In today’s Washington Post, columnist Robert Samuelson makes a small but telling error when discussing the trade deficit. He writes that
The willingness of foreigners — including central banks in China and
elsewhere — to invest their surplus dollars in American stocks and
bonds raises U.S. share prices and reduces U.S. interest rates.
Why "surplus"? If foreigners have a demand to invest in dollar-denominated assets, then the dollars that they do not spend on U.S. exports aren’t in any way "surplus." Put differently, these dollars are no more "surplus" than are dollars that I choose not to spend on goods and services and instead spend on investments.
Labeling dollars that foreigners do not spend on U.S. exports as "surplus" creates the mistaken impression that
(1) there’s something more natural or right about foreigners spending their dollars on current U.S. output (exports) rather than investing these dollars in dollar-denominated assets;
(2) these dollars are ready to be dumped, and thus on the verge of causing a sudden decline in the dollar’s value;
(3) there’s something less natural or right about foreigners saving to invest in the U.S. economy than there is about Americans saving to invest in the U.S. economy.
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I think we can certainly all agree that foreign (in this case US) stocks and bonds are/can be a good, part of an entity's shopping choices, in much the same way cheese and cars can be.
The use of "surplus" could mean something like an uncleared stock, i.e. dollars that can't be used otherwise because other purchases from the US would be inefficient, in other words dollars you can either keep or spend on US stocks.
The degree to which exchange rates and world-wide prices are allowed to move freely under the weight of the stocks of dollars many banks have accumulated is another story. I agree with the authors of this site that a deficit is not necessarily an issue or cause for concern, in a free-ish market, but I reserve a bit of worry for the case in which US planners start "managing" it.
If there are useless (no profitable use is possible) stocks of dollars, as some seem to suggest, then some worry might be justified.
You may not have read the article closely. This is about 'central banks' surplus dollars. Seeing that a central bank surplus is about as far away from a free market demand decision as can be imagined, I don't see your points. Are you saying the central bank should give the money to the individual foreigners for them to buy US exports or maybe the central bank in its wisdom should buy US exports that they think their people should have and then distribute them? Sounds like you are arguing for large government. These are not individual foreigners, this is the central banks. But I do like the comment on current affairs. Maybe we can get to a discussion of something that matters and this group of scholars might be able to make a difference in discussing…like health care.
I agree with Gabriel's point about central banks.
I also agree that "surplus" is loaded terminology.
But I do think there is something noteworthy, and perhaps troubling, going on here.
We have never had trade imbalances of the magnitude we do now (~$400bln). It is good that most of "these dollars" (i.e. the "surplus") are coming back here, so the imbalance is not really a huge minus sign over national well-being.
But the bulk of these returning dollars are turning into debt–a troubling fraction of which (about half, I think, or $1trln) is public.
It is questionable whether this situation is sustainable. My guess is that it is not. At some point there will be a breaking point caused by a number of factors: China and India slowing down their forced "hyper-industrialization", currency re-valuation, and the simple matter of finding better places for central bank dollars than US treasury bonds (can *you* beat a 4.5% return? I can).
While it is more tendentious to say the "surplus dollars" situation is per se dangerous, it is certain that there really is no historical lesson that can be applied mindlessly to the near future in this situation.
So, in this situation, I give the point to the guy using the "surplus dollars" terminology. The syntax isn't what matters, it is the semantics that is of concern.
On that note, do you think the current trends will not have to correct, or not have to do so painfully?
Not to depart from the topic, but I seem to recall that this is the same guy who argued that the decision in Flemming vs. Nestor was a good reason *not* to change Social Security. His argument was that it's better for the government to have a Social Securiy program that it can just skip out on rather than debts that it actually has to pay. See http://www.msnbc.msn.com/id/6959879/site/newsweek/ for details. I'm not surprised to see even more economic foolishness coming from this guy.