad (e.g., foreign travel, software licensing).
  • The U.S. often has a surplus in services, partly offsetting the goods deficit.

2. Primary Income (Net Income from Abroad)

• Investment Income:
  • Earnings from U.S.-owned foreign assets (e.g., dividends, interest, profits from multinational corporations).
  • Payments to foreign owners of U.S. assets (e.g., interest on Treasury bonds held by foreign governments).
• Compensation of Employees:
  • Wages paid to foreign workers in the U.S. (outflow).
  • Wages earned by U.S. residents working abroad (inflow).

3. Secondary Income (Net Current Transfers)

• Government Transfers:
  • Foreign aid, grants, and donations (e.g., U.S. financial assistance to other countries).
• Private Transfers:
  • Remittances sent by foreign workers in the U.S. to their home countries (outflow).
  • Gifts or inheritances received from abroad (inflow).

Current Account Balance

The sum of these components determines whether the U.S. has a surplus or deficit:

• Deficit: The U.S. has run a persistent current account deficit, driven by:
  • A large goods trade deficit (imports > exports).
  • Outflows from secondary income (e.g., foreign aid, remittances).
• Partial offsets come from services surpluses and primary income (e.g., returns on U.S. overseas investments).

Key Implications

• Reflects the U.S. role as a net borrower globally, financing consumption and investment through foreign capital inflows.
• Highlights structural economic factors, such as reliance on imports and the dollar’s role as a reserve currency, and exporting dividends and interest on US investments.