The U.S. trade deficit is an American problem. It is the result of insufficient savings at home and a widening budget deficit. In structural terms, the U.S. trade deficit shows that the productive capacity of the U.S. economy is too small relative to spending. Foreign financing allows the government to expand its expenditures without putting too large a burden on the taxpayer. This way funds are set free for private consumption.
The U.S. economy is propped up by China and Japan, while at the same time these two countries depend on the United States. Japan is helped by its persistent trade surplus with the United States to soften the consequences of its economic stagnation, and China relies on its surplus in foreign trade with the U.S. in order to proceed with its development strategy. By this arrangement, Japan can maintain its level of wealth, while China is in a position to develop and accumulate wealth at a rapid pace. In this constellation, the United States is the beneficiary in terms of real goods and enjoys its present period of prosperity. [FULL ARTICLE]
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The most frightening mainstream exposition on the near term future including the monetary deficit is BP’s annual energy report:
http://www.bp.com/liveassets/bp_internet/globalbp/globalbp_uk_english/publications/energy_reviews_2005/STAGING/local_assets/downloads/pdf/statistical_review_of_world_energy_full_report_2005.pdf
I think it bodes some very difficult times ahead for the US. And the DOE’s continued rosy analysis, I believe, has been used deliberately to keep Americans in the dark about just how badly this administration mismanaged a problem they were fully cognizant of.
I am terrible at international trade issues and macroeconomics. Is what follows a correct summation?
The reason the US trade deficit is a problem is because it reflects a fundamental imbalance: in contrast to the “trade deficit” I run with my grocer, the US account is not “balanced” in the way mine is by the fact that I earn income from my own customers in order to buy groceries for cash on the barrel head. Rather, the US shortfall is made up by inflation and credit. In essence, Asia is loaning us money to buy their goods.
Obviously, such an arrangement is not sustainable over time. Eventually, more money must be devoted to servicing debt than purchasing imports. At that point, interest rates must rise to continue to attract Asian lenders or it will simply no longer be worthwhile for Asia to loan the US money to buy Asian imports.
The massive imbalances currently in place would seem to require that interest rates rise and, per ABCT, the correction of imbalances all up and down the economy. The correction is postponed by Asian central banks frantically buying up US dollar-denominated assets (with newly minted money in their own coin, if that is what it takes) to keep interest rates low.
I have zero formal instruction in economics, and would appreciate any critique.
America is awash in debt – national, state, family, personal. Oldies are borrowing against equity in order to get money for living. Others are mortgaged to the hilt. Credit card consumer debt is at record levels. Savings are at record low levels. A significant rise in interest rates will make things really interesting when the housing bubble bursts.
I have just decided against investing in a property syndicate that owns shopping centres in Georgia (I live in Australia), out of nervousness at the American property market.
Dick Cheney says that deficits don’t matter. We’ll see about that, I think sooner rather than later. The sheer volume of US borrowing, on a daily basis, is astounding. Something, surely, has to give.
john b
sydney
I would like to comment on Doug’s observations. You have drawn a very logical conclusion.
The world is dependent on the US spending for its growth. And in order to keep their spending going the world lends to the US. In effect, its like a shopkeeper providing money to customer so that the customer keeps buying from the shop.
The Chinese, Japanese and other Asian Cetral banks have increased their dollar debt in an effort to keep their exchange rates depriciated against the dollar and protect their exports. This explains the flow of foreign capital to the US, even though US interest rates have been at historical lows.
The question here is whether US can continue to depend on Asian central banks to finance their external as well internal deficit.
Consider the following scenarios –
1. Japan is experiencing increase in trade with patners other than US, that is China and Europe. As economic recovery broadens and does not soley depend on exports to US, Japan would no longer need to support the dollar to protects tis recovery.
2. China decides to finally float the renmimbi. This would result in an improvement in the US trade deficit, but to what extent depends on US restrictions on certain key exports to China. More importantly CHina would no longer need to buy US treasuries to hold down its currency.
The world markets are distorted and adjustment of global imbalances a near to medium term eventuality. The quetion si what the world economy will go throught to obtain this balance – higher interest rates, inflationery prssures, recessions?
I would like to comment on Doug’s observations. You have drawn a very logical conclusion.
The world is dependent on the US spending for its growth. And in order to keep their spending going the world lends to the US. In effect, its like a shopkeeper providing money to customer so that the customer keeps buying from the shop.
The Chinese, Japanese and other Asian Cetral banks have increased their dollar debt in an effort to keep their exchange rates depriciated against the dollar and protect their exports. This explains the flow of foreign capital to the US, even though US interest rates have been at historical lows.
The question here is whether US can continue to depend on Asian central banks to finance their external as well internal deficit.
Consider the following scenarios –
1. Japan is experiencing increase in trade with patners other than US, that is China and Europe. As economic recovery broadens and does not soley depend on exports to US, Japan would no longer need to support the dollar to protects tis recovery.
2. China decides to finally float the renmimbi. This would result in an improvement in the US trade deficit, but to what extent depends on US restrictions on certain key exports to China. More importantly CHina would no longer need to buy US treasuries to hold down its currency.
The world markets are distorted and adjustment of global imbalances a near to medium term eventuality. The quetion si what the world economy will go throught to obtain this balance – higher interest rates, inflationery prssures, recessions?
Is it just me, or does this discussion look very neoclassical?
1. Japan does not have a major recession. What they do have is a market interest rate that is as low as that of the Bank of Japan. That means they have stopped inflating the yen and are enjoying a growth “deflation”, just like what the USA had in the 19-th century and would have again if Rothbard got his 100% gold standard.
2. What keeps the economy growing is not spending, but investment. If people would stop spending more than their wages until after the bubble burst that would be a good thing, and the current borrowing/lending for consumption is making the crisis worse.
First, I don’t see any logical argument or numbers that indicate that money saved (invested for the long run with assurance that it will be there in 10 years) by the working class will increase American production efficiency or go to plant expansion. Most of the money put into the stock market buys shares already in existance in hopes that some sucker will pay more for them in the future. Most shares are selling at a terrible price/earnings ratio. Only new offerings of stocks or bonds can go toward plant expansion. Putting money into newly invented products is a gamble, not an investment.
Second, GM advertises that it has x models that get over 20 MPG while Toyota advertises y models that get over 30 MPG. Last year The Wife wanted a new (different) car because her knee was unhappy operating a clutch. I couldn’t find a single “American” car that had a low end 4 door that got a decent MPG. We bought a used Toyota with a factory guarantee that gets 40 MPG on the freeway. $16,000 out the door, tax and lic included (not a hybred).
Third, the problem is psychological, not economic. This young generation of Americans has never seen a day of hard times nor unintentionally missed a meal. They think nothing of buying toys and vacations on credit because (they think in their guts) the economy will never crash.
Is the U.S. trade deficit an American problem? I wonder if things have changed dramatically since Rothbard wrote this:
Myth 4: A major cause of the crash was the big trade deficit in the U.S.
Nonsense. There is nothing wrong with a trade deficit. In fact, there is no payment deficit at all. If U.S. imports are greater than exports, they must be paid for somehow, and the way they are paid is that foreigners invest in dollars, so that there is a capital inflow into the U.S. In that way, a big trade deficit results in a zero payment deficit. Foreigners had been investing heavily in dollars—in Treasury deficits, in real estate, factories, etc. for several years, and that’s a good thing, since it enables Americans to enjoy a higher-valued dollar (and consequently cheaper imports) than would otherwise be the case. But, say the advocates of Myth 4, the terrible thing is that the U.S. has, in recent years, become a debtor instead of a creditor nation. So what’s wrong with that? The United States was in the same way a debtor nation from the beginning of the republic until World War I, and this was accompanied by the largest rate of economic and industrial growth and of rising living standards, in the history of mankind.
Mises: “One calls the balance unfavorable if the exports of money and bullion exceed the imports. This terminology stems from inveterate Mercantilist errors unfortunately still surviving in spite of the devastating criticism of the economists. The imports and exports of money and bullion are viewed as the unintentional outcome of the configuration of the nonmonetary items of the balance of payments. This opinion is utterly fallacious. An excess in the exports of money and bullion is not the product of an unhappy concatenation of circumstances that befalls a nation like an act of God. It is the result of the fact that the residents of the country concerned are intent upon reducing the amount of money held and upon buying goods instead.”
Is it not more than just an impression of mine that neither Rothbard nor Mises had much bad to say about “unfavorable” balances of payments?
Paul – You raise an excellent point and I hope the author of the article will address it.
Obviously, there is nothing wrong with trade deficits per se. After all, I run one with my local grocer. However, my books “balance” because my production equals my consumption: I offer services to people who pay me, and then I trade the money for groceries. If I want to consume more than my present production then I have two choices: increase my production, or go into debt. My grocer may even be happy to extend credit. I buy lots of groceries and he records lots of sales. Eventually though, the books must balance. At some point I will run out of future production with which to pay my debt and reality must intrude on the nice little Ponzi scheme my grocer and I have been running between ourselves.
Since Americans aren’t saving enough to fund increased production, foreigners must make up the difference. This is a finite process, since at some point our foreign debt servicing will crowd out our foreign purchasing. Interest rates must then rise to continue to attract foreign savings, and consumption must decrease. US and Asian central banks are doing their best to prevent this inevitable correction but it will happen as surely as it would between me and my obliging grocer.
Empirically, and without going back thru the article, I do not know which statistics one would look at to confirm to what extent the trade deficit is financed by inflation and credit rather than production.
good point paul. I also thought the same thing, one reads similiar things in hazlitt’s economics in one lesson where he says that the real benefit to trade is what we get out of it, that deficits are a good thing.
Depends upon why the nation goes into debt. In the 1800′s the debt was used to build the railroads and such. In this year it is used to finance toys and vacations.
Yes it is very common to read things like that: good or bad, it all depends on this or that. However, i have yet to see Mises or Rothbard ever put it this way.
The fact is, IMO, the entire question of balance of payments adds a layer of unnecessary confusion over the important and more basic question of how severely is your government and its banks inflating and trashing your currency. It is the issue at the base of many unpleasant symptoms brought up when balance of payments is discussed and the one that warrants most of our focus and attention.
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