One of the reasons I began supporting Donald Trump and declared GuerillaStockTrading as an official supporter of the Trump candidacy had to do with economics and ultimately the stock market.
The majority of people who are against Trump are not very smart when it comes to understanding international trade and macroeconomics.
Donald Trump has nothing to do with supporting isolationism, protectionism, or racism.
Donald Trump has everything to do with taking back control of the ‘I’ variable in the GDP formula. To improve the economy, Trump must grow GDP.
The GDP equation is: GDP = C + I + G + (X – M)
C = Consumption
I = Investment
G = Government Spending
(X – M) = Net Exports (the difference between imports and exports)
The four drivers of GDP growth are consumption, investment, government spending, and net exports.
Net exports represent the difference between the exports of a nation and its imports. If imports are greater than exports, then a country runs a trade deficit.
Economic forecasters and stock traders like myself track the four different components of GDP via economic reports. For example, to monitor the C component of the GDP formula, I will watch consumer confidence reports carefully. The idea is that a more confident consumer will spend more. Below is a graphic that shows the different economic reports I track as they relate to the GDP.
Trade Deficits and Offshoring Subtract From GDP Growth
The GDP equation is: GDP = C + I + G + (X – M). The (X – M) component means net exports (the difference between imports and exports).
If a country like the U.S. runs a trade deficit, this directly subtracts from GDP growth. The trade deficit has been a structural drag on the U.S. economy for decades.
The massive trade deficits in the U.S. impact the GDP beyond just the (X – M) component. The huge trade deficit also affects the ‘I’ component of GDP.
Consider that in 2015, the U.S. trade deficit with China was $365.7 billion. The trade deficit with China means lower domestic investment growth, the ‘I’ component of the GDP formula. Companies like Caterpillar, General Electric, Honeywell, and General Motors have built more plants in other countries and fewer plants in the United States.
Offshoring is the act of US corporations building plants in other nations. Offshoring creates jobs in other countries at the expense of U.S. jobs. Where have most of the offshoring of productions gone? China.
Trade deficits with China negatively impact GDP by way of the net exports component (X – M), and by the reduction of investment (‘I’ component) here in the United States.
The double negative impact on GDP from large trade deficits is no longer a subject of debate. Economists have enough data to prove this point. My macroeconomics teacheropens in a new window, the renown Dr. Peter Navarro at the University of California, Irvine, notes when China joined the Word Trade Organization in 2001.
China Joins the Word Trade Organization in 2001
Not coincidentally at the start of America’s new era of slow growth in 2001, China acceded to the World Trade Organization or WTO and was given full access to American markets.
Contrary to the rules of the WTO, China began flooding the U.S. with cheap, often illegally subsidized exports, and over the next decade, the US would see the loss of over 50,000 factories and more than 5,000,000 manufacturing jobs.
The Emergence of Structural Trade Imbalances
Shortly after China joined the WTO, the economies of the UK, Europe, India, Brazil, and others, would likewise begin to have significant growth-sapping trade deficits with China. Global growth fell, and troubles across the euro zone began. A growth-sapping global trade imbalance gripped the planet as shown below.
By the year 2012, trade deficits with China slowed growth dramatically in both Europe and the United States (remember, trade deficits negatively impact net exports and the ‘I’ component of GDP). A bad sort of negative feedback loop took place as China’s two biggest customers, Europe and the United States, slowly became too weak to sustain China’s export-dependent growth.
In a ripple effect, slow growth in China, in turn, lead to slower growth in commodity countries like Australia, Brazil, and Canada, whose economies depend heavily on the sale of natural resources like coal, iron ore, and soybeans to China. These structural trade relationships would lead to a new type of butterfly effect the world had not yet seen.
The New Butterfly Effect Circa 2013
Weak demand for Chinese exports from Europe and the U.S., result in weaker import demand from China for commodities and other natural resources.
Chronic trade imbalances between China and other countries around the world make it tough for a robust U.S. economic recovery to happen.
Why Keynesian Stimulus Failed
From the butterfly effect, you can see why expansionary, Keynesian fiscal and monetary stimulus in the US and Europe, did not have the full results anticipated. Indeed, a short-run Keynesian approach does nothing to address the underlying, chronic, long-term structural trade imbalances, acting as a drag on both the U.S. and European economies and by extension, much of the rest of the world.
The only way to improve the U.S. economy, and by extension much of the rest of the world, is to deal directly with the structural trade imbalances the U.S. has with several of its trading partners.
Trump economics is all about tackling the ongoing trade deficits that have destroyed so many jobs in the U.S.
Trump is targeting two components of the GDP formula, net exports (X – M), and investments (‘I’ component). By reducing trade deficits, more corporations will invest in production plants inside the U.S. Further, Trump’s fiscal policies will penalize companies that engage in offshoring. Trump’s fiscal policies will also give tax breaks to corporations that create jobs here at home.
The result of Trump’s policies will indirectly help the consumption or ‘C’ component of the GDP formula as well. More corporations creating more jobs here at home will increase consumers buying power.
Building a wall and stopping illegal immigration and reducing the flow of people across the Mexico/U.S. border will help preserve U.S. jobs and wages. Stopping illegal immigration and reducing the flow of immigrants into this country targets the ‘C’ component of the GDP formula.
When labor supply increases from both legal and illegal immigration, this shifts the supply curve of labor outward (to the right), and wages fall.
When someone tells you a problem is too difficult to solve, remember, for them it is too difficult to solve, not for you.
Donald Trump wants to shift the supply curve of labor inward (to the left) to improve wages. The left mainstream media says he’s a racist.
Donald Trump wants to reduce trade deficits to improve investments here in the U.S. The left mainstream media says he’s against international trade.
Donald Trump wants to fine corporations that engage in offshoring to positively impact the ‘I’ component of the GDP formula. The left mainstream media says Trump wants to start a trade war with China.
Folks, like I’ve said for almost a year now, Donald Trump knows what he’s doing and how to improve the U.S. economy. Analyzing Trump’s positions from a macroeconomics perspective leaves you with no other conclusion.