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Everyone Has a Favorite Horse to Beat. Mine is Not Dead.

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Earlier today I heard Washington Post columnist Robert Samuelson interviewed on WTOP radio [2] (a local all-news/sports/weather channel in DC).  Samuelson is usually pretty good, but he — like so many others — fails to understand the trade deficit.  He said in this interview (as he says sometimes in his columns) that the trade deficit "must be financed."

That's simply not so.

If Mr. Toyota sells $1 million worth of cars to Americans in 2009, spends $600,000 buying ("current") goods and services — exports — from Americans, and stuffs the remaining $400,000 into his mattress, the U.S. trade deficit rises by $400,000 but there's no more "financing" of this amount going on than if Americans had spent that $1 million buying, not Mr. Toyota's product, but Mr. Chrysler's and Mr. Chrysler had used the proceeds exactly as Mr. Toyota did.  The only difference between these two scenarios is that, in the first, the U.S. trade deficit rises while in the second it does not rise.

Ditto if, say, Mr. Toyota used the $400,000 to buy shares of General Electric and 3M — or if he used the $400,000 to buy real-estate in Ohio.

Only if Mr. Toyota lends the $400,000 to Americans is there any financing going on, but even here there isn't necessarily a problem.  Is it worse for Entrepreneur Jones in Jacksonville to launch his firm with money borrowed from Mr. Toyota than with money borrowed from, say, Bill Gates?  In both cases there's debt.  But economically it matters not one whit which government issues the creditor's passport.  If the borrowed funds are used wisely, they serve a useful purpose.  Period.  End of story.

If the borrowed funds do represent a problem, it must be because the debtor went into debt unwisely — say, he borrowed the $400,000 not to launch a new firm but to throw a gigantic party.  (Yes, yes.  I know that even gigantic parties are not unambiguously wasteful or unwise, but please don't be pedantic with me on this point.)  But the problem here, again, is not the nationality of the creditor but the status of the debt — how it was used.

There is a great deficiency in the way even otherwise well-informed pundits think and write about the so-called "trade deficit."

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