One of the dumbest theories from the NatCons that we keep hearing of late is that we have to eliminate America’s “trade deficit.”

As we’ve shown many times on these pages, the trade deficit is simply a mathematical mirror image of our capital import surplus.

But what is also misunderstood is the trade deficit corresponds with prosperity.

As the FRED blog has put it in their headline analysis: “trade deficits decrease in recessions and increase in booms”

Here is their clear cut analysis:

“How does the trade balance relate to economic activity? The graph below shows that every time there’s a recession, the trade deficit tends to decrease. Or, if we go farther back in the past, the trade surplus tends to increase.”

That’s because Americans have more money to spend on imports when times are good and much less money when times are tough.