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.
That sounds absolutely preposterous. If you have a link on that we'd all be interested. If you have trouble finding a source, you might want to consider the possibility that you're mistaken.
Some people are getting rich, at the expense of others.
Again, absolutely preposterous. Over the past year, the total of all the private wealth in the US went from $48 trillion to $52 trillion. I say that the rich create wealth. Think for a second. Let's say that every single penny that us rich guys have was stolen from some poor people. If you can figure out where the poor people got that $48 trillion that I stole, please tell me where I got the other $4 trillion.
Was that a voices in your head vote? Or could other people hear it too?
It was on CSPAN.
Over the past year, the total of all the private wealth in the US went from $48 trillion to $52 trillion.
Asset inflation isn't wealth.
It depends upon who was listening. You clearly weren't.
It wasn't. Greenspan's comments (even when he's on CSPAN) are all published by the Fed (here). It ain't there.
Asset inflation isn't wealth.
Inflation this past year was 3%, so that might explain $1.5 trillion. Where did the other $2.5 trillion come from?
bookmark
Where did the other $2.5 trillion come from?
How about a real estate bubble.
Yes. If "operational control" is what is meant by "use." "Use" of an asset means "use as one sees fit." We certainly do not have that now.
Most of the time, I have a lot of respect for Roberts.
Carry_okie also has a lot to say that is worth listening to. His grasp of issues on certain topics is much broader than mine. I respect his opinion immensely.
And no, no voices in my head told me to say that.
I didn't say that it did. I said that the Desertification treaty was passed by a voice vote. You asked me to prove it, so I did. It isn't the first such dirty treay either.
Using treaties to get around the Constitution and empower environmental laws for fun and profit has been going on since the early 1940s. The Convention on Nature Protection committed the entire land area of the United States and the resources of the entire economy to save any endangered species. I have the Congressional Record from that date proving that Cordell Hull lied to the Senate in his letter describing the scope of the treaty. FReeper sauropod dug up that letter at the Library of Congress for me as part of the research for a book. There are no online links, but I may put up a pdf some day.
I'm in and out only for short periods today and won't post tomorrow. So if it looks like I left, I'll be back Sunday.
Thanks. Now if you could prove that Treasury debt is backed by any collateral then I'll stop assuming that you're crazy.
No it wasn't (click here).
How about a real estate bubble..
Thank you for dropping that slur that somehow I've gotten my wealth at the expense of others. Just the same, total real estate equity (after deducting mortgages) only went from $10.9 trillion to $11.1 trillion. So inflation explains $1.5 trillion and real estate explains 200 billion. Look, I'm having a easy Friday so I got lots of time, but it might be a lot less work for you to just consider the possibility that us rich guys are creating wealth --big time
I'm sure you're right. When it comes to Treasury debt being backed by Western land, he comes off as a conspiracy believing nutjob.
Same here. Then again, I only listen to my voices for porn so they wouldn't have been any help anyway.
Did you ever finance a house? Have you ever worked or owned a company who used borrowing to expand or make capital goods purchases? if yes to either, you must have been living beyond your means.
You brought up use. This is what it means to me, the privilege or benefit of using something.
If you want to define it as "operational control", well we already admitted that we gave that up thanks to Jimmy Carter.
"Use" of an asset means "use as one sees fit."
Really? I can use the street in front of my house, but the police might be upset if I used it at 130 MPH. They probably won't let me "use" it like that again.
Yes positive investments in Chinese infrastructure and military development. That's how Chinese missiles, rockets, subs, fighters, and tanks are built.
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