I was looking at the latest US trade figures from the Bureau of Economic Analysis and thought, rather unoriginally, that this is an unsustainable trend. Despite the decline in the value of the US dollar against most major currencies, the US balance of trade in goods and services hit a record deficit of $55 billion (annualised, this would be about 6 per cent of Gross Domestic Product) in June. The deficit has grown fairly steadily, and this trend shows no obvious signs of reversal, at least unless oil prices fall sharply.
This naturally, and still rather unoriginally, led me to the aphorism, attributed to Herbert Stein “If a trend can’t be sustained forever it won’t be”. Sustained large deficits on goods and services eventually imply unbounded growth in indebtedness, and exploding current account deficits, as compound interest works its magic. So, if the current account deficit is to be stabilised relative to GDP, trade in goods and services must sooner or later return to balance or (if the real interest rate is higher than the rate of economic growth) surplus
But forever is a long time. Before worrying about trends that can’t be sustained forever, it is worth thinking about how long they can be sustained, and what the adjustment process will be.