Fisher Investments’ Founder, Ken Fisher, Debunks: “Trade Deficits Make Deficient Markets”

Transcript

Ken Fisher:

We've grown faster than most all other countries that have trade surpluses. Not because their surpluses are bad, not because our deficits are good, but because we're doing other things that make us grow faster. As we grow faster, we become wealthier.

Every month I highlight a different short chapter from my old book, Debunkery, on a varied topic. And this month, because of all of the discussion that's gone on via the administration, here as I speak in the pre-spring of 2025 on tariffs and trade deficits—on Bunk 48: The supposition that trade deficits make deficient markets.

Now, I picked this one now because President Trump, of whom I'm neither a friend or a foe, has said—per his April 2nd quote "Liberation Day" announcement on his tariffs— that the justification behind this is the trade deficits that America has and has long had, and discussions that he's having with many countries on trade negotiations are to eliminate those terrible trade deficits. As well as, in his mind, to raise revenue for the government through tariffs.

Now, let me just say that his commentary is ignorant, and you'll get a pretty good sense of that— not exactly at the full scope. but a pretty good sense of that out of this very short chapter, because trade deficits are never causal. We had trade deficits not just with America, but around the world. Countries run trade deficits, trade surpluses forever. Trade deficits—you can measure and analyze this stuff, and they've never been causal. Trade deficits are a result, not a cause.

People are afraid of the word deficit because it sounds bad. And it's easy to envision that deficit is bad, because why would they call it a deficit if it wasn't bad? But in reality, it's just an accounting moniker, and it misses the other side of the aisle. It misses the other thing that finances the trade deficit in any broad, diverse economy, of which we have the broadest, most diverse economy, which is the flow of funds surplus. And I'm going to talk about that a little bit.

But let me first just talk about this in some other ways. I mean, trade deficits have never been causal by themselves, ever, or surpluses. Ever. Let me give you some real brief examples of that. Germany, for a quarter century has run steady big trade surpluses. Just as Mexico and Canada are our neighbors in America, and our biggest trading partners, Germany and France, are our neighbors. And they're each other's biggest trading partners. France has run big but smaller trade deficits at a time over the last 5, 10, 15, 25 years. 25 years! Their economies have grown through the time period that the eurozone has existed. So they have a common currency to measure very similarly in GDP growth rate, in inflation and other demonstrable features other than the trade surplus of Germany and the trade deficits of France. Overall, France has actually done a little bit better in these than Germany has. How can that be true if trade surpluses are good and trade deficits are bad?

You follow the simple logic here? You run a trade deficit—most of your life. You buy stuff. You go to the grocery stor. You give them money. You take the groceries from the grocery store. It's a one way negative cash flow drain. Is that deficit costing you? No. You do something else outside somewhere that gets you what you need otherwise. And you'd be doing that while maybe you're going bankrupt or maybe you're becoming the richest person in the world.

Let me do that a different way. No one thinks about this. No one notices this. States, within the great 50 states of our country, don't have a cataloged thing called a trade deficit or a trade surplus with other states. That nomenclature is used on things that relate to external overseas affairs or foreign affairs, economically. But states have what are called trade balance or imbalance with other states and overall within the United States. So a state like Tennessee or Georgia, which have both been fast growing states, have steadily run inter-state trade imbalances. Negative. But been among the fastest growing in the country. It's calculated the same way a trade deficit is. It's just with the states. It's not called the deficit. Is Tennessee going bankrupt because it's growing faster than other states? You know that's ridiculous.

Let me take you through kind of how this works in a different way. At a micro level, you buy a stock. Maybe it doesn't pay a dividend. You immediately created a trade deficit yourself on that transaction. You follow that? Did that make it a bad thing? If it pays no dividend, you're never going to get a penny back on that thing until the day you sell the stock. And you know that. But you do it anyway because you hope the stock will do well. And if it does, you make a lot of money on it. And of course, if it doesn't, you still get money back when you sell it, unless it goes bankrupt. And you get more money back than the money you put out, even though you ran a trade deficit when you put it out.

America, the land of the free and the home of the brave, has grown faster as an economy than most. Not all, but most all of the countries that have trade surpluses against us. I cited Germany before. We've certainly grown faster than Germany, and for decades and decades we've grown faster than most all of the countries that have trade surpluses. Not because their surpluses are bad, not because our deficits are good, but because we're doing other things that make us grow faster. As we grow faster, we become wealthier. As we become wealthier, we buy what we make. And because we're wealthier, we buy some of what they make too, which gives us the trade deficit as we become wealthier.

Part of that is businesses that create new-and-never-yet done things that are better, and we become wealthier. Funds flow into America from overseas to get our financial assets, and as they bid our financial assets up we become wealthier. The flow of funds offsets the trade deficit. Now, mind you, not with a couple of those examples that I've used, like the Germany-France one.

But this is all depicted in this Debunkery chapter. You can get the essence of it out of the Debunkery chapter in like one, two, three, four pages. And I encourage you to do that because this topic matters, which is front and center in America's mind. And I understand why it is so many Americans think: "Oh, we have a trade deficit. That must be terrible." It isn't. It's not causal. It's not predictive. It's neither good nor bad. It's a result. It's not a cause, and is not predictive of some loss as President Trump has ignorantly said. That America is suffering to the world. That's making our jobs go overseas and all of that stuff.

Have we lost a lot of jobs to overseas? Yes. But it's not got a darn thing to do with trade deficits or the trade barriers that suppose that other countries are imposing, which is a different discussion than the trade deficit.Thank you very much for listening to this. I hope you tune back next month when I cover another chapter out of Debunkery.

Voice of Ken Fisher:

I very much hope you enjoyed this video as part of my series on debunking common market myths.To watch more videos like this, click the link on the screen, and make sure to subscribe to Fisher Investments' YouTube channel. Thanks so much for listening to me.