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Clear Evidence of Fuzzy Thinking about Trade Deficits

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After explaining – and endorsing the explanation – that non-Americans’ demand to use U.S. dollars as the major global currency contributes to the U.S. running trade deficits period after period after period, Robert Samuelson offers this parenthetical disclaimer [2]:

(Note: Many economists reject this theory. The problem, they say, is that Americans want to invest more than they’re willing to save. The gap is filled by an inflow of foreign capital converted into dollars. Despite differences, both theories operate similarly. They create a demand for dollars that affects the exchange rate.)

There are two flaws in this disclaimer, one minor the other major.

The minor flaw is that no economists of whom I’m aware deny that non-Americans’ demand to hold dollars or to use dollars as a major global currency causes U.S. trade deficits to be larger than otherwise. It’s true that many economists reject the claim – and righty so – that the dollar’s role as major global currency is the only reason why the U.S. consistently runs trade deficits. But contrary to what Mr. Samuelson might here be understood to mean, it is not true that even a small number of, much less many, economists reject the claim that the U.S. dollar’s role as major global currency is among the reasons why the U.S. consistently runs trade deficits.

The major flaw is contained in these words: “that Americans want to invest more than they’re willing to save.”

Mr. Samuelson’s wording is true to the conventional view that U.S. trade (or current-account) deficits reflect inadequate U.S. savings and, hence, that these deficits would disappear if only we Americans would increase our savings by enough to cover the full amount of investment that takes place in the United States. Notice again Mr. Samuelson’s wording, here with emphasis added: “that Americans want to invest.”

This wording accurately reveals the conventional presumption that all of the investment that takes place during some period in the U.S. is driven exclusively by the desire of – and reflects the entrepreneurial designs and investment plans of – Americans. But this presumption is invalid. Much of the investment that takes place in the U.S. is driven by the desire of – and reflects the entrepreneurial designs and investment plans of – non-Americans. That is, it is emphatically not true that if, say, $X amount of investment takes place in the U.S. in August 2018, that in August 2018 we Americans “want” to invest in the U.S. an amount equal to $X.

Non-Americans want to do some of this investment. And much of the investment that non-Americans do in the U.S. simply would not be done – or not done in the U.S. – were it not for the entrepreneurial designs and investment plans of non-Americans.

If this point of mine appears to be academic, it isn’t. In the conventional view in which all investment that occurs in the U.S. is driven by the desires and plans of Americans, the amount of that investment that is funded with dollars contributed by foreigners is easily taken reflect a shortfall of American savings. ‘We Americans want to invest $X but – profligate us – we saved only $X-Y. Therefore we must rely upon foreigners to contribute $Y if we are to have funded all of the investment spending that we ‘want’ to take place in the U.S.’ (And it’s a very easy and common, although not necessary, leap from this false conclusion to the further false conclusion that we Americans borrow $Y from non-Americans.)

But once it is recognized that non-Americans can initiate the entrepreneurial plans that are manifested as investments in the U.S., there is no longer any reason to suppose that if, in some month, $X amount of investment takes place in the U.S. and if $Y amount of this investment is contributed by foreigners, then we Americans must be saving too little or that the trade deficit of $Y would not have occurred if only we Americans had saved and additional $Y amount.

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