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
OOPS!
See the article in full WITH charts!
http://www.mises.org/story/1955
My bet is that it's the other way around. It's not that the word 'deficit' makes people scared, it's that scared people prefer to justify their helplessness by saying 'deficit' and other scary words.
There are people who want others to support them and they know they can't just say "raise your taxes and feed me". That's why they take America's 'capital surplus', call it 'trade deficit', and scream 'anyone who doesn't feed me is a traitor!'.
This thread will skyrocket to ten or so comments. Too many big words.
LOL!
Running a capital account deficit isn't a problem in itself. The problem is that as more countries use dollars in their central bank reserves, general trust in the value of the dollar has to go down given its increased supply. At that point, the dollar becomes vulnerable to speculation on the foreign exchange markets, leading to possible devaluation. Irrational psychology can have just as big an effect in this situation as well-considered economic logic.
This isn't cluelessness; this is what happened to the United States in January-March 1968, and is one of the reasons LBJ decided to stop escalation in Vietnam as well as Great Society social spending.
The root of most economic idiocy is Goldbugism.
And Goldbugism is a complex, and quite old, psychological disease. It's based on a sort of child-like obsession with the idea of gold being "real" and a distruct of things perceived as "not real" and also harkens back to the very old American political trope of suspicion of "Eastern Bankers."
The biggest saving grace of any debt or deficit the United States runs, is that these are in dollars, our own currency. That's much better, than, say, the typical third world country where the country's debt is also in dollars, but the local money is pesos, bolivars, suns, moons, stars, or sea shells.
Gold has value in and of itself - are you saying paper money has the same ?
Good thread bump
>Too many big words.
Smaller words:
The trade deficit is not bad. It is just a result of the US economy being attractive to foreign investors.
E.g., as translated, "We faux free traders are people who want others to support us, and we know we can't just say "destroy your self-preparedness, and entwine and massively encumber our government's (State & Federal) with debt owed to foreign enemy nations, and debase the currency, savings and meanwhile insure and subsidize me while I do all this outsourcing."
And that's how they take a massive trade deficit, call it a "capital surplus" LOL!!!!!!!! and scream "anyone who doesn't salute our Free Trade flag and continue to subsidize us is a traitor to the ideals of...Alexander Hamilton! No, that's not right. A traitor to the ideals and economics of George Washington. No, that's not right. A traitor to the ideals and economics of Theodore Roosevelt. No, guess that's not right. A traitor to the ideals and economics of Franklin Delano Roosevelt and Bill Xlinton. There. That's right. Thaaaaat's the ticket. Anybody who opposes those ideals can't be conservative....
Simpler (more accurate) words still: "It is just a result of the PRODUCTS of the U.S. economy (manufactures of goods and services) NOT being attractive (i.e., "competitive") to foreign BUYERs. Investors included."
The only thing that is "competitive" is the willingness of the special-interest Government cabal issuing debt in our name...backed up by our onerous taxes...at rates that still attract buyers at all. You are spending worse than a drunken sailor. At least a drunk sailor is spending his own money.
That sentence could be marketed under the label "TRUTH CONCENTRATE" because it packs several hours of thought into one line.
This is key to our disagreement. First, forget about all you know that I know, because it's not what you don't know that won't hurt you, it's what you do know that ain't that will --you know? Second, the reason I say that we got welfare bums complaining about our excess capital, is because
| ---they've arbitrarily decided that a capital surplus is bad for America, |
| ---they say the best way to eliminate the excess capital is by raising taxes, |
| ---these tax hikes are supposed to benefit people who don't want to do anything that free people want to pay them to do. |
Now, tell us how far you were able to follow and I'll go into more detail.
Ping for later.
Actually nothing has value in and of itself.
Even Gold (and silver) value as money can be traced back to both their scarcity and there use as a commodity (Mises regression theorem).
Beautiful! LMAO.
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