Posted on 06/21/2012 11:06:18 AM PDT by moonshot925
They are meaningless, goods trade for goods.
According to Thomas Sowell (everybody here PRETENDS to read him for obvious reasons), and Walter Williams, and Milton Friedman, and Steve Landsburg there is no such thing as a trade deficit (they are correct). I’ll let doubters read those men in their own words for the simple explanation.
You are 100% correct. 1 in 100 will grasp the argument.
Continual large surpluses are also not good. You might end up like China, building ghost cities and misallocating capital, finally forced to revalue their currency anyway. Or like Germany, who created the Euro to juice their export markets. It worked too well, now they have to either finance their trading partners, see them leave the Euro, or leave the Euro themselves. Or you might end up like Saudi Arabia, a few at the top get to spend the money while the rest live of a government dole. When the oil runs out, so will the false prosperity.
Since the US has run large trade imbalances for decades, you might ask why it hasn't ended up like Greece. There are several reasons, the primary ones are: the role of the US dollar as the primary reserve currency, the perception of the US as a "safe haven", the size and strength of the US economy, and a AAA credit rating, until now.
How many times must Thomas Sowell (whom EVERYBODY around here swears to read religiously) explain this simple concept before people grasp it?
Are trade deficits good or bad? There is no correct answer.
when they are paid for with backed-by-nothing pieces of paper, in exchange for TV’s and plastic toys from Asia, its probably bad for everyone - including those left holding the dollars!
If I get a tv or a Honda for a bunch of worthless paper, how is that bad for me?
Why would the intellgient Japanese give me a Honda in exchange for a pile of worthless paper?
Well, I for one can’t grasp his logic.
His example is that US trade surpluses did not seem particularly helpful in the Great Depression, or that US trade deficites were not particularly hurtful in the 1990s.
Where is the evidence that trade surpluses did not help us in the Great Depression. We had massive deflation. Is it not possible that the trade surpluses slightly offset the massive deflation? If so, with still massive economic contraction, it would be hard to measure the value of the trade surpluses.
Then in the 1990s, how do you measure the impact of the trade deficits in light of the MASSIVE credit expansion.
You would have to have a society where there was no deflation and no credit expansion, and then see the effect of a trade deficit or surplus in that controlled environment.
I do appreciate Sowell’s argument that trade imbalances don’t occur in a vacuum. As he says, our deficit in automobile trade gets offset somewhat when our trading partners invest in new auto manufacturing plants, returning some of that imbalance back to us as investments.
I get that.
All I know is that during the 1950s we were massive net exporters of goods and our economy soared.
Since the 1970s we have had very large trade imbalances where we imported far more than we exported, and over that time our living standards have steadily eroded.
I would need Sowell to explain it, but I find it impossible to believe those were just coincidences — that prosperity coincided with massive exports, while decline coincided with massive imports.
Then there is the ascendency of the Chinese economy? Who in their right mind doesn’t understand that the Chinese economy has gained almost solely from massive exports and large trade imbalances in their favor with many nations?
The same was true in the soaring Japanese economy.
You can quote Sowell all you want, but I would need him to explain to me why our economy soared in the 1950s and why Japan and massive China and tiny Japan became economic powerhouses, without any discussion of trade deficits and exporting goods and services to the world.
Have at it. I am anxious to learn.
As if those worthless scraps of paper don’t represent a lifetime of my labor output.
I am not trading paper for goods. I am trading my time-valued labor output for goods. The paper is just a temporary storage medium for my labor output. OK, our collective labor output.
It is why some currencies are stronger than others. US productivity is very high and that is still reflected in our currency. Ditto Germany and the yen. There is a reason the Lira was the Lira and the Peso was the Peso.
You are conflating two issues — a trade imbalance with another nation, which can and does occur, but is 100% beneficial to both parties, and an overall trade deficit, which is impossible and cannot occur. If you want to know how and/or why not read Sowell, Williams, Friedman, etc.
Why would the intellgient Japanese give me a Honda in exchange for a pile of worthless paper?
It sounds like you are using semantics. A raw trade deficit is mathematically impossible, but you must know full well that when we use the term “trade deficity” it is conventionally accepted to mean a trade imbalance between nations.
So when we say the USA experienced a record “trade deficit” it simply means that the value of what we imported was at a record high against the value of what we exported.
I don’t know what phrase you would use for that concept, but it sounds to me like you are berating the use of a technically sloppy phrase rather than disagreeing with an economic concept.
It’s one of those things (private monopolies are BAD, trade deficits are bad, the “wage gap” needs to be corrected, etc) that has been so drilled into the public that not even reason stands a chance.
I’ve tried explaining it with the grocery store analogy. I run a trade deficit with the grocery store (I buy their goods, they never buy mine). The more money I make, the more groceries I buy, the bigger my “deficit” becomes. Is this a bad thing?
In your 1st para, you say “trade deficit” is accepted to mean trade imbalance between nations.
In your 2nd para, you say the opposite.
Regardless... a trade balance between nations is possible, it happens, and it is meaningless.
An overall trade balance is impossible.
The paper isn’t worthless. It represents face value in its denominated currency. Both the Honda car and the pile of paper represent an equivalent labor, differing only by the relative value of the currencies of the two countries.
Like I said, I don’t know what term you want to use to represent a large imbalance in trade. If my population has to work 40 hours a week to buy what your population produces in 10 hours a week, then my population is going to send all of its labor value to you in exchange for 25% of its labor value to me. That leaves 75% of its labor value to consume or trade with others.
They gain relative wealth. We lost relative wealth.
What am I missing? I know I made a simplistic example, but what am I missing here?
Historically, our manufacturing, gdp and employment increase the most when our trade deficit is expanding the fastest.
They give us goods and services and we give them dollars. They can either use those dollars to buy our goods and services or invest in our economy. Either way, it's good for us.
We are talking about 2 different things. Let’s take these 2 populations you discuss. The 10 hour a week pop. will be and is wealthier than the other pop. Period. But this has NOTHING whatever to do with any sort of trade def. or trad imbal. The poorer pop. could take 100% of its accumulated labor, valued at say X amount and trade it. In exchange for X value, they will receive exactly and precisely X amount of goods. Period.
If they traded with the richer pop., the richer pop will still have more stuff left over with which to trade with others; that just makes them richer. If my neighbor works at my house 40 hours a week 52 weeks a year, he has given me X amount of services. I’m way richer than he is. I give him X amount of paper. We are 100% even in our exchange. I still have 10X amount of paper to trade with others. What has this to do with a trade def?
I know what they say when you use the GS analogy... “Yeah, but you’re using the same currency! That’s not what happens when we trade with china!”
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