Two Excellent Posts by Dan Ikenson

I don't see the trade deficit as a problem in itself, but doesn't it concern you that we take on so much debt in order to run the deficit? If we ran a trade deficit with no debt then that would be fantastic, but probably impossible too. Eventually I would think the world will stop trading stuff for paper.

From China's perspective, it seems like they're giving America free stuff and keeping their dollar weak in order to keep their exports up. But wouldn't they just consume these things themselves and raise their own standards of living if they let their currency appreciate? I understand this isn't desirable in the short term for China but in the long term it seems to be the answer.

"I don't see the trade deficit as a problem in itself, but doesn't it concern you that we take on so much debt in order to run the deficit?"

No. Where's the connection?

It bothers me that we take on debt -- but I'm not particularly concerned with who we owe it to.

The problem is with the word "deficit". It sounds like we're coming up short. in our accounts.

Someone sends me a Honda -- I send them some paper promises (that we all agree have value) -- and I've got a deficit?

What in the hell are people thinking? If the seller didn't think that currency or debt couldn't somehow be converted into real world goods, they wouldn't have accepted them.

We're either calling our trading partners idiots, or attempting to prove that we are.

Well put. However, if our currency is overvalued because of too much gov credit, then eventually there will have to be a correction. At that point our deficit will become a bad thing because we'll have to start increasing our exports to regain that purchasing power. That would explain why exports increase during downturns and decrease during upswings. Interest rates also decrease during booms, but I don't think that Don would say that we should maintain artificially low interest rates and that this is a sign of a healthy economy. There should be a natural balance.

The error that people make is in thinking the trade deficit is a bad thing for our prosperity right now. It actually means we're getting free stuff. It might be a problem in the future, though...

"However, if our currency is overvalued because of too much gov credit, then eventually there will have to be a correction. At that point our deficit will become a bad thing because we'll have to start increasing our exports to regain that purchasing power."

Not necessarily -- the owners of that debt might simply purchase the Sears Tower, or the Port of New York.

"They" are "us" ...

or attempting to prove that we are.

or proving that we are.

Fixed.

Why no strike allowed?

"or proving that we are.

Fixed.

Why no strike allowed?"

It's allowed -- but it won't be by the collectivists. That would be suicide -- because they're mostly parasites, and we wouldn't miss them.

No. If we prove we are idiots, we'll do it in the conventional way ;)

Simply the fact that so many, seemingly otherwise bright people, make such a distinction between currency and goods -- makes my head spin. God help me if I ever start keeping track of surpluses and deficits of goods with my trading partners. It sounds like a full time job with no reward. Why anyone actually cares is beyond my comprehension.

Someones smoking crack up there when the White House says Obama 'strengthened America' in his first year. The press, I assume, is just getting second-hand smoke.

It seems to me that the problem that people see with the trade deficit is (1.) it's persistence, and (2.) the reason for it's persistence. This isn't even to say that a persistent trade deficit is always bad either - simply to say that some people have concerns about the nature of this particular persistent trade deficit.

Of course there's nothing inherently wrong with imports. That strikes me as beyond obvious. I don't see how it advances the discussion to knock down a straw man of what people are actually concerned about, and ignore the real underlying concerns: a sharp currency correction.

People can fix the "trade deficit" by 1) stop using oil 2) Stop the government from borrowing so much we need other countries to sop up the debt. So yes we people cause this persistant phenomenon.

I wonder, though, do we "need" other countries to sop up the debt... or have other countries just decided that that was the safest American asset to invest in to maintain the value of their currency that they want to maintain? I have a hard time believing that we couldn't sustain government borrowing without the Chinese.

"I have a hard time believing that we couldn't sustain government borrowing without the Chinese."

If I read that statement correctly, then I agree with you, daniel. The U.S. is going to sell its national debt regardless of what China does.

The U.S. will monetize its debt regardless of what China does. By exchanging Chinese currency, created to boost demand for Chinese exports, for entitlement to U.S. tax revenue, China's monetary authority only works in tandem with the Treasury to monetize the debt indirectly.

Ultimately, the Fed will inflate to repurchase China's Treasuries, just as it has already inflated to purchase quasi-public mortgage backed securities. When push comes to shove, we'll inflate away the value of Treasury securities before we'll cut the real value of Social Security benefits a lot more, and the choice is practically upon us already. Within this decade, the choice will be behind us.

Eventually, income taxes will finance a substantial portion of Social Security benefits. This expenditure of income tax revenue begins in only a few years, when the payroll tax surplus disappears. A few decades later, the "trust fund" runs out, but Congress keeps paying benefits from the income tax anyway. Inflation in the meantime only hastens the arrival of this event.

That was the plan all along. We'll never repay the real value Treasury securities held by China or anyone else, instead.

I do not see why you feel fear of imports is a straw man. Dan Ikenson is not referring to discussions among enlightened economists. He is referring to the way politicians and mass media ignite fear in common man through use of non-neutral language about trade deficits. Ikenson's point may not "advance discussion" with you, daniel, but who cares? He's commenting about an important issue: how demagogues and an ignorant press can incite fear that results in dangerous protectionist laws.

I'm talking about politicians and media too. If we didn't run persistent, large trade deficits with a nation that should, by all indications, be keeping more of it's capital at home than it currently is I don't think anyone would care about a trade deficit. The media may not be writing treatises on currency corrections, but the only reason why they care about it is because of it's unusual and unsustainable persistence. My whole point is if the persistent trade deficit isn't a problem then politicians wouldn't be talking about it and media wouldn't be writing about it. I think you give them too little credit. They may shroud it in "protect American workers" rhetoric that is regretable, but I really don't think it's imports per se that bothers them. The idea that "imports aren't really bad" isn't THAT hard of an idea, after all johndewey. You don't have to be an "enlightened economist" to grasp that concept.

danielkuehn: "The idea that "imports aren't really bad" isn't THAT hard of an idea"

Oh, please! Do you personally know any blue collar workers? Do you know any labor leaders? They've been scared of imports for at least 30 years. Demagogues and mass media have consistently played to that fear. America has been engaged in this fight over protectionism for all of my adult life, daniel, about 40 years. U.S. manufacturers have been paying prominent spokespersons to get that message out. Politicians have enacted stupid protectionist legislation with the support of the electorate. Yet somehow you believe discussion about balanced reporting of protectionist arguments is not worthy because it doesn't "advance the discusion". Wake up and see the real world, daniel.

They've been scared of competitors - which is a valid fear. Fear of competitors is what drives businesses to succeed. I don't think they're afraid of trade deficits in general. What motivates fear of the Chinese trade deficit is it's size, origin, and persistence.

RE: "U.S. manufacturers have been paying prominent spokespersons to get that message out."

Again, as I mentioned above, yes it's shrouded in this sort of rhetoric from spokespeople. But as I said that's the result of a fear of competitors - a valid fear - not a fear of imports and trade deficits in general. Of course a specific manufacturer is going to seek protection. That's just rent-seeking. Wake up and see the real world - worries about competitors are going to inevitably mixed up in discussions of imports. But that's not a concern about imports and the trade deficit per se, just because it's mixed in with it. Very few people today - not even manufacturing interests - think imports in and of themselves are a bad thing. Of course they're going to be concerned about foreign competitors, though. Concern about competitors does not a neo-mercantilist make.

"Very few people today - not even manufacturing interests - think imports in and of themselves are a bad thing."

Get out and talk to real people, daniel, or watch the demagogues on TV.

Ya - I sound very disconnected from reality when you quote that one sentence from my post. The point is, when concern is expressed it's usually concern about foreign competitors, which is very different from an imports = bad instinct.

Doesn't the causality run the other way? It seems likely to me that something will cause a currency change ("correction" seems presumptuous to me) and that will affect the trade levels. But, when that happens, most observers will claim that it was all the trade deficit's fault & that it caused the currency revaluation. (They'll call it a "correction".)

If the trade deficit & American profligacy were the problems, is there any theory that would explain why they would continue for decades before they would correct? If profligacy were the problem, wouldn't the currency reactions be fairly immediate? It seems like there is an easy story to see here - that this is a result of demographics, capital flows, and returns on capital, and that observers are biased against seeing it because the profligacy story seems so satisfying. IMHO

Well - keep in mind that the only person talking about "profligacy" is Don Ikenson. It's a word he uses to characterize the people he's criticizing - not a word that they've used themselves. So I'd agree with you completely on that point - profligacy has nothing to do with it.

I think it is, as you suggest, a result of capital flows and the duel impact of Chinese weak yuan policy and the Triffen dilemma on the part of U.S. monetary authorities. That is the "cause" of the trade deficit in the sense that those are the exogenous factors driving the persistent deficit. But I don't think you can draw such strict lines of causality in the case of a currency revaluation. Those markets (for traded goods and currency) are simultaneously determined. Chinese and American monetary policy may be the finger on the scale right now, but when the correction does occur I don't think you can say "the currency changed the trade patterns" or "the trade patterns changed the currency". Those two things are simultaneously determined.