Stop Worrying About the Trade Deficit

TCS Daily ^ | February 10, 2006 | Donald Boudreaux

[cripplecreek]

These aren't the droids we're looking for.

[satchmodog9]

Move along.

[MNJohnnie]

Achieve Energy independence and the Economic Isolationist will not have to worry about the "Trade Deficit" any more.

[LowCountryJoe]

VADER: I find your lack of faiths disturbing.

[Elsie]

Who's worried?

We send them paper with pictures on it, and they send us useful stuff!What a deal!


Of course, they probably do NOT use that paper for toilets or burning, so, sometime in the future, that paper will come back to us and we'll send THEM useful stuff!

Neat how that works; eh?!

[Willie Green]

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!"

What kind of baloney hypothetical scenario is THAT???

Our Trade Deficit isn't increasing because Chinese investors are purchasing factories that we're building in Utah.

Donald Boudreaux is a double-talking shyster.

[LowCountryJoe]

You're right Willie, it's even better than this, typically. The foreigners generally buy our debt which gives American entrepreneurs easy rates at which to expand or start businesses, for people to achieve home ownership, or for consumers to buy things like cars now - at low rates - and pay for them later when the real cost of tomorrow's dollars is less.

For their part, foreigners who hold these debt instruments cannot just simply bail out of their positions when (or if) rates rise: if they did they'd take a bath with the losses. And if rates rose, new investors would rotate money in from other positions in order to seek better yields.

It's emotional knee-jerkers like you who usually end up on the wrong sides of rotated money - selling when you should be buying and buying when you should be selling. I tell you what I'll be doing, I'll be waiting for idiots like Dobbs, Tollenson, and Buchanan to finally admit that things are good. When that day comes, I'll be the one who sours. In fact, these are the same guys who are 'in on' the joke: I wonder how much money they make off of scaring people like you...just like how the union leaders have mastered the concept for decades.

[1rudeboy]

No doubt (it's "Tonelson," btw). As soon as those three stooges exclaim that things are good, it'll be a sure sign that the end times are upon us.

[Willie Green]

It's emotional knee-jerkers like you who usually end up on the wrong sides of rotated money -

LOL! "rotated money"!!!
Is that what you money-laundering con-artists call it when it comes out of your spin cycle?

"I am one of those who do not believe that a national debt is a national blessing, but rather a curse to a republic; inasmuch as it is calculated to raise around the administration a moneyed aristocracy dangerous to the liberties of the country."

-- President Andrew Jackson - (1824)

[bordergal]

Tell me again how the average American benefits from getting priced out of the housing market?

Sheesh.

[1rudeboy]

Any number of ways, the most obvious being that folks shouldn't buy something they cannot afford. /mild sarcasm

[LowCountryJoe]

Wiilie, Maybe you could explain to me what the national debt has to do with the so-called 'trade deficit' and what the rough correlation between the two are. That would be an excellent start and an excellent opportunity for you to show off your knowledge on these subjects.

Oh, and were you not the same guy who was celebrating the book about Hamilton last year or was that one of your like-minded 'unspun' FRiend here? If it was you (although it could have been Fulluja Nuker or some other Economics genius), how do you reconcile Hamilton's views with those of Jackson's? And, for the record, I'd rather be in the 'spin cycle' than have terminal pretzel logic.

[LowCountryJoe]

Is that why home ownership is at a record high?

"Sheesh!" is right.

[Carry_Okie]

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.

They're buying our debt floated to fund entitlements and military protection of American investors abroad (a massive subsidy). Holding vast amounts of our debt gives those investors political leverage over our government. Not a good thing.

[Toddsterpatriot]

Here are the facts:

Gross Domestic Product (GDP), the measure of the USA's output of goods and services, is calculated by the Commerce Department's Bureau of Economic Analysis using the following items:

• Personal consumption expenditures: Personal consumption expenditures are far and away the largest and tends to be the most stable of the four expenditures, averaging about 65-70% of gross domestic product.
• Gross private domestic investment: Expenditures on capital goods to be used for productive activities in the domestic economy that are undertaken by the business sector during a given time period. Gross private domestic investment tends to be the least stable of the four expenditures, averaging between 12-18% of gross domestic product.
• NET EXPORTS OF GOODS AND SERVICES Net exports of goods and services is the smallest of the four expenditures, averaging around 2% of gross domestic product. Unlike the other expenditures, net exports of goods and services can be either positive or negative. They are positive when exports are greater than imports (Trade Surplus) and negative when exports are less than imports (Trade Deficit). In recent years, net exports of goods and services have been negative.
• Government consumption expenditures and gross investment measures government purchases undertaken by the government sector. Government consumption expenditures and gross investment averages between 15-20% of gross domestic product. This percentage tends to be ebb and flow a little with the political winds.

The BEA News Release for FOURTH QUARTER 2005 provides us with the following current data for these items. (Seasonally adjusted at annual rates)

Gross domestic product (GDP)............................. $12,735.3 billion
Personal consumption expenditures.......................... 8,926.9 (70.10% of GDP)
Gross private domestic investment.......................... 2,185.7 (17.16% of GDP)
Net exports of goods and services........................... -784.1 (-6.16% of GDP)
Government consumption expenditures and gross investment... 2,406.8 (18.90% of GDP)

The current BALANCE OF TRADE is in deficit, which is considered unfavorable.
That is why it is SUBTRACTED from the other factors used to calculate GDP.

And at historic highs, it diminishes our domestic economy by over 6% - more than twice the normal variation. This is NOT insignificant.

Willie looking at half of the equation

The above shows why Willie is always wrong. He looks at net exports of goods and services and sees a negative number. In his one dimensional thinking that means that imports are bad. With Willie there's no Thinking Beyond Stage One.

If he did, he'd realize that those pesky foreigners take their new dollars and either add to our private domestic investment (Which adds to our GDP Willie), buy Treasuries which funds Government consumption expenditures and gross investment (Which adds to our GDP Willie) and allows Americans to use their dollars to consume (Which adds to our GDP Willie) or invest (Which adds to our GDP Willie).

It's not Willie's fault, even educated men like Paul Craig Roberts and Alan Tonelson don't understand.

[TChris]

A trade deficit isn't debt.

Bears frequent repetition.

[Willie Green]

Wiilie, Maybe you could explain to me what the national debt has to do with the so-called 'trade deficit'

Gladly...
Rather than promoting domestic investment and development of our own productive infrastructure, the Bush Administration is utilizing Deficit Spending to prop-up consumption and the Trade Deficit. Instead of "trickling down" to benefit our own citizenry, trade deficit dollars finance the closure of our domestic industries and their offshore migration. A portion of these funds are then "loaned" back to the Bush Administration to continue the deficit spending and plunge American taxpayers deeper in debt.

It's a trade war that the Bush Administration is waging against the peaceful prosperity of the American Middle Class.

[Mase]

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.

Of all the misconceptions by the economic illiterates, and other assorted protectionists here at FR, this is one of the most common and most frustrating. Boudreaux does a good job of explaining it simply so even the most dense reader can understand. We'll see.

Thanks for posting this. It will be a good reference when this story gets posted later and the forces of doom gather to blame the deficit, transnational corporations, China and Bush for all that ails them.

US Trade Deficit Hits All Time High

[bordergal]

Not in my area, average housing prices have jumped from 150k for a 3 bed 1 bath to 550+k for same. Not to mention rental costs.

And there are plenty of working people (including college professors, teachers, policeman, fireman) who can't afford these prices.

I was fortunate enough to own, but there are lots of people who weren't.