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.
Gee, do you think the "minus sign" might have something to do with it?
buy Treasuries which funds Government consumption expenditures
Yes, I plead guilty to opposing Government consumption expenditures.
That's what makes me a true conservative instead of a progressive, Big Government loving, liberal RINO.
Every time a foreigner --be it a nice Australian buying up and owning TV Guide, a nice Brit buying and owning Pillsbury, or merely one of those Chinese buying a factory in Utah, -- it all increases the capital account surplus which is the same as increasing the current account deficit.
Yes Willie, there is a "minus sign". The dollars foreigners earn because of that "minus sign" become positive investments. If you knew how to add, you'd understand that the positive and negative numbers added together equal zero. That means the trade deficit doesn't subtract from our GDP.
Yes, I plead guilty to opposing Government consumption expenditures.
Wow, Willie is actually right about something, the government spends too much money. And I guess if foreigners weren't buying our Treasuries the government wouldn't spend so much. LOL! You're so simple sometimes Willie.
Positive investments on THEIR side of the ocean.
As you pointed out, they merely come back to the United States to finance Government consumption DEFICIT expenditures.
Let's keep doubling the deficit every quarter. Why make anything here, someone can do it cheaper. What's to lose? We pay them in just paper. They use it to build arms and buy America. Then those that made all the money from exporting America can move to another country with their money. They are citizens of the world in the New World Order. When the Chinese come to collect the debt from the rest of us, they will have a missile in each hand. How do you say thanks to our representatives in Washington?
>He looks at net exports of goods and services and sees a negative number.
>>Gee, do you think the "minus sign" might have something to do with it?
You proved his point. You can't get past stage one in your thinking. (HINT: His point was not that you are wrong in thinking that NX is a negative number.)
No Willie. Like the theoretical Utah factory, their investment here adds to our GDP.
As you pointed out, they merely come back to the United States to finance Government consumption DEFICIT expenditures.
Like them or not, they add to our GDP. Their purchase of our low interest rate Treasuries allows Americans to either consume (adds to GDP) or invest in higher yielding investments (which also add to GDP).
Except that the paper comes back almost immediately to buy bonds that finance a national debt. If we default on those bonds, then Bono does a benefit concert for us.
They buy a whole lot of our government debt, and that's encouraging a whole lot of reckless government growth. I wonder why the article didn't mention that.
I don't need any hints to understand Toddsterpatriot.
Stage 1 is viewing trade statistics from an American's POV.
Stage 2 is where he engages in paradigm shifting to the detriment of American national interests.
Yes, it is true that I refuse to go along with such convoluted logic.
Willie, why don't you explain your "logic" about how low steel prices are bad for our economy. We could all use a laugh.
Thanks for pointing that out.
Like the Utah factory, their contribution to our GDP is nonexistant.
DANG!!
Just WHO floated those bonds??
No matter WHO buys them, we get the same result.
HOW?
WE atre the ones that can 'default', leaving them with a chunk of paper to wipe their butts with. Remember all the nationalization of OUR foreign assests in countries around the world? They just STOLE them!
Actually, the trade deficit is a measure of the huge indebtedness of Americans and the unwillingness of our populace to live within its means.
There's my Willie, confusing a theoretical example with reality again.
So when we were running a budget "surplus" our trade deficit disappeared? And just how huge is our indebtedness? Is it larger than our assets? Or is it less than 20% of our assets?
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