≡ Menu

Bonus Quotation of the Day…

is this recent tweet by trade scholar Dan Ikenson:

It’s not so much that we “need foreign savings,” but that foreigners need, desire, demand US investments. Even when US policymakers play roulette with fiscal policy or when the world is in a seemingly chaotic state and US policymakers are exacerbating the problem, investors want dollar denominated investments in US assets. May change at some point. But for now there is a strong argument to make that foreign investment in US (not mindless consumerism) drives the trade deficit.

DBx: Yep.

An unfortunately common practice, even among economists, is to talk or write about the U.S. trade deficit as if it’s necessarily a consequence of inadequate savings by Americans and would, therefore, shrink or disappear altogether if only Americans saved more.

For example, if the U.S. trade deficit this month is $70 billion, this fact does indeed mean that foreigners this month are investing in America $70 billion more than Americans this month are investing abroad. From this reality people conclude that “if only” we Americans as a whole saved more we either would have invested at least $70 billion more this month in foreign ventures and assets or we Americans, rather than foreigners, would have undertaken in the U.S. that $70 billion of investment in America that is instead being undertaken by foreigners.

But this conclusion is mistaken. Investment opportunities aren’t dispensed by nature for all to see, with the fastest or most-frugal individuals on the globe seizing them, leaving no further opportunities for others. Until and unless every human need and whim is fully satisfied, creative individuals will have opportunities to make productive and profitable investments. Investment opportunities are ultimately the creations of human ingenuity. When a Norwegian or Bulgarian uses U.S. dollars to build a business in the U.S., that activity causes the U.S. trade deficit to be higher than it would be had that Norwegian or Bulgarian instead used his or her dollars to purchase American exports. But it isn’t the case that had we Americans saved more we would have built that business. Absent the foreign investment in America, that particular business would not have been built at all, and perhaps no similar business would have been built.

Ditto with portfolio investments: foreigners might see – correctly or incorrectly – prospects for profit that we Americans miss.

In short, the amount of investment done in a country during some period, or over long expanses of time, is not a nature-given fact independent of the particular individuals who are making the investments. And, importantly, because the amount of investment opportunities is practically unlimited, there is simply nothing inherently harmful about U.S. trade deficits to Americans. As Ikenson points out above, quite the opposite is the case.

Next post:

Previous post: