Deficient Economics

by Don Boudreaux on August 18, 2010

in Balance of Payments, Debt and Deficits, Trade

Here’s a letter to the New York Times:

You assert that “The bulging American trade deficit means that rising consumer demand is flowing to suppliers overseas rather than fueling growth at home” (“Return of the Killer Trade Deficit,” August 16).

Not so.

Why do foreigners accept green pieces of paper in return for the goods and services these foreigners produce for Americans?  It’s not because foreigners have an insatiable demand for tiny monochrome prints of dead American statesmen.  Rather, foreigners accept dollars because they want to spend those dollars, either on American exports or on American assets.  Another term for spending dollars on American assets is “investing in America.”

The U.S. trade deficit rises whenever the amount of dollars foreigners invest in America rises relative to the amount of dollars foreigners spend on American exports.  This investment – contrary to your claims – is perfectly sustainable as well as an activity that fuels demand in the U.S. economy.  The U.S. trade deficit, as such, is nothing to fear (although today its size is in part a symptom of Uncle Sam’s scary incontinent borrowing – borrowing which you, inconsistently, applaud in the very same editorial in which you lament America’s growing trade deficit).

Sincerely,
Donald J. Boudreaux

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