Posted on 02/10/2006 5:08:24 AM PST by LowCountryJoe
America's trade deficit -- in December reaching a near-record $64.7 billion -- is unfortunate, right?
Wrong. Contrary to popular opinion, this so-called "deficit" is a blessing.
Consider that if Americans export lumber, sheetrock, and architectural blueprints to China so that people build a factory there, we're gleeful. "Wonderful!" we proclaim. "Exports are up and our trade deficit is down!"
But if those very same building materials are assembled by Americans into a factory situated and operated in, say, Utah and then bought by Chinese investors, we complain -- led today by the likes of Senators Charles Schumer and Lindsey Graham -- that "Something's wrong! Our trade deficit is higher!"
Truth is, though, that nothing economically important separates the first scenario from the second. In each case the world's stock of productive capital grows as Americans produce things for sale to foreigners. Those cases appear different from each other only because of the conventions of international commercial accounting, which records investments separately from imports and exports.
This accounting convention creates the false impression that an excess of imports over exports -- called a "trade deficit" -- is an ominous imbalance requiring corrective action. In fact, America's trade deficit is evidence, not of any imbalance, but of the happy fact that our economy is so strong and stable that foreigners invest here eagerly.
When foreigners sell things to Americans they earn dollars. If foreigners then spend all of those dollars on American exports, trade is "balanced." There's no trade deficit or surplus. But if foreigners instead invest some of those dollars in dollar-denominated assets -- say, by purchasing that factory in Utah, houses in Hawaii, or shares of Google -- they obviously must buy fewer American exports. So the trade deficit grows as investment in the U.S. rises.
Although dollars spent by foreigners on investments are not spent on items classified as U.S. exports, these dollars nevertheless are spent in the U.S. They raise the value of American corporations and real-estate, and improve American workers' productivity. In turn, those increases in asset values and productivity enhance Americans' current ability to buy goods and services -- perhaps the same goods and services that foreigners would have bought had they not invested their dollars here.
Isn't it better, though, if Americans do the investing and foreigners the consuming? No. What's important is to have lots of investment to increase worker productivity, which ultimately is the only way to raise our living standards. The nationality of investors is insignificant.
Because savings and investment are indeed so beneficial, we should welcome rather than regret foreign savings invested in our country. If we applaud the guy across the street who forgoes that vacation in Las Vegas in order to save and invest more in the U.S. economy, we should applaud also the guy across the ocean who does the same.
But doesn't a higher trade deficit mean that Americans are sinking more deeply into debt? Not at all. A trade deficit isn't debt. My young son, for example, received for Christmas several Chinese-made toys. These were bought with cash. If the Chinese toymakers invest their newly earned dollars in, say, that factory in Utah, the U.S. trade deficit rises but no debt is created. Neither I nor any other American owes any foreigner anything as a result of my purchase of toys from China and the corresponding Chinese purchase of equity in a company located in America.
More generally, whenever foreigners buy American real-estate or equity, or when they simply hold dollars in their portfolios, our trade deficit rises without creating debt.
Nor is it true that a higher trade deficit means that Americans are selling off assets. Whenever, for example, IKEA builds a new store in the U.S., a new asset is created. No Americans had to part with assets as a pre-condition for this Swedish investment in America.
Of course, part or all of the trade deficit can become debt. This happens whenever Americans borrow dollars from foreigners. As it happens, the most prodigious borrower today is Uncle Sam. But despite self-righteous accusations leveled at foreigners by the likes of Senators Schumer and Graham, the fact remains that U.S. government indebtedness is not caused by foreigners buying Uncle Sam's bonds, but by Congress spending beyond its means. If government debt is a problem, then Congress should stop borrowing. Complaints about the trade deficit are a red herring.
We Americans have many real problems confronting us. The trade deficit isn't one of them.
Our indebtedness is quite large when you factor in foreign ownership of land.
When we ran a "surplus" I don't recall that the trade deficit "disappeared.
What don't you understand?
My economic perspective is unabashedly pro-American.
Globalists OTOH, view economic data from a "neutral" perspective, interpreting it to their own advantage regardless of national consequences.
The Bush Administration represents the vested interests of transnational corporations."Merchants have no country. The mere spot they stand on does not constitute so strong an attachment as that from which they draw their gains."
--Thomas Jefferson to Horatio G. Spafford, 1814. ME 14:119
How much land do foreigners own? And how does their ownership of assets translate into our indebtedness?
When we ran a "surplus" I don't recall that the trade deficit "disappeared.
That's correct, so how does their accumulation of dollars and dollar assets translate into our indebtedness again?
Mark, can you help out here?
Todd, when someone owns a note or a signed obligation, does it not mean the signatory to the note owned by someone else is in debt to that other person?
There is also a sovereignty and national security aspect to this. If foreign countries own certain things in this country, it puts Americans at risk. Think the Chinese and the Panama Canal. You can thank Mr. Peanut for that.
Isn't it great. Foreigners send us cars, electronics, oil, etc. and all we have to do is send them little green pieces of paper. Best scam ever.
If you're talking about Treasury debt then just say so.
There is also a sovereignty and national security aspect to this. If foreign countries own certain things in this country, it puts Americans at risk.
Why don't you be more specific?
Think the Chinese and the Panama Canal. You can thank Mr. Peanut for that.
Yes, handing over the Canal was stupid. The last time I checked though, the Canal was not in this country.
We built the canal and had operational control over it. Last time I checked, the definition of property rights was to have acquisition, ownership, and use of an asset. We certainly had "use."
Yes we did. And it was stupid to give that up.
Last time I checked, the definition of property rights was to have acquisition, ownership, and use of an asset. We certainly had "use."
Yes. Are you saying we no longer have use?
And as the article points out, that is the fault of the government. We should be lobbying the government to stop deficit spending. That will not, however, stop the trade deficit.
They're two different things.
They hold collateral on the note. As I understand it, this includes the entire mineral estate of the United States and (more recently) water resources. The way control of these is transferred from Americans to foreigners is via environmental regulations empowered by (IMO unconstitutional) treaties held at the UN.
Given that interest rates on bonds don't pay very much, there has to be a way to sweeten the deal given inflationary pressures on the principal, else the lenders aren't very enthusiastic at bond auctions and interest rates would otherwise rise rather sharply. Needless to say, once regulatory power has been consolidated in administrative government, a selective permitting and enforcement process is a very easy way to deliver a politically opaque return.
I can confirm that there are virtually no American hard rock mining operations left in the Western US. Those permits are held by European and Asian concerns (no, I don't have a lot of hard data on this, but I know some folks in the mining business who might; I've been avoiding doing that research because I've been busy elsewhere). We have effectively sold our assets to secure borrowing to fund a military machine that defends the creditors' interests abroad, something against which toddsterpatriot has inurred his comprehension, the siren song of comparative advantage being what it is.
Unfortunately for the economists, there's no such thing as an even playing field; the intangibles of relative risk skew any transaction, whether environmental (exotic species in imported goods), military (obligations to defend extended supply lines when domestic production is subject to regulatory constraint), or political (illegal aliens). It is the role of government to see that those risks are justly apportioned. Unfortunately, it is all too easy for a craven welfare state to socialize the risks while privatizing the benefits instead.
And as they vacate elsewhere, the market will adjust. Supply and demand.
Spoken like a true DU'er
Oh man, that's funny. The last time I bought a Treasury I didn't see anything about collateral. Maybe you have a link that goes into more detail? Maybe on the Alcoa website? LOL!
bttt
So if the US defaults then we may wake up one morning an every drop of water in the US will be carted off by some Chinese repo man?
Not exactly. It's much more effective from their prospective locking them up so that foreign production has a "comparative advantage." It's easy to do using environmental law.
There are ranchers being driven away from deeded and developed water rights at gunpoint by Federal agents all across the West. The claim is that ranching MIGHT be harmful to endangered species, turtles, grouse, flycatchers, whatever. The fact that those species do BETTER when cattle are present has nothing to do with the policy. Of course, it has nothing at all to do with the fact that Soros and Rockefeller have major investments in South American cattle production either. Nope, not a bit.
They get calves out of India and Pakistan, ship them to Argentina and Brazil, fatten them up down there, ship them to Mexico, they come in under NAFTA, spend two weeks in a cattle pen eating Cargill grain, and VOILA! It's American beef. American beef producers can't get honest domestic labeling out of the USDA. I wonder why?
Soros is now the largest landowner in Argentina. He bought it after crashing the currency. Take the hint.
Yeah, yeah, yeah...
Why don't you go to the Religion forum and claim that the Pope is a Scientologist or something?
Show a little ingenuity instead of that boringly lame DU innuendo.
Wow, the Pope's a Scientologist? What's your source?
The trade deficit is separate. Nations that trade with each other can swap goods (crops, products, services) and they can swap capital (land, patent rights, stocks and bonds). By the end of the day (or year), if a country sells more capital than goods, it has a 'trade deficit' and a capital surplus --or vise versa.. . One will always equal the other regardless of who's getting rich. We're getting rich right now even though we have a trade deficit. In 1960 we had a trade surplus and we were going broke --we had to pay off our capital account deficit by shipping out our gold reserves. More info here.
The balance of payments is always zero. What's important is whether or not we're getting rich. We are.
That's the case for American citizens. Treasuries held by foriegn investors are collateralized. I've heard Greenspan himself demand more collateral from Congress, and he specifically mentioned water. The Desertification Treaty passed soon after, by voice vote.
The trade deficit is separate.
I was asked, by sauropod, to explain how bonds, bought with the cash of the trade deficit, were a problem for Americans. So I did.
What's important is whether or not we're getting rich. We are.
We disagree. Some people are getting rich, at the expense of others.
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