Posted on 03/21/2006 10:08:04 AM PST by Marxbites
The US trade deficit is often viewed with alarm and has attracted considerable attention from both the public at large and policy makers. [1] Much of the uneasiness about the US trade deficit can quite simply be attributed to the term "deficit" itself, which holds with it many underlying negative connotations. However, in answer to these concerns, one may take the perspective, drawing on the theories of Ludwig on Mises and Friedrich August von Hayek from the Austrian School of Economics, that the US trade deficit is merely a reflection of the competitive advantage that the United States has been enjoying over the past decades.
Opting for a relatively free-market system, the United States appears to have succeeded in providing an environment more conducive to investment and growth than other currency regions, most notably Europe and Japan. This is evidenced, for instance, in its higher growth and capital return rates. In the words of Mises, "[…] the tremendous progress of technological methods of production and the resulting increase in wealth and welfare were feasible only through the pursuit of those liberal policies […]" [2] That said, the current deficit in the United States may very well be a result of its adherence to a more efficient economic model than many other currency areas.
"The idea that there is a third system — between socialism and capitalism, as its supporters say — a system as far away from socialism as it is from capitalism but that retains the advantages and avoids the disadvantages of each — is pure nonsense." [3] "The idea of government interference as a "solution" to economic problems leads, in every country, to conditions which, at the least, are very unsatisfactory and often quite chaotic. If the government does not stop in time, it will bring on socialism." [4] Building on what Mises termed the infeasibility of pursuing the idea of a third system, Friedrich August von Hayek in his Fatal Conceit (1988) asserted that such attempts would interrupt the natural operation of a market economy and individual freedom and yield worse results than a spontaneously working economic order. [5] In contrast to the fairly strong degree of government interventions in the market system practiced in many Western industrialized countries — be it via taxation, regulation, redistribution of market generated incomes, etc. — the United States may still be inspiring confidence among investors that liberal economic principles and, as a result, a systematic economic outperformance might be preserved.
The upshot of such an interpretation would be that the United States continues to attract funds from abroad as long as internationally scarce resources are allowed to be used most efficiently. As long as demand for US dollar-denominated assets from abroad exceeds US residents' demand for assets from the rest of the world, we should see the United States continue to accumulate capital surpluses — here regarded as merely the flip side of trade balance deficits; an interpretation which echoes the work of Eugen von Böhm-Bawerk (1914), who wrote that the capital account would reign over the trade balance. [6] To shed some more light on such a conclusion, we must take a closer look at the economic precepts underlying our understanding of the US trade deficit.
A country's transactions with the rest of the world within a given period of time are recorded on its "balance of payments". Goods transactions are shown in the trade balance. A country records a trade deficit (surplus) if the value of its exports to other countries falls short of (exceeds) the value of imports from abroad. However, the trade balance shows only "one side" of total transactions, namely a country's goods transactions. The other side comprises capital flows, which are recorded in the capital account.
The capital account provides a contrast between a country's capital imports and exports. If, for instance, foreigners buy more stocks and bonds in the United States than US citizens purchase abroad, the capital account balance records a surplus. Japan and Germany, for example, are "chronic" capital exporters, meaning that the amount of assets they acquire abroad exceeds foreign demand for Japanese and German assets. As a result, the capital account deficits of these countries corresponds with US trade surpluses.
Importantly, when one has a free floating exchange rate, a deficit (surplus) in the trade balance will by definition be accompanied by a surplus (deficit) in the capital account, and the balance of payments will always be balanced — i.e., the amount of goods and services bought and sold equals the amount of money spent and received from abroad.
To better understand why a trade deficit is widely viewed as "dangerous," it is useful to look briefly at the period when the gold standard prevailed. Under such a monetary regime, countries' trade balances tended to be zero, with temporary trade surpluses or deficits ironed out over time. For example, think of a country accumulating a trade surplus during this period. It would receive gold inflows from importing countries. The increase in the domestic stock of gold, in turn, would make the domestic money supply "looser," thereby stimulating output and employment.
The rise in the domestic money supply would then translate, sooner or later, into higher domestic prices, which caused exported goods to be less price competitive and imported ones more attractive. As a result, a country's exports declined and imports rose. The trade balance "deteriorated," that is to say the surplus declined (and even became negative), as did the stock of domestic gold (i.e., money); the latter declined to the same extent to which the trade surplus declined. So over time, a country's trade balance tended to follow along the line of a "zero mean reverting" process.
Figure 1 illustrates this point. It shows the US current account as a fraction of total output on a historical basis. On average, the ratio was less than 0.5% (close to zero) from 1870 to 1973, after which the gold standard (i.e., the system of fixed exchange rates) finally broke down. Since then, the trade deficit has embarked upon a widening trend. In 2004, the deficit ratio amounted to 5.5%, the highest proportion from 1870 to 2004.
Source: Historical series is from International Historical Statistics, The Americas 1750-1993, 4th Edition by B. R. Mitchell; graph is taken from Pakko, M. R., The U.S. Trade Deficit and the "New Economy," in: Federal Reserve Bank of St Louis, September/October 1999, pp. 13. — For the period 1998 to 2004: current account in percent of GDP. Under the gold standard, any build-up of export surpluses — and the accompanying "boom" for the domestic economy — was seen as something that needed to be reversed, a process accompanied by unwanted swings in growth and employment. This explains to some extent why to this day a country's trade imbalance continues to be seen as calamitous. However, such concerns are no longer justified in the post-gold standard era. The "gold automatism" for balancing
I would love to hear you propound on the uselessness of a metals backed currency versus one the Fed'l Reserve can inflate at will going on 100 years now.
Tell us all how the Fed was the great idea of patriots and NOT that of the banking cartel who spent over 10 years getting it created.
Tell us all how good it was when FDR confiscated gold "temporarily" until the "crisis" passed, when folks were promised the gold notes they got were going to be redeemable in gold for the same amount they tendered.
Then tell us why FDR arbitrarily raised spot gold once Govt had it all, thus devaluing the dollar and INCREASING GOVT'S ABILITY TO SPEND on whatever the F it wanted to?
Tell us all how it was not all the same grand scheme of currency devaluation used throughout history for elites to concentarte their wealth at the people's expense, and how inopportune it was, but just in time, to pay for WWI that Wilson (Rockefeller's bought boy) campaigned he would under no circumstances get us into?
Then tell us how the historical scholars most credible to America's right, and most hated by the left, all seem to finger WWI as the direct cause of WWII.
Then tell us those good ole bankers who financed both sides of both wars were just interested in a stable American economy, but trashed the constitution to do it for our own good.
But first do yourself a favor and watch this please:
http://www.cato.org/realaudio/cbf-02-15-06.ram
The Constitution was written and ratified to secure liberty through limited government. Central to its design were two principles: federalism and economic liberty. But at the beginning of the 20th century, Progressives began a frontal assault on those principles. Drawing on the new social sciences and a primitive understanding of economic relationships, their efforts reached fruition during the New Deal when the Constitution was essentially rewritten, without benefit of amendment. In a new Cato book, Richard Epstein traces this history, showing how Progressives replaced competitive markets with government-created cartels and monopolies. Please join us for a discussion of the roots of modern government in the Progressive Era.
As well he should these days!
Ah, but IYHO, what is to made of a press rolling, tail chasing Federal Reserve that is directly responsible for EVERY boom/bust cycle this nation has seen over nearly 100 years, starting with the Great Depression they created, but which was conveniently tho wrongly blamed on capitalism to fool Americans into accepting unlimited Govt by the very SAME people who fought ten years to get the Fed created and thus their hands on the control of America's capital?
http://www.cato.org/realaudio/cbf-02-15-06.ram
See what real economists say about the Fed here:
mises.org
You just might want to better explore the reasons the Founders did NOT want banks that were NOT controlled by the people.
Mises.org has tons of arguments against the Fed and the fiat currency it's given us that they can inflate at their will and which we the people have zero control over - the Feds stock shares owned exclusively by select American elites and Foreign banking cartels.
You certainly aren't hep to history's lessons of tyrannts debasement of currencies as one of their greatest weapons, like taxation, against the people they rule versus represent.
Why boost in exports due to currency depreciation cannot grow the economy
When a central bank announces a loosening in its monetary stance, this leads to a quick response by the participants in the foreign exchange market through selling the domestic currency in favor of other currencies, thereby leading to domestic currency depreciation. In response to this, various producers now find it more attractive to boost their exports. In order to fund the increase in production, producers approach commercial banks, which on account of a rise in central bank monetary pumping are happy to expand their credit at lower interest rates.
By means of new credit producers can now secure resources required to expand their production of goods in order to accommodate growing overseas demand. In other words, by means of newly created credit producers divert real resources from other activities. As long as domestic prices remain intact, exporters will record an increase in profits.
However, the so-called improved competitiveness on account of currency depreciation means that the citizens of a country are now getting less real imports for a given amount of real exports. In short, while the country is getting rich in terms of foreign currency, it is getting poor in terms of real wealth, i.e., in terms of the goods and services required for maintaining peoples' life and well-beings. As time goes by however, the effects of loose monetary policy filters through a broad spectrum of prices of goods and services and ultimately undermine exporters profits. In short, a rise in prices puts to an end the illusory attempt to create economic prosperity out of thin air. According to Ludwig von Mises,
The much talked about advantages which devaluation secures in foreign trade and tourism, are entirely due to the fact that the adjustment of domestic prices and wage rates to the state of affairs created by devaluation requires some time. As long as this adjustment process is not yet completed, exporting is encouraged and importing is discouraged. However, this merely means that in this interval the citizens of the devaluating country are getting less for what they are selling abroad and paying more for what they are buying abroad; concomitantly they must restrict their consumption. This effect may appear as a boon in the opinion of those for whom the balance of trade is the yardstick of a nation's welfare. In plain language it is to be described in this way: The British citizen must export more British goods in order to buy that quantity of tea which he received before the devaluation for a smaller quantity of exported British goods.
Contrast the policy of currency depreciation with a conservative policy where money is not expanding. Under these conditions, when the pool of real wealth is expanding, the purchasing power of money will follow suit. This, all other things being equal, will lead to currency appreciation. With the expansion in the production of goods and services and falling prices and thus production costs, local producers can improve their competitiveness and profitability in overseas markets while the currency is actually appreciating. Within the framework of loose monetary policy exporters' temporary gains are at the expense of other activities in the economy, within the framework of a tight monetary stance gains are not at any one's expense but just the manifestation of real wealth generation.
excerpted from: http://www.mises.org/story/1345
I agree.
The comparative advantage of low cost producers in free trading markets raises everyone's stds of living.
It will cost the Chinese in less sales too.
Dead wrong again as usual eh?
I have long flagged this as a stupid, cut-off-your-nose to spite-your-face kind of approach to solve a real problem of rapidly ratcheting up levels of dependency on enemy states that have not been properly so identified.
Bilateral adjustments are best. Their government intervenes to totally unhinge the playing field for their benefit. Our government needs to counter it.
A general depreciation of the U.S. dollar...the blunderbuss approach... is simply catastrophic for the net savings and investments of the U.S.
This is what our enemies want to happen. They want to weaken us. But this depreciation is something that will happen unavoidably unless something is done...U.S. interest payments owed and outflowing to foreign nations has already passed what the U.S. is receiving. And every time the debt is increased, and the foreign nations increase their position in the debt instruments of the country, national state and corporate...we are looking at a future liquidity crisis. Bananna Republic stuff that has long been well understood...but strangely not by the faux traders.
And your analysis implies that there are those actively seeking to accomplish it here. Enemies within and without. Savage was right!
""You just might want to better explore the reasons the Founders did NOT want banks that were NOT controlled by the people.""
so the founders were communists??? that's the first time ive ever heard that.
""Tell it to G.E. or Bechtel, and the whole raft of other Fortune 500 multinationals falling all over themselves to close U.S. operations and relocate them to these nations.""
youre an absolute ignoramous....if labor costs alone made a nation competitive, Germany would have no factories and Haiti all of them
It was a joke, n00b.
Of course not, but they in no way shape or form wanted fiat currency. I think the article the below excerpt is from explains why the Fed is unconstitutional very well. IMHO it's called property rights, when the Fed inflates our money they lower it's purchasing power, that's theft in my book. Plus it's the mechanism Congress needed to deficit spend - the reason this pig is so bloated and a circumstance the founders abhored.
http://www.mises.org/mysteryofbanking/mysteryofbanking.pdf
Given this dismal monetary and banking situation, given a 39:1 pyramiding of checkable deposits and currency on top of gold, given a Fed unchecked and out of control, given a world of fiat moneys, how can we possibly return to a sound noninflationary market money? The objectives, after the discussion in this work, should be clear: (a) to return to a gold standard, a commodity standard unhampered by government intervention; (b) to abolish the Federal Reserve System and return to a system of free and competitive banking; (c) to separate the government from money; and (d) either to enforce 100% reserve banking on the commercial banks, or at least to arrive at a system where any bank, at the slightest hint of nonpayment of its demand lia bilities, is forced quickly into bankruptcy and liquidation. While the outlawing of fractional reserve
as fraud would be preferable if it could be enforced, the problems of enforcement, especially where banks can continually innovate in forms of credit, make free banking an attractive alternative. But how to achieve this system, and as rapidly as humanly possible? First, a gold standard must be a true gold standard, that is, the dollar must be redeemable on demand not only in gold bullion, but also in full-bodied gold coin, the metal in which the dollar is defined. There must be no provision for emergency suspensions of redeemability, for in that case everyone will know that the gold standard is phony, and that the Federal government and its central bank remain in charge. The currency will then still be a fiat paper currency with a gold veneer.
""Given this dismal monetary and banking situation""
New Flash: The banking system is stronger now than at anytime since deregulation in 1980...are FReepers completely on another planet when it comes to economics???
Peruse this please:
http://www.mises.org/mysteryofbanking/mysteryofbanking.pdf
It will help you understand fractional reserve banking and the atrocities of the Fed.
Years ago it was paper money issued by individual banksAnd that under the so-called "gold standard." Those private issues were paper money. They weren't even "backed" by gold. They were backed by the institutions alone. Sound familiar?
The purpose of the Fed was to streamline and standardize those issues to allow for flexibility and liquidity when required.
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