Here's a letter that I sent yesterday to the Wall Street Journal:
Peter Morici asserts that America's trade deficit with China causes "a huge drain on the demand for U.S.-made goods and services. The absence of reciprocal free trade is an important reason the U.S. economy is in its current mess," (Letters, Feb. 11).
Untrue. Dollars the Chinese do not spend on U.S.-made goods and services are invested in dollar-denominated assets. These investments raise demand for U.S. output just as would more direct expenditures on goods and services.
Consider what happens, for example, if the Chinese buy shares of Microsoft, thus raising America's trade deficit with China. First, the American sellers of these shares get more dollars to spend on U.S.-made goods and services. It's economically irrelevant if the persons buying these outputs are from Seattle or from Shanghai. Second, Microsoft's cost of capital falls, making that company more likely to expand operations, or at least less likely to contract them.
Concerns about the U.S. trade deficit are unwarranted.
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{ 33 comments }
Opening trade relations with China sure doesn't seem to have helped our economy too much. And that is no cheap shot because I've seen very good arguments made that link our trade deficit to our fed policiy and ultimatly to the bubble and collapse we are now in.
” rel=”nofollow”>Peter Morici's argument in further detail.
"Trade deficits must be financed by foreigners investing in the U.S. economy or Americans borrowing money abroad. Direct investments in the United States provide only about a tenth of the needed funds, and Americans borrow about $50 billion each month. The total debt is about $6.5 trillion, and at five percent interest, the debt service comes to about $2000 per U.S. worker each year.
High and rising trade deficits tax economic growth. Each dollar spent on imports, not matched by a dollar of exports, shifts workers into activities in non-trade competing industries like department stores and restaurants."
Muirgeo,
Yet again your familiarity with the facts is wanting. First, note the research by economists Christian Broda and John Romalis, documenting how U.S. trade with China has helped America's poorest citizens. Here's the link:
http://www.american.com/archive/2008/september-october-magazine/how-china-helps-america2019s-poor
Second, why do you take at face value Morici's claim that a U.S. trade deficit must be "financed" by Americans? That's simply untrue.
If you buy a Wii from Nintendo for $300 cash and if Nintendo holds that cash, the U.S. trade deficit rises, but no new debt is created. Nothing in this scenario needs to be financed. No American owes any foreigner anything as a consequence of this transaction. Ditto if Nintendo spends the $300 buying shares of Microsoft or buying real-estate in the U.S.
Only if Nintendo loans the money to Americans is debt then created, but such debt is not an inevitable consequence of, or inseparable from, a trade (or current-account) deficit.
Finally, even if foreigners do lend every single dollar to Americans, Morici is not correct to imply that such lending strips demand from the U.S. economy. Such lending no more strips demand from the U.S. economy, or changes the nature of that demand, than does Citibank lending money to a small business in Milwaukee or Miami strip demand from the U.S. economy or necessarily change the nature of that demand.
Do try to think a bit harder.
The only problem is that the Chinese invested in a lot of mortgages and U.S. government debt. And since the credit bubble created such distortions throughout the economy (including the plans of companies like Microsoft), I am not so sure the consequences will be so different there.
Either way, the value of dollars has declined. If I am correct, then we're just now waiting for the market to realise this. For now, dollars are overpriced, or so I think is likely.
It's kind of like "dumping" for an extended period of time, but unintentional, since they genuinely thought the dollars they were receiving would be worth more.
"Opening trade relations with China sure doesn't seem to have helped our economy too much."
-Muir
Um… Where have you been for the last 30 years?
What do you make of Bernanke's assertion Tuesday before the House Financial Services Committee that low interest rates preceding the housing boom were caused by the trade deficit, rather than Federal Reserve policy? This is consistent Greenspan's earlier Congressional testimony that Fed efforts to raise interest rates were unsuccessful due to financing from China. There is also conventional wisdom that the recent low dollar exchange rate is due to the trade deficit.
Wondering if you think these are examples of where trade deficits do matter.
There is no debt in the accountant's sense, but the effect is very similar nonetheless. Whatever U.S. dollars Nintendo holds are claims on goods and services here. Since saving is just deferred spending, when Nintendo eventually uses its dollars an upward pressure on prices will be exerted. People in the U.S. will pay off the "debt" through inflation.
I think too many dollars have collected abroad without a corresponding increase in productivity in the U.S. (but rather a great deal of malinvestment). When these foreign eventually begin to spend, the U.S. will pay off its debt with high inflation.
Lee Kelly,
Not so. The Wii transaction that I mention, and that you use in your comment, is economically identical to, say, an American buying a $300 product from General Electric and GE holding the cash for some time.
Don,
Exactly!
General Electric are willing to sell at $300 because of what they anticipate it to buy in the future. But if capital resources are squandered, future output may actually decline, or at least not increase as much as General Electric anticipates.
By saving their $300 General Electric are exerting a downward pressure on prices. By spending it they will eventually exert an upward pressure on prices.
Suppose that General Electric started accumulating dollars. Not spending them, just saving them. For a time it is as though dollars are just disappearing into a black hole, and prices begin falling accordingly. In short, General Electric are creating wealth, but never asking for anything in return.
Prices begin to settle much lower than they had been before, and then, all of a sudden, General Electric decide they want to consume. Suddenly prices begin rising rapidly as dollars start re-entering the economy.
It's like everyone is paying General Electric back for all those years of enjoying free stuff. In other words, it's like a debt, but just one paid back in higher prices.
Only afterwards is it clear whether any economic growth has occurred. If prices are below what they were before GE started accumulating dollars, then the economy has become more productive; if prices are the same, then productivity has not changed; and if prices are higher, then productivity has declined.
I think the U.S. may be facing the third prospect, or something close to it.
The price system really is quite beautiful.
When someone pays off debt they are foregoing spending in the present to spend in the past.
That money which is earned but not spent is what is saved. When someone does not spend according to what they have produced, prices decline, and the purchasing power of everyone elses money increases. But when saved money is eventually spent, prices rise, and any increase in purchasing power is offset (unless real gains in productivity occur).
That which is produced, but not claimed by the saver, is like a loan. They have produced for others, and temporarily asked for nothing in return. For lowering prices, everyone else is indebted to the saver, and must repay that debt when he decides to spend.
Above I noted, 'when someone pays off debt they are foregoing spending in the present to spend in the past.' This does not quite describe how people pay off their debt to the saver, for instead of spending less, they forego the purchasing power of the money they spend. The overall effect on the allocation of resources is very similar.
(unless real gains in productivity occur)
This is the crux of economic growth.
Lee Kelly,
Glad to have you back down to Earth.
Hope you'll stay a while.
I agree with you about the irrelevance of the amount of money in circulation.
Suppose the money supply in the US were cut in half. Would that mean that there was only half as much purchasing power and demand? No, for prices would fall accordingly, and there would be just as much purchasing power and demand, only at lower prices.
It's the same thing if we bought from China and they just sat on the dollars, but with one difference. We'd have all the real goods we got from them, and just as much demand for our own.
And the cheap foreign goods would save American jobs. For, while America's own policies priced its labor out of the market, the cheap imports, reducing the cost of doing business in America, would price it back in. So, without them, there would not be more but fewer jobs in America, and lower paying, for they boost the purchasing power of our money and real wages.
Sam,
If real gains in productivity occur, then the initial increase of purchasing power is offset and then some. If no real gains in productivity occur, then the initial increase is offset and no more. If real losses in productivity occur, then the initial increase is not offset.
I have said here before that I think inflation has been "hiding" in the trade deficit. The Chinese, and others, have been saving in dollars. Some of these dollars have been held, while others have been invested.
By withdrawing money from the U.S. economy, those who hold U.S. dollars exert a downward pressure on prices. They send goods and services to the U.S. economy but ask for nothing in return. When they eventually decide to spend, inflation will be the result (that is, the U.S. economy will pay off its debt by foregoing purchasing power).
Those who invested back in the U.S., unfortunately, did so during a credit boom, if not The Credit Boom. If you do not understand how that promotes malinvestment throughout the economy (not just in real estate or banking), then you do not understand economics. So productivity has been hit hard; resources have been squandered on unprofitable pursuits (and I do not think prices reflect that yet).
It is like "dumping" i.e. the practice of selling overseas below cost, only this time it was an accident. The Chinese, and others, genuinely thought they had priced their goods correctly–not anticipating the debasing of the dollar. When the Fed and Congress further cripple the U.S economy with more bailouts and stimuli, the incentive to begin spending these overseas dollars will increase.
What happens when the rest of the world tries to cash in its dollars at once? Remember, this kind of debt is repaid by a decrease in purchasing power. It is a genuinely worrying prospect, and I just wish the Chinese, Saudis, and others, would stop supplying the money to the U.S. Government to continue the economy down this disastrous path.
dg lesvic,
I understand how international trade is a good thing. I also understand why the trade deficit is not a bad thing. I really do understand Don's argument, and he is right if prices are telling the truth. Once they are corrupted, we're in a different ballpark. Something usually harmless (even positive), like the trade deficit, might now portend a big problem.
In the comments section of another blog entry, I found this.
It's interesting, because most data comes from measuring prices. But when prices are corrupted, then what does the data actually say about reality? Someone told me how productive the U.S. was a week or two ago, but did so in dollars! If I am correct, then most measurements of the U.S. economy derived from dollar prices will be misleading.
(Although the data may be misleading, it is not wrong. Data is never wrong, only wrongly interpreted).
I have said here before that I think inflation has been "hiding" in the trade deficit.
It has also been hiding in productivity gains.
Where prices should have been going down due to increased productivity, they have remained stable or risen less they they would have without the gains.
If real gains in productivity occur, then the initial increase of purchasing power is offset and then some. If no real gains in productivity occur, then the initial increase is offset and no more. If real losses in productivity occur, then the initial increase is not offset.
If you would, tie this explicitly to the reference. Increase in purchasing power due to….money not spent?
Fortunately, in a large economy, while GE is holding money, Westinghouse is spending what they had been holding.
Issues come up when gov't policy or other events induce harmonization of these events causing them to occur in temporal proximity.
"Opening trade relations with China sure doesn't seem to have helped our economy too much."
-Muir
Um… Where have you been for the last 30 years?
MWG
I've been here… watching people explain the dangers of the trade deficit ( more then 5 years ago) and predicting this outcome. While others keep insisting to this day that it is not a problem.
As Prof. Boudreaux suggest I am in over my head on this issue so all I can do is read what other experts state. All I can do is look to see who's arguements seems to make the most sense. All I can do is see who most accuratly predicted these results. When I read an article from 4 years ago predicting this outcome it's hard for me to put my belief with the ones telling me everything is A-OK.
Bull! and you know it twit! Many here have shown you links to Austrian economists who have done a better job of predicting this crisis. I challenge you to post links of those predictions that you have read from 5 years ago, and I will match it with 2 links for every single link you post. I mean two links of prediction from Austrians.
If I can match it, then you will have to shave your head and post your picture online at a place where you can't delete and admit in a public forum that you trolling blogs, you have been wrong and you are sorry. Wanna take me up on it you little twerp?
"When I read an article from 4 years ago predicting this outcome it's hard for me to put my belief with the ones telling me everything is A-OK."
-Muir
Yes, and I can predict that we will come out of this recession. I can further predict that we'll see future recessions. So what? There are numerous theories as to what caused the current recession (as we see daily on this blog alone). Some guy predicted 4 years ago we'd have a recession and you consider him an oracle?
To say: "Opening trade relations with China sure doesn't seem to have helped our economy too much." is absolutely ridiculous.
Are you saying our standard of living has not improved in the last 30 years? You do you want to argue that it has improved "despite" our trade with China?
"As Prof. Boudreaux suggest I am in over my head on this issue so all I can do is read what other experts state. All I can do is look to see who's arguements [sic] seems to make the most sense. All I can do is see who most accuratly [sic] predicted these results. When I read an article from 4 years ago predicting this outcome it's hard for me to put my belief with the ones telling me everything is A-OK."
Are they right because their analysis was good or do they appear to be right by coincidence?
Without understanding their reasoning you can't approach an answer. This is nothing more than naked intellectual laziness.
That you would examine only the conclusion without the rationale is indicative of your dogmatic and myopic worldview.
Make a conclusion and jump to it why don't you?
Muir is a racist. He doesn't like to see any improvement in the livelihood of the Chinese people.
Lee Kelly,
In case you hadn't noticed, I've been needling you. Martin, for all his faults, had the decency, at least, to snap back at me.
You wrote,
"I really do understand Don's argument, and he is right if prices are telling the truth. Once they are corrupted, we're in a different ballpark. Something usually harmless (even positive), like the trade deficit, might now portend a big problem."
The problem was the inflation, in the first place, not the revelation of it. The sooner the revelation, the better.
Muir is a racist. He doesn't like to see any improvement in the livelihood of the Chinese people.
Posted by: Marty Steinberg
JUMP!!!
Notice which of Marty Steinberg's posts Mierduck chose to respond to, and which one he ignored?
quack, quack, quack.
Notice which of Marty Steinberg's posts Mierduck chose to respond to, and which one he ignored?
quack, quack, quack.
Posted by: brotio
Maybe because I already provided 2 links to explanations of how the trade deficit could cause the problems we now see in our economy.
OOPS… here is the first one again which didn't work in my first post
Here's a third.
Muirgeo, what is your obsession with returning to the mid 20th century? Do you really believe it was a better time when people got a high school degree (or less) and then went to work in the local factory for the rest of their lives? I've done factory work. Trust me, it ain't as great as you imagine. The only people who could possibly have anything to gain from putting Americans back to work in the factories are the big unions. Okay, you Progressives are in charge, so how about just unionizing the big boxes and shutting the hell up about "buy American".
If you are a real man with real cojones, you first will agree to take me up on the challenge. You first work out the details of how you are going to post your bald headed picture. You will agree to openly apologize in public, you blockhead.
Lee Kelly: "By withdrawing money from the U.S. economy, those who hold U.S. dollars exert a downward pressure on prices."
I've tried to think this through, and I come to a different conclusion.
How is it "withdrawing money from the U.S. economy" when China buys TBills? Is it any different than if American investors bought those TBills?
If China (and other international investors)did not buy $billions of TBills, wouldn't the amount of money raised by issuing Tbills remain the same? The net result of China not buying Tbills should simply be less demand for Tbills. Reduced demand would just cause TBills to be sold at a higher discount, right? If so, more Tbills would have to be issued to finance the government deficit. And so the claims on future taxpayers be even higher than they are now.
As I see it, China's huge purchases of Tbills has reduced the future liability of American taxpayers.
Let's take it one more step.
One thing we should realize from the recent crisis in the financial market is that, nothing is permanent, including Chinese purchase of Treasuries.
By keeping interest low in the United States, China has become the enabler. Without this catalyst, the U.S government would not have been able to finance all this borrowing. Most of the borrowing in the last 20 years was done not with 30 year bonds, but with treasuries of shorter maturity. Once the catalyst goes away from the market, not only will it be difficult for the Federal government to borrow at low interest, it will have trouble rolling over existing debt.
That day may be 2 years from now, or 20 years from now or 40 years from now. However, that isn't going to make the future liabilities any less painful. I think the day will be sooner than later.
oil shock: "By keeping interest low in the United States, China has become the enabler. Without this catalyst, the U.S government would not have been able to finance all this borrowing."
Do you really believe that? that a higher interest rate would have stopped or even slowed down government's deficit spending? I don't believe that for a minute.
As I see it, the lower interest rates – perhaps "enabled" by Chinese saving – reduced the cost of borrowing for American businesses. I cannot see anything wrong with that, oil shock. In fact, the reduced interest expense resulting probably increased industrial investment over what it would have been. That increased investment will ultimately lead to higher U.S. productivity and a higher standard of living.
It really doesn't matter who holds the government Tbills – and that was the point I was making. If this massive debt is going to reduce the standard of living of future generations of Americans, it would do so regardless of who lends the money to the U.S. government.
If you want to argue that government deficit spending will harm future generations, go ahead and make that argument. What Lee Kelly seemed to be saying was that a trade deficit with China was the cause for that future harm. I have been unable to follow Lee's reasoning.
What Lee Kelly seemed to be saying was that a trade deficit with China was the cause for that future harm.
Lee Kelly
I think too many dollars have collected abroad without a corresponding increase in productivity in the U.S. (but rather a great deal of malinvestment).
Lee is suggesting that bad fiscal policy has benefitted from the trade deficit, that is, the damage has been shifted to the future. The fiscal policy is the cause, and the deficit has enabled a temporal displacement of the consequences.
Postponing consequences often tends to increase them. Politicians are hoping they will go away somehow.
I wrote above,
"The problem was the inflation, in the first place, not the revelation of it. The sooner the revelation, the better."
That doesn't mean, the sooner the end of the trade imbalance, the better. The "unfavorable" trade balance means that we get more real goods from the Chinese than they get back from us. That's good for us, not bad. It means that the Chinese are working for us for free. The longer they're willing to do that, the better for us. Though their "generosity" masks our inflation, and delays the day of reckoning, it is still not the cause of the problem. The cause is still our own inflationism, and attacking the alleviation rather than the cause of it will not cure but only make it worse.
sam grove: "Lee is suggesting that bad fiscal policy has benefitted from the trade deficit, that is, the damage has been shifted to the future."
This I don't understand. To me, the damage from bad fiscal policy was shifted to the future as soon as Congress decided to spend more than current government revenues. The government was going to borrow its billions whether the Chinese saved or not.
What Chinese savings did was lower interest rates for business. Private enterprise was able to invest more capital than it otherwise would have invested. That increased capital investment by business – increased above what it would have been absent Chinese savings – enabled large productivity increases in the U.S. Those productivity increases have increased our standard of living not just the past decade but for the next several decades as well.
I cannot see how our capital surplus with China did anything to harm the U.S. Quite the opposite, actually.
HERE IS HOW I WOULD END THE DEPRESSION IN AMERICA OVER NIGHT?
I want give you something to think about.
It is really a funny thing that the all the Highly Industrial Countries are all affected by this Financial Problem. All of these Industrial countries have one common thread that runs though all of those affected countries. However, the only difference is the degree of the Financial Problem in each country.
All the Industrial Countries of the World have been sending all their highest paid Jobs off shore to China in search of the lowest wages.
This has been going on for 15 years, every since all other Industrial Countries of the World followed America in to joining the WTO and canceling all their Import Tariffs.
America over the years has proven to be the best country in the whole world for creating new jobs, that’s why America was the wealthiest Country in the world till we joined NAFTA and the WTO in 1992 and 1993 respectfully.
Here is the problem; as fast as America creates new Jobs the Politicians advocate sending all of these higher paying Jobs off shore to Mexico, India or China in the name of Free Trade faster than America can create them.
That’s why China a third world country 15 years ago is getting much richer on the backs of American workers and America is going Bankrupt, it’s that simple.
What is the America Politicians Thinking? They are either being bought off by the Big International Bankers, International Manufacturing Companies or just plain stupid. I got a feeling it is not the latter.
I’ll bet Americans will have a change of heart about Free Trade when they have lost everything and are standing in the Soup line with their children.
The final analysis is that American Workers ends up working at Wal-Mart as a check-out or at MacDonald’s flipping homburgs and China grows much wealthier and militarily stronger every year.
If that’s not enough the Politicians all refuse to build a concrete wall on our southern border to stop the Drug Pushers, Illegal Aliens and Terrorist from entering our Country Illegally.
What the hell type of Politicians do we have in Washington D.C.?
They are allowing more Cheap Illegal Drugs to flood our country through our southern border and drug pushers killing each other on our streets. Then all these Illegal drugs are allowed to flood our streets to addict all of our young children.
These Illegal Aliens who can’t speak English or don not even have elementary school education are causing the deterioration of our Wages standards in America and taking advantage of Free Medical Services.
In the end our children will have minority status in our great country.
What would you think of your Father and Grand-Father had they left you in such a position?
Then at some point in our future you can bet one of those terrorist will walk a weapon-of-Mass-Destruction across our southern border and kill a million or more Americans.
The Question is not if this will happen? But when it will happen?
The bottom line is that the whole world wants America to stay in NAFTA and WTO because they all want some of those High paying America JOBS that our politicians are moving off shore to the cheapest wage country.
Everyone keeps saying; Harry why are you preaching Protectionism, that is what, caused the Great Depression back in 1930s.
I say to you; “That’s Absolute Bull S-H-I-T.”
You know when they tell a lie often enough it will in time become the truth.
They all say that because they either didn’t check the history of American Free Trade or they are benefiting in someway from NAFTA or WTO.
Yes, America did pull out of some International Trade Agreements by passing Smoot-Hawley Tariff Act passed into law on June 17, 1930. That’s exactly what I am suggesting we do right now.
The truth is it had absolutely nothing to do with causing The Great Depression.
Read this you will know exact how Smoot-Hawley Tariff Act, affected THE GREAT DEPRESSION:
Earlier today I visited the National Bureau of Economic Research’s Macro history Database. I clicked on Chapter 7 and then looked at the value of U.S. imports and the value of U.S. exports for each of the 120 months during the 1930s.
Turns out that for only 18 of the 120 months of that dreary decade did the United States run a trade deficit (that is, imported more, value-wise, than it exported). For each of the remaining 102 months of the decade of the 1930s the U.S. ran a trade surplus.
On an annual basis, the only year of the decade of the 1930s that the U.S. ran a trade deficit was 1936; in each of the other nine years the U.S. ran a trade surplus.
So, you see during the Great Depression American Trade Deficits was exactly the opposite in 1930s as they are right now.
This is nothing more than a 5th Grade mathematic problem.
America must pull out of NAFTA and the WTO to Survive. Here are the International Trade Balances for the year 2006. YOU FIGURE IT OUT FOR YOURSELF….
In 2006 America Exported $1,440 Billion Dollars worth of Jobs.
In 2006 America Imported $2,200 Billion Dollars worth of Jobs.
In 2006 America Imported $386 Billion Dollars of Crude Oil.
If America just stopped exporting everything in 2006 we would have LOST $ 1,440
Billion Dollars in Jobs.
America Imported ( $2,200 minus $386 (Oil Imports for 2006) = $1,814 Billion Dollars.
If America just stopped Importing all Manufactured Goods in 2006 we would have GAINED $ 1,814 Billion Dollars in Jobs.
The Question is: Would give up $1,440 Billion Dollars every year if you were guaranteed to receive $1,814 Billion Dollars in return?
That would be a Net Total Increase of $ 374 Billion Dollars of new Jobs created every year in America. These newly created JOBS would cost America absolutely nothing.
That is assuming America did not Export one penny worth of goods during 2006.
What’s the best way our politicians can create NEWS JOBS in America?
“STOP GIVING THEM TO CHINA”.
Look at all this bailout money our politicians are borrowing from China to Bailout all of their CFR buddies, the International Banksters and the Wall Street Gansters.
This is laughable and will only make things worse in the end. These bailouts will be a yearly advent and America will go farther and farther in debt to China.
The day America Pulls Out of NAFTA and the WTO, you will see all of our problems solved over night. All those International Manufactures will bust their A-S-S to bring back all those jobs they sent to China. Remember America has the Biggest and the wealthiest consumer Market in the whole world.
I am sure America will get a lot of flack for doing this. But, America must do this to SURVIVE or be totally destroyed.