US

How a Wall Street chief strategist's Costco shopping experience explains the biggest misconception about global trade

David Kelly, Chief Global Strategist of JPMorgan Asset Management, explains why the US trade deficit with China doesn’t matter. Kelly explains that he runs a trade deficit with Costco and many other retailers. What does matter is whether you run a trade deficit overall. He says the cause for the US trade deficit is the country’s budget deficit. Following is a transcript of the video.

Sara Silverstein: So everybody’s talking about trade wars and trade deficits. What do people get wrong about trade deficits?

David Kelly: I wrote a piece actually, on my LinkedIn blog a few weeks ago called “My Trade Deficit with Costco” and I think it’s a good way of looking at this. I run a trade deficit with Costco. I buy a lot of their stuff, they don’t seem to want to buy what I have to sell, which is basically investment insight, but I run a trade deficit with almost everybody. I run a trade deficit with Whole Foods. I run a trade deficit with CVS. The only people that I run a trade surplus with are JPMorgan Chase, my employer, but that’s actually ok because overall, I run a trade surplus, and I don’t really care who I run the trade deficit with. So I think that’s the first thing.

We focus on, “We’ve got a real problem with China,” or “We’ve got a problem with Germany.” It doesn’t matter, so long as, overall, we run a trade surplus, we wouldn’t have a problem. But of course, we don’t. But then that gets to the second point. Why do I run a trade deficit with Costco? Or why do people get into problems in which they’re buying a lot of things from one group and not selling them? It’s because I overspent. And as a nation, we overspend.

The reason we have a trade deficit is actually because we have a budget deficit. If you think about it this way, you’ve got the private sector, you’ve got the public sector, you got trade. If the private sector more or less pays its way, if we fund our investment through our savings, but if the government runs a big budget deficit, if it spends a whole pile more than it’s taking in taxes, then we, as a nation, will live beyond our means. I think this is so important. It’s not a matter of tariffs, it’s not a matter of the dollar. If we run a big budget deficit, if we continue to buy more stuff – the government does and it takes it in taxes – we will run a trade deficit. So if we want to fix our trade problem, we got to start by fixing the budget deficit.

Silverstein: And to take your analogy further, when is it ok to run a budget deficit or a trade deficit as an individual, or a nation?

Kelly: It’s actually a very good point, because now, I suppose, I do overall run a trade surplus, and that’s good. But 20 or 30 years ago when I was a younger man I actually ran a trade deficit. I was borrowing money every year just to fund my expeditions to Costco, because I wasn’t getting paid enough. But that’s ok, because I knew that over time, I’d get paid more. And that’s actually true for – for example, emerging market economies. It’s ok for them to borrow a whole pile of money to grow their economies because they’re young, they have got plenty of room to grow. We are an old, mature economy. Our economic growth is going to be about 2% in the long run. In this kind of economy, and with so many people retiring, we actually should be running a budget surplus and a trade surplus. We should be storing up money to pay for our retirement, and of course, we’re doing exactly the opposite.

WATCH THE FULL INTERVIEW HERE:
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This video was originally published on July 27, 2018

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