The Congressional Budget Office has reported the largest federal budget deficit since 2012, and the highest interest payments ever.

The deficit in the 12 months through September was $113 billion, or 17 percent bigger than in the same period a year earlier and adjusting for calendar effects, the gap was even larger.

The fact that paying for the debt is so expensive is a little surprising given how low interest rates are. Of course, this is a reflection of the fact that deficit financed tax cuts at a time of full employment will tend to cost money.

The Congressional Budget Office also informed earlier this year that the U.S. budget deficit will surpass $1 trillion dollars by 2020, two years sooner than previously estimated.

Now, a deficit is not necessarily a problem. One way to manage it is financial repression. This effectively forces investors to buy bonds at a price that is higher than fair value and therefore yield that is lower than fair value. It is a hidden form of taxation.

The fiscal deficit does directly affect the U.S. current account deficit. A current account deficit is simply the private sector deficit plus the government deficit.

President Trump’s tax cuts have been generally spent and not saved. Only a very small part of the corporate tax cut went into investment. Most went to share buybacks and dividend payments, giving the money to the consumer. Over a third of the income tax cuts for consumers was spent on imports.

The consumer tax increases that the tariffs represent are not enough to turn round the fiscal position and thus will not turn round the current account position.  

Maybe investors could do well keeping in mind that some Fed officials have warned that rising U.S. deficits could hamper any U.S. fiscal response to a downturn.

Treasury Secretary Mnuchin and the Investment Conference in Saudi Arabia 

Meanwhile, the United States is trying to decide whether Treasury Secretary Mnuchin should be dispatched to the desert or not to attend Saudi Arabia’s “Davos in the Desert” conference, which is the “Future Investment Initiative” event in Riyadh next week. A decision is to be made by Friday.

The chief executive officers of HSBC Holdings Plc and Credit Suisse Group AG became the latest top bankers to abandon the Future Investment Initiative investment conference in Saudi Arabia next week as pressure grows on the kingdom amid allegations it killed a dissident journalist.

Mr. Mnuchin’s yes-or-no attendance at the conference is likely to be taken as a signal of how seriously the relations between the U.S. and Saudi Arabia have deteriorated.

President Trump has suggested that the journalist Jamal Khashoggi may have been killed by “rogue agents” who somehow broke into the Saudi’s diplomatic offices in Turkey. Of course, it is not just the U.S. President who needs to be convinced of “rogue agents”, Congress is also getting involved in this issue and there is the precedent of Russia where Congress passed veto-proof sanctions.

Brent crude oil prices remain at around $80 dollars per barrel. It’s interesting that there has not been a dramatic increase in the oil price.

Eurozone Trade Balance

The seasonally adjusted trade balance showed a 16.6 billion euro (USD $19.2 billion) surplus  in August, up from a slightly larger revised 12.6 billion euro (USD $14.6 billion) surplus in July. Unadjusted, the black ink stood at 11.7 billion euro (USD $20.4 billion), a 3.6 billon euro (USD $4.2 billion) deterioration versus a year ago. The headline improvement was wholly attributable to exports which rose 2.1 percent on the month to 193.1 billion euro (USD $ 223 billion).

Imports on the other hand were flat at 176.5 billion euro (USD $204 billion), the first month not to show positive growth since February.

Unadjusted annual export growth now stands at 5.6 percent, down from 13.0 percent, while the import rate is a somewhat firmer higher at 8.4 percent, but still down from 13.4 percent last time.

August's widening puts the average surplus in the first two months of the third quarter 1.2 percent above its second quarter mean.

However, the trend in the balance has worsened since the start of the year and the building threat from global protectionism could see this pattern extended over coming quarters.

For investors it’s important to take note that the trade numbers of the Euro area that has 19 member states, which do not include the UK, are not the same of those of the European Union (EU) that has 28 member states.

Etienne "Hans" Parisis is a bank economist who has advised investors on financial markets and international investments.