The writer who penned this report in today’s New York Times seems to try her best to scare readers into thinking that the U.S. trade deficit (more precisely, the current-account deficit) – now at $665 annually – is a gigantic load of debt that eventually must be paid.
The United States is currently borrowing $665 billion annually from foreign lenders to finance the gap between payments to and receipts from the rest of the world, an amount equivalent to $5,500 per American household.
This claim is untrue. The size of the U.S. current-account deficit is indeed $665 billion – but it is not all borrowed money.
It bears repeating again and again: a current-account deficit is not synonymous with debt. Nor are all dollars that foreigners do not spend on U.S. goods and services loaned to Americans. Many of these dollars are
– held as cash reserves
– used to purchase American real estate
– used to purchase shares in American corporations
– used to create, maintain, and expand foreign-owned firms located in the U.S.
Whenever foreigners use their dollars in any of the foregoing ways, (1) the U.S. current-account deficit increases, and (2) U.S. indebtedness is unaffected.
The only part of the current-account deficit that becomes debt is that part that is loaned to Americans – principally through the purchase by foreigners of dollar-denominated bonds (both government and private).
Suppose Mr. Toyota earns $1M by selling Camrys to Americans. Further suppose that, during the current period, he spends $600K of this money buying American-made lumber, computer software, and Las Vegas vacations.
He does not spend the remaining $400K on U.S. goods and services during the current period.
This $400K that is not spent on U.S. goods and services makes the U.S. current-account deficit $400K larger than it would have been had Mr. Toyota spent the entire $1M on U.S.-made goods and services during the current period.
What does Mr. Toyota do with the $400K? If he spends all of it buying U.S. Treasury Notes or bonds issued by General Electric, Inc., then this $400,000 part of the U.S. current-account deficit becomes debt. Americans owe $400K (plus interest) to a Japanese citizen.
But if Mr. Toyota holds his $400K in cash, or buys commercial real-estate in Atlanta, or buys shares of Microsoft, or finances the start-up of his nephew’s sushi restaurant in Seattle, then these uses of the $400K – while contributing $400K to the U.S. current-account deficit – create not one cent of debt. With these uses by Mr. Toyota of his dollars, no American becomes indebted to any foreigner. There’s simply no debt in this picture.
Describing a current-account deficit as being synonymous with debt is a revelation of ignorance too deep to be excused.