Global 'Imbalances' and the Crisis [TRADE DEFICITS ARE GOOD FOR YOU]

Wall Street Journal ^ | JANUARY 11, 2010 | DAVID BACKUS AND THOMAS COOLEY

[expat_panama]

In the 1920s, capital began flowing from Massachusetts to North Carolina, a process that continued until after World War II as textile mills migrated to the South from New England. Beginning in the 1950s capital moved again as textile manufacturing moved to Mexico, India and Malaysia. Capital has long moved to where it can be used most productively, and by and large, that has been a good thing.

Whether capital moves within a country or between countries, its flow addresses imbalances between available local capital and uses for capital (otherwise known as investments). Through much of history, the major capital flows have been from rich countries to poorer ones. England financed canals in this country and railroads in Australia and India.


[snip]

Thus the clamor to rectify global imbalances. In the case of the U.S., doing something presumably means increasing domestic savings and dealing with our federal government's deficit. In the case of China, doing something presumably means revaluing its currency. Both are reasonable choices, in our view, but have little to do with the current account deficit (the net amount of capital flowing into the country). Throughout the 1990s, even in years of budget surpluses, the current account was growing.

[snip]

International capital flows have become huge, and they are arguably a more important part of the global economy in the past decade than ever before. But are they at the heart of the financial crisis, and do we need to control them?

[snip]

[expat_panama]

Throughout the 1990s, even in years of budget surpluses, the current account was growing.

The problem here might be that most people don't know that the current account is what pundits call the "trade deficit", but those same pundits won't add that it's always paid for by a capital surplus.

[stephenjohnbanker]

How much is a nice home in Panama?

[expat_panama]

Everyone looks for something different when they buy a home so one guy’s ‘nice’ is another guy’s ‘yuck’. Rents are cheap (3br 2bth home $300/mo.), great for looking around and waiting for a bargain, and then building to suit —but that’s my way.

[1rudeboy]

People also don’t realize that the quickest way to cut the trade deficit is to have a recession.

[expat_panama]

-—which is like getting a lifetime haircut using a guillotine.

[wolfcreek]

Don’t the national debt, joblessness and over regulation/taxation have an effect on the amount of capital flowing in this country?

[NVDave]

I have to quibble here: the current account is computed as:

trade balance + net foreign income + net unilateral transfer payments

The trade deficit is only the first component here.

[Will88]

The trade deficit is by far the biggest component of the current account balance. For a quick look at the US current account in 2007, go all the way to the bottom of the list of nations:

http://www.nationmaster.com/graph/eco_cur_acc_bal-economy-current-account-balance

I don’t see the components of that -$731,200,000,000.00 current account balance for 2007, but it’s probably linked somewhere in that website.

[Will88]

“The trade deficit is only the first component here.”

From 2004, and a graph which shows the enormous trade deficit and the slight offset by other components of the current account:

“As Figure 1 illustrates, the current account consists mainly of the trade balance, but it also includes the payments on returns from foreign U.S.-owned assets, net of the payments made to foreigners for returns on assets they own in the United States.”

http://www.frbsf.org/publications/economics/letter/2007/el2007-08.html

[expat_panama]

"...an effect on the amount of capital flowing..."

For years all we heard on these threads was all about how terrible Bush's spending and Bush's economy was.  Meanwhile, people all over the world with money bought T-bills because they knew that the posters were morons.  There was no affect because the there was no cause.

How about the affect of today's record deficits and unemployment on future capital flows?   My take is that it depends on whether Obama makes capital illegal or not.

[expat_panama]

have to quibble here

OK, so instead of the -$108,034M current account you like the -$97,378M balance on goods and services (from here).  Somehow the distinction always seems to end up being a lot bigger than the difference.

[expat_panama]

don’t see the components of that -$731,200,000,000.00 current account balance

The BEA posts the tables here for transactions.

Off hand I can see the BEA's transactions but not the balances, which is pretty much a fact of life.  There've always been disagreements over the current value of land bought 30 years ago...

[expat_panama]

"...Figure 1 illustrates, the current account consists mainly of the trade balance..."

--and also shows how the trade deficit grows when the economy's healthy.

[Will88]

That’s a good site. Looks like the -726,573 for 2007 breaks down to -$701,422 trade deficit and -$25,151 other components.

96.5% of the 2007 current account deficit was the trade deficit.

98.6% of 2008’s current account was the trade deficit ($695,936/$706,068).

I’d have thought 2005 and 2006 would be significantly less since oil prices were lower, but the trade deficit still makes up around 95% of current account balance in those years:

http://www.bea.gov/international/bp_web/simple.cfm?anon=71&table_id=1&area_id=1

The current account IS the trade deficit for most all practical purposes.

[Toddsterpatriot]

The current account IS the trade deficit for most all practical purposes.

And the relationship to the budget deficit is what?

[Will88]

--and also shows how the trade deficit grows when the economy's healthy....and when the dollar is strong.

And, we all know much of the recent decreases in the trade deficit is due to the weakening dollar.

[Will88]

And the relationship to the budget deficit is what?

You think far too much in general terms on these matters. Try to think of industries whose activities affect line items found in both the federal budget and in the trade balance of payments (which makes up most of the current account balance).

Take crude oil for an example, which has made up as much as half of our trade deficits in recent years. Increased domestic crude oil production would reduce both the budget deficit and the trade deficit. Not going into any more detail today, since you've shown your inability to comprehend on other occasions.

But you have more work to do. Last night on the John Batchelor Show on WABC radio, a California congressman was making the same point and Batchelor was agreeing with him: increased domestic crude production would reduce budget deficits and trade deficits.

You need to get in touch with Batchelor and tell him there is no relationship between trade deficits and budget deficits, even pertaining to crude oil. Hundreds of thousands heard that show.

[Toddsterpatriot]

And the relationship to the budget deficit is what?

You think far too much in general terms on these matters.

That's funny.

Look, if you are correct, you could show that an increased trade deficit leads to an increased budget deficit. Or an increased budget deficit leads to an increased trade deficit. Maybe you could even explain why? Unless you meant there was an inverse relationship?

You need to get in touch with Batchelor and tell him there is no relationship between trade deficits and budget deficits

Or you could get in touch with him and ask if the trade deficit is increased by $100 billion, how much larger will that make the budget deficit and why? And then you could post his explanation here.

[NVDave]

Yes, but I want to highlight the distinction between the two, because if foreign investors think that the US markets are not a good place to invest, or they fear systemic and lasting devaluation of the USD vs. their home currency, you’ll see that their withdrawal of their investments from the US will cause that gap to widen - and then people will be wondering “WTF?” when, if they understood the nuance of the differences between the “trade deficit” and the “current account deficit,” it would not surprise them.

eg, NB the recent comments by the Chinese that they see a point to their financing a US trade deficit with China, but not their financing our current account deficit. This is a shot across the Fed’s and Geithner’s bow, but I suspect that neither one is willing to believe that the PRC is serious - yet.