Canada will pay the price for Trump’s trade ignorance.

The U.S. government briefly shut down last week for the second time this year; the vote on legislation that would have otherwise avoided the shutdown was delayed by Senator Rand Paul’s speech scolding his fellow Republicans for going along with a plan that would significantly increase the government’s budgetary deficit, even though the U.S. economy is running at full employment. “I want them to have to answer people at home who said ‘How come you were against President Obama’s deficits, and then how come you’re for Republican deficits?’ Isn’t that the very definition of intellectual dishonesty?”

The answer is, of course, “yes,” but it’s not clear why Paul should be surprised, or even pretend to be surprised. This is the third consecutive Republican administration to abandon the rhetoric of fiscal discipline while in opposition for the practice of fiscal profligacy while in power. The Reagan, Bush and now the Trump presidencies have all implemented deep tax cuts for high earners, and accompanied those tax cuts with increased spending.

Former vice-president Dick Cheney once said “Reagan proved that deficits don’t matter,” although it’s probably more accurate to say that “Reagan proved to Republicans that their deficits don’t matter to them.” They certainly don’t matter to their own electoral base: Republican voters have stayed faithful through every fiscal pivot. But large and sustained U.S. government deficits do have consequences, and not just for the U.S. economy. They have and will make life more complicated for Canadian policy-makers as well.

The usual story that is told about the dangers of running deficits when the economy is not in recession is that increased government borrowing increases the competition for domestic savings, pushes up interest rates and “crowds out” private investment.

But in an open economy, governments don’t have to depend on domestic investors to buy their bonds; they also tap into foreigners’ savings to finance their borrowing.

Borrowing from abroad is essentially the story of how the Reagan and Bush deficits were financed: an inflow of foreign savings to the United States allowed the government to run large deficits without an increase in interest rates or a decline in private investment spending. American voters could be forgiven for thinking that deficits didn’t matter, after all. (The reason why Canadian governments can’t pull off this trick is that the international appetite for Canadian bonds is nothing like that for U.S. Treasury Bills.)

But then there’s the matter of the trade deficit that accompanies those capital flows. All countries’ balances of payments must add up to zero: credits equal debits. And the foreign purchase of domestic assets counts as a credit, for the same reason that a foreign purchase of a domestic good counts as a credit. So in order to make the balance of payments accounting to add up, that surplus of domestic assets being sold to foreigners has to be offset by a deficit in domestic goods being sold to foreigners. In other words, the obverse side of selling all those U.S. government bonds to foreigners is that the U.S. also runs large trade deficits. In market terms, the foreign purchases of U.S. bonds pushes up the value of the U.S. dollar, and the stronger dollar results in a U.S. trade deficit.

There are a couple of ways that increased U.S. government borrowing could pose challenges for Canada. The first is simply that increased competition in the global bond market will make it harder for Canadian governments to continue borrowing as cheaply as they have been. These market pressures are likely to be aggravated by a decline in the demand for bonds: both the U.S. Federal Reserve and the European Central Bank are preparing to wind down their purchases of government bonds. One of the reasons why the federal Liberals have been so unconcerned with running $20 billion deficits is that interest rates have been running at historic lows; it may soon be dangerous to assume that debt service costs will stay under control.

But the real challenge facing the government of Canada — and the governments of all the trading partners of the United States — is that the present U.S. administration remains invincibly ignorant of balance of payments accounting. President Trump wants to increase the government deficit and reduce the trade deficit, without the pain of higher interest rates and weakened investment. It is literally impossible to meet these demands, and the challenge of explaining this point to an incurious President is only slightly less daunting.