The moment of truth?

Trump's proposal to drastically reduce the US external deficit has substance. And not just for us, but also for US voters. Accounting-wise, the external deficit means that the country's savings (private and public) are insufficient to finance its domestic spending (consumption and investment), so the rest of the world must make up the difference. Therefore, closing the imbalance Trump is pursuing inevitably means that its citizens will lower their standard of living.

This simple truth was what we Spaniards learned suddenly and abruptly during the financial crisis: the foreign loans that had allowed us to live above our income in the 2000s disappeared, and we had to embark on the painful path of austerity. But the United States has a unique trait: it has been able to pay its lenders by issuing currency. This is what Valéry Giscard d'Estaing, former French finance minister, famously said when he spoke of the "exorbitant privilege" of the dollar. Since the 2000s, the American foreign deficit was partially financed with resources from China, generating a symbiotic relationship between the two: American citizens used Chinese savings to finance a standard of living they could ill-afford, and those in China kept them very low, generating financial surpluses with which to lend to the US. It was a new paradox, that of a poor country lending to a rich one, so well described by Stephen Roach in his work on China-US relations. Just a couple of facts: in net terms, without depreciation, at the end of the last decade Chinese savings stood at around 45% of GDP, an unusual figure compared to the meager 2% in the United States or the 12% in Europe, reflecting, in turn, very modest private consumption in China (only 40% of GDP), far removed from the 67% in the United States or the 58% in Europe.

Americans used Chinese savings to finance a standard of living they could not afford.

Trump's policy, if successful, will not only affect the rest of the world, weakening and/or reducing our surpluses with his country and affecting our growth. It will impact his population: adjusting their spending to the income they generate and avoiding borrowing from the rest of the world means lower public deficits and/or greater private savings. In short, lower living standards.

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I doubt Trump is willing to make this colossal change. Perhaps he hopes that with the increased revenue generated by the new industry, the adjustment will be less painful. But if we really want to close the external deficit, both the public and private sectors will have to moderate their spending. These are difficult times. For everyone.