Question: Is a debit good or bad?
In an early version of SNL, Gilda Radner, in character as Emily Litella, rants in mock editorial rage on the prohibition against TV violins. “Why don’t parents want their children to see violins on TV?”
Her Weekend Update compatriot Chevy Chase interrupts, clarifying that the restriction is against TV violence, not violins, to which she stares at the camera, embarrassed, and says:
“Oh. Well, that’s different! Never mind.”
This is the current debate on trade deficits in a nutshell.
As Ricky says to Lucy: “Lucy. Lucy — I ‘splain you.”
Blame it on Father Pacioli (circa 1494): Often called the "Father of Accounting," (possibly the sneakiest pun ever), Pacioli was the first to articulate the bookkeeping system we call Double-Entry Accounting.
Among his gripping citations are this:
"A person should not go to sleep at night until the debits equal the credits."
Oh.
Padre.
Get a life.
But in fact this turned out to be a useful enough concept to last us the next 531 years. In short it means each transaction makes more sense when looked at from two sides of an imaginary ledger, debits, and credits. And tracking these is very wise. Seriously.
In his statue, pictured below in San Sepolcro, Italy, Father Pacioli is shown elaborating the system, while also pensively wondering (you can see it in his eyes just there):
When will tax season will be over?
Will Italy invent tomato sauce?
Does that light actually go off when I close the fridge?
Okay, so, what’s a debit? And is it good or bad?
Harold Averkamp, CPA, MBA has a handy website called “The Accounting Coach,” where he responds to this very question.
“It is best if you accept the meaning that the word debit has had for 500 years: a debit is an amount entered on the left-side of an account. Don’t add “good” or “bad” or “add” or “subtract” or other meanings.”
“If you associate the word “good” with debits, you will have a problem when it comes to expenses. After all, expenses have debit balances. Since expenses will reduce a company’s profits, they are not good.”
“Lots of people have tried to make debit mean something more than “left side...” It never works. That’s why after 500 years we are still using the unusual word debit.”
And what does this have to do with Trade Deficits, and by implication, Tariffs?
The term Trade Deficit is a misunderstood, misleading misnomer. Like a debit, it’s not good or bad.
It’s misunderstood --- it sounds like something about as serious as say a Budget Deficit, which is very serious indeed (and somehow not even in the current conversation). It’s simply a balance sheet entry on one side of the international trade ledger. It’s not good or bad.
It's misleading because it implies a false dichotomy – as if the choice is between overseas factory jobs and similar jobs in the US. That’s not the choice. The truth is, automation is replacing those mind-numbing factory jobs everywhere, but replacing them more slowly where people work for less. In truth, a US producer has to choose between automation at home and cheap labour abroad. If the factories come home, the jobs aren’t coming with them. Because factory owners are smart, they automate.
It’s a misnomer because it’s cherry-picking data -- referring only to physical goods trade, deliberately ignoring services (such as AI, software, entertainment, transportation logistics, etc.). And in the global trade of those non-physical items the US has a massive trade surplus with the world, approaching $300B. Why ignore the until-a-minute-ago-much-celebrated tech stuff that is making the America the global growth envy, and the tech bros roughly as wealthy as some European nations? And does that services surplus imply that Americans are ripping off the others? Nope. It’s still just a ledger entry.
This hard goods obsession also ignores another transaction – the massive flow of funds into US financial markets from all over the world (that’s partly how all the cash the US spends on goods imports comes back). The US has a massive, humongous, super-duper, stupendiferous capital market, which is the absolute truly-ooly envy of the entire whole wide world. Isn’t it better to treasure this absolute gem of wealth creation?
If you want to see what it’s like to lose that enormous privilege, just ask London.
RBC Wealth Management's latest investment newsletter.
Tackling the U.S.-China tariff tug of war
As the U.S. and China continue their tariff battle, President Donald Trump surprised some people by announcing exceptions to the latest reciprocal tariffs. Where do the on-again, off-again policies leave China?
Regional developments: Bank of Canada holds rates steady amid U.S. trade policy uncertainty; A potential conflict looms in the Fed’s dual mandate; Rising trade tensions lead to a European interest rate cut; China reported strong Q1 GDP growth but now tariff headwinds prevail
More here: Global Insight Weekly.
Feel free to contact me with any questions and/or to discuss investment ideas.
Please scroll down.
I can’t get rid of this polar bear snowstorm thingy here…
Anyone know a blog editor looking for work?
Some Interesting Graphs this Week:
This one is from Facebook, via the New York Times, and shows global migration patterns. It’s interactive and quite interesting if you can get it to run for you. I’m pasting a screengrab below but try the link under it. I’m not sure if you need an account to view it or not.
Taking stock of gold’s recent rally (see chart below): “Gold is the only major commodity that has escaped the latest tariff-driven market turmoil unscathed. We expect it to remain resilient, especially relative to its more cyclical commodity peers. True, the yellow metal has enjoyed an impressive bull run to successive fresh record highs over the past couple of years. However, the bull market is still relatively young and not exceptional by historical standards. Importantly, the policies of the new U.S. administration amplify the forces that are driving this bull run. Elevated policy uncertainty benefits safe haven demand for the metal. Meanwhile, trade and geopolitical tensions will further incentivize central banks around the world to purchase the metal to boost its share of their reserves. Meanwhile, ETF flows have only recently started picking up. That said, the cyclical uptrend in gold won’t be without hiccups. Our gold composite indicator is near the top of its historical range, in overbought territory. In particular, price momentum and bullish sentiment are relatively elevated. This suggests that the rally may be due for a tactical pause.”
The flipside of trade: Capital inflows (see charts below): “The USD depreciation in response to U.S. tariff increases – the opposite of economic textbook doctrine – and the U.S. Treasury sell-off in parallel to equity losses – the opposite of safe-haven behavior – have cast a broader light on the overall dynamics triggered by Trump's tariff policy. Rather than appreciating in light of a tariff-induced reduction of U.S. imports, the USD depreciated as a consequence of global investors aiming to reduce their overall exposure to USD assets. Rather than declining in light of a rising recession probability, U.S. Treasury yields rose as a consequence of foreign holders demanding a higher term premium to compensate for concerns about Treasuries as a care-free safe-haven instrument. These developments are so important to watch because they indicate a potential paradigm shift in how the US is seen as a destination for capital flows overall.
Focusing on the underlying core instrument of all global financial markets, the U.S. Treasury bond market, about 22% of it is held by non-U.S. residents. The largest holdings are by China and Japan, the two economies with which the US has had large and persistent current account deficits. The capital account is the flipside of the current account.
To be very clear: U.S. exceptionalism grew over a century or more and the USD's reserve currency status has no clear rivals. The U.S. is no emerging market economy vulnerable to sudden capital flow reversal.
However, first, the magnitudes of inflows into USD assets over recent years also mean that small corrections can imply large outflows.
And, second, an administration that explicitly states the USD global reserves status as a burden rather than an 'exorbitant privilege' could ultimately get what it wishes for in a much more uncoordinated manner than it desires.”
Also. Ouch.
If decoupling continues at pace, the next major target is likely to be investment flows. The “America First Investment Policy” published in February laid out actions the Trump administration could take, including delisting Chinese firms from US stock exchanges, tightening controls on Chinese FDI into the US, and limiting capital flows in the other direction, both FDI and portfolio investment.” See chart below.
Cognitive dissonance: Most Americans want to onshore manufacturing but few want to work in it (see chart below from the Financial Times): “If the goal is to recreate the scale and specialization of the developing world’s factories, the US will need workers and capital. But few Americans want to go into industrial work. A 2024 Cato Survey found that only one in four believe they would be better off in a factory over their current employment.”
Economic Webcast - April 2025
Lastly, if the melatonin still hasn’t settled in, here’s an economic update from our guys, enjoy
Eric Lascelles shares the RBC GAM Investment Strategy Committee's economic views, including timely insights and global economic outlook –
Welcome to our April Economic Webcast. Join Chief Economist Eric Lascelles as he delves into the complexities of the current economic climate, with a particular focus on the evolving trade dynamics in North America. In this session, you'll gain a nuanced understanding of:
- The far-reaching impact of recent tariffs on the U.S., Canada, and Mexico
- A comprehensive breakdown of the latest tariff proposals and their implementation
- Insight into potential Canadian responses to the shifting tariff landscape
View the full presentation here: (about 45 minutes) Eric Lascelles
Wishing you and your loved ones a happy Easter weekend!
Enjoy!
Mark