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Source link: http://archive.mises.org/4363/the-trade-deficit-an-austrian-perspective/

The Trade Deficit: An Austrian Perspective

November 24, 2005 by

The US trade deficit is often viewed with alarm and has attracted considerable attention from both the public at large and policy makers. However, from a Misesian-Hayekian perspective, the US trade deficit is merely a reflection of the competitive advantage that the US has been enjoying over the past decades. The US trade deficit will continue to widen in the coming years — which would be the case if the United States’ trading partners prove to be unsuccessful in making their economies more conducive to investment and growth compared with the status quo. FULL ARTICLE

{ 18 comments }

KY Leong November 24, 2005 at 7:43 am

Interesting discussion correlating US capital surplus to trade deficit. Valid points regarding state interventionism in the competitiveness of an economy. But let’s not forget the underlying realities here:
- The growth we see today in the US is an illusion, a mirage, one gigantic malinvestment boom driven by reckless Fed policies & unsustainable household debts, with inevitable & nasty consequences (according to ABCT),
- The foreigners (trade surplus) are still shipping toys, shoes, electronic widgets… to the US in exchange for phoney green notes because they don’t understand the Austrian concept of Money (as a store of production),
- Even if they did (know Austrian economics) they’d have No Choice – all other major paper currencies (Yen, Euro, Sterling, you name it…) are just as fiat (as the greenback),
- And, everything real, tangible and useful is priced in US$: crude oil, commodities, Boeng 777s, F-16s, B-52s…
We “Austrians” should bear in mind the above qualifications when ascribing the current strength of the US$ to the (supposedly) competitiveness edge of the US economy, and the lack of (consumption?) growth in the trade-surplus countries, lest we lend credibility to Dr Bernanke’s lie? (at the Senate confirmation hearing)

David White November 24, 2005 at 8:04 am

“Asians now own enough U.S. dollar assets to buy a controlling interest in every company on the Dow. They have enough T-bonds to destroy the U.S. economy on a whim.”

“The entire homeland economy now depends on the savings of poor people on the periphery to keep it from falling apart.”

– Bill Bonner and Addison Wiggin, “Empire of Debt”

We have no capital account surplus, in other words; we are simply borrowing to buy that which we can’t otherwise afford, the only question being when, not if, the Fed decides to inflate our debts away and when, in response, our creditors start dumping their increasingly worthless greenbacks — at which time our economic house of cards comes crashing down.

Let’s face it, there is nothing “Austrian” about our trade deficit; rather, it is all just Keynesianism coming to its logical conclusion.

Jonathan November 24, 2005 at 9:00 am

Well put David.

Maybe Thorsten should have incorporated a little on how excessive money+credit expansion works with this ‘new growth theory’?

One could argue that it leads to capital depletion, increased debt and excessive consumption. This in turn is supported by the mercantilist policies of many Asian nations only too willing to accept the dollars in exchange for their currency to stem its appreciation. Or what about the trillions managed by hedge funds who in one form or other are simply levered traders, in their simplest form funding with artificially low rates and buying longer dated assets. Are they doing this because they think the U.S. is a great bastion of freedom or because it’s simply offering cheap money?

All due respect but how can an Austrian write such an article without mentioning what role the abuse of the unit of currency has had in bringing about this state of affairs.

New growth theory my arse.

N. Joseph Potts November 24, 2005 at 9:24 am

I really don’t see the difference between the gold-standard scenario of balance-of-trade “imbalances” (another falsely value-laden term) and the floating-exchange-rate scenario. The account given in this article matches all the other accounts of the gold-standard scenario in at least appearing to overlook capital flows, which everywhere and always offset trade flows in the opposite direction. In fact, movement of gold (or whatever is money) is ITSELF a payment flow (capital or trade – makes no difference), alarming mercantilists and other dupes of superstition.

If anyone cares to explain – on or off the blog – where I’ve gone wrong, I’m all ears.

LibertyFirst November 24, 2005 at 9:47 am

I’m not an economist, and I’d like to have some feedback about some strange ideas I have about US-China economic relations.

US people consumes too much and saves almost nothing. US firms don’t know where too look for fundings and sell US assets abroad.

The trade imbalance is thus given by excess consumption and insufficient savings, that causes goods imports in exchange with assets.

The demand for foreign goods increases the profitability of foreign investments, thus causing the enormous growth of chinese economics… China’s growth is a Greenspan’s miracle!

On the other hand, US economy is so full of debts that no real increase of the interest rate will be feasible without causing widespread bankruptancy…

Besides, this policy (which began in the Reagan era) is causing disinvestment in the US and low wages among generic workers.

Am I right?

LF

Stefan Karlsson November 24, 2005 at 12:02 pm

I had a article on the same issue earlier this year and there I described two possible fallacies regarding the trade gap.

http://mises.org/daily/1762

One is the protectionist/mercantilist view that trade deficits is always bad, the other is what I called the supply-side view that they are never bad. I am afraid that Polleits article comes dangerously close to the second one.

He points out that trade gaps could be driven by capital flows to countries with higher economic growth, in my article I mentioned how there is large flows from stagnating Germany to fast growing Estonia, capital flows which are mirrored by a large trade surplus in Germany and a large trade deficit in Estonia.

But that is not the only possible reasons for trade deficits . It could also be the result of low savings, and this is certainly true in the case of America. The household savings rate is negative and the net national savings rate is near zero (it was in fact below zero during the third quarter but this can be attributed to the temporary factor of Katrina).

This reflects in part budget deficits (which Polleit mentions as well as a inflationary monetary policy which have undermined savings and created malinvestments and in part also that Americans seem to have a higher time preference than non-Americans.

Especially to the extent this low savings rate is because of government policy, this is not a good thing and will reduce income growth.

Moreover, the capital inflow to America also reflects the housing bubble .

While the U.S. economy is indeed growing faster than Western Europe and Japan, it is not growing faster than the world economy as a whole because emerging economies, especially East Asia excluding Japan and Eastern Europe is growing much faster, so I don’t think it can be attributed to this. Instead it reflects lower savings which in turn reflect in part government policy and in part voluntary time preferences.

David White November 24, 2005 at 5:04 pm

Stefan,

There’s nothing wrong with trade deficits if you’ve got the money to pay for the goods you’re buying from abroad. Here in the US, however, we don’t have the money, which is why we are not only not growing as fast as Western Europe and Japan; we aren’t growing at all.

To quote once again from “Empire of Debt”:

“An entire American generation has grown up being told that it could spend its way to prosperity. Snow, McTeer, Greenspan, Bernanke — they all still believe it. Debt is no problem, they say. Spend, spend, spend. American spending created a boom in China, where the average person works in a sweatshop, lives in a hovel, and save 25 percent of his earnings. … Meanwhile, in the United States, the average man lives in a house he can’t pay for, drives a care he can’t afford, and waits for the next shipment from Hong Kong for distractions he can’t resist. He saves nothing and believes the Chinese will lend him money forever, on the same terms.”

“In the first half of 2005, Americans got poorer, not richer — at the rate of $80 million an hour. Their system of imperial finance was impoverishing them. Even that is not the worst of it, because it also reduced their ability to compete in the modern world. While they were providing a public good — at a loss — their competitors were saving money, building capital and expertise, setting up factories, and taking the market share away from them. Each year, Asians produce more of what Americans buy, and Americans produce less of what anyone buys. Products leave Asia for North America. Money leaves North America for Asia. The money comes back to America within days. America’s economists breathe easy. What is there to worry about, they ask, as long as it comes back to us. ‘It is a form of tribute,’ they claim; the empire works. But it works in a perverse way. The money that comes back is not the same money that left. It has been transformed: It goes out as an asset and comes back as a liability.”

olmedo November 24, 2005 at 10:08 pm

“Here in the US, however, we don’t have the money, which is why we are not only not growing as fast as Western Europe and Japan; we aren’t growing at all.”

a small correction here: unfortunately, the US do have the “money” to pay for the deficit(and have a technology called the printing press to garantee it”) the problem is, it doesnt has the assets to back “the money” up.

when people abroad begin to discover this fact all hell will break loose.

the situation with the US economy resembles the typical inflationary boom so common in latin america: first , everything seems all right, goverment spends and the economy starts growing like a rocket, internatioanl financier rush in to leveraged the boom and keep it growing further, ” a miracle” is being called. then , the mal-investments start becoming so evident that people take their money a run….then a crisis. ex: argentina2001, mexico 94 and so on…..

the only diference here is that the US is the leading economy in the world and its currency the only reserve currency in the world.(oil is still being sold in US dollar denominations). but this is “borrowed time” and when the time comes, argentina´s crisis will be peanuts beside this one which is coming sooner or later.

Just apply ABCT(austrian business cycle theory) to world trade and this will become aparent to you.

Olmedo

Yancey Ward November 24, 2005 at 10:44 pm

It is all well and fine to point to the flip side of the trade deficit and call it the capital surplus. However, it seems to me that the missing discussion here is the identity of the goods the United States is importing, and their relative distribution between final consumption goods and actual capital goods. I am open to the idea that large, continuing trade deficits need not be a catastrophe, but I would like to see the actual argument fleshed out with some deeper detail.

Yancey Ward November 24, 2005 at 10:48 pm

Also, I think it is possible that if the distribution of the imports is skewed towards final consumption goods, that this may have an impact on the distribution of the domestically produced goods. For example, the United States imports more final consumption goods, but then is able to produce more production goods, and vice versa. Does anyone have any thoughts or links to those that do?

billwald November 25, 2005 at 9:42 am

“In the first half of 2005, Americans got poorer, not richer”

Americans didn’t “get” poorer, excepting the storm damaged people, they chose to become poorer. For example, the third of all new car buyers who are “upside down” and the half of all credit card holders who carry an average $8,000 balance.

The reason for the trade deficite is that Americans want Chinese junk more than they want cash savings.

If Asians did buy controlling interest in the DOW list we might have better run companies.

Stefan Karlsson November 26, 2005 at 6:19 am

David , this “There’s nothing wrong with trade deficits if you’ve got the money to pay for the goods you’re buying from abroad.”, was my entire point.

But I must object to the calculations of Americans becoming $80 million poorer per hour. At first, I was merely puzzled by that number and couldn’t figure out just what they were talking about. But after multiplying that $80 million by 24 I realized that they were refering to the current account deficit.

And equalizing current accunt balances with wealth developments is just crude mercantilism, something which I and others have repeatedly refuted.

More valid analysis would look at real income and real wealth developments and this was positive during the first half of the year, although it turned negative during the third quarter because of the large scale destruction from Katrina.

Dennis Sperduto November 26, 2005 at 9:07 am

I would like to make two points. The first is a question: what part of the U.S. capital account surplus is made up of foreign purchases of U.S. government debt? As Rothbard has demonstrated, government spending can not be considered investment. Furthermore, the vast majority of U.S. government spending is on current consumption and not on capital goods. It can be reasonably argued that a major part of foreign “investment” in the U.S. is actually funding U.S. consumption spending, with this investment the result of the mercantilist policies of many of our trading partners. Secondly, and others above have mentioned this issue, the maintenance of the U.S. trade deficit and capital account surplus is strongly supported by the fact that the U.S. dollar remains the world reserve currency. If this should no longer be the case in the future, I believe a mitigation of the trade deficit/capital account surplus would occur.

Jim Bradley November 26, 2005 at 9:47 am

Article would be true for a free market in currencies — but foreign central banks are committed to competitive devaluations (benefiting the politically connected exporters receiving new money first), the dollar is the reserve asset of the world (so the U.S. can misbehave for longer), and oil is priced in dollars as are many other essential goods (boosting demand for dollars and demand for dollar denominated financial assets). A substantial portion of the dollar demand which offsets the issuance of currency and debt is because of the depth and broad acceptance of U.S. dollars.

At some point, excess dollars will cause hard goods to be safer than currency, at which point gold will likely rally in ALL currencies (something that is recently happening). It remains to be seen whether Gold Bull stage II is the actual beginning of a flight out of currencies. Any other currency that has the potential for absorbing the amount of dollar trade and remain decently collateralized could be a dollar competitor — but it would take some time. The Fed’s game is to oscillate the dollar depreciation and so catch speculators short dollars and thus spur dollar demand only to later devalue.

Vince Daliessio November 26, 2005 at 11:55 am

billwald, I hope you will forgive me if I point out that the Chinese “junk” Americans are buying is not the problem – it is the high-quality, low-priced items coming from China that represent the larger “threat” to the US economy, whatever we mean by that.

The fundamental problem remains the continual draining away of wealth due to US government inflation. Consumers are simply responding rationally in a market where equities are flat, taxes are high, and each dollar grows less valuable every second it is held – they get rid of them as fast as they can, not only their own dollars, but other peoples’ as well. The flood of inexpensive Chinese products serves as a kind of ersatz or virtual deflation, substituting (poorly) for the real deflation that would be our birthright in a hard-currency world.

Paul Edwards November 26, 2005 at 3:17 pm

IMHO Vince nailed it:

“The fundamental problem remains the continual draining away of wealth due to US government inflation.”

If all roads lead to Rome, then the symptoms discussed on this thread are the roads and banking inflation, both domestic and foreign, is Rome.

Mamurjon November 26, 2005 at 6:51 pm

Dear Prof. Polleit,

Please, come down from your ivory tower!

Please, search for articles on Chinese oil company CNOOC’s bid for American oil company UNOCAL.

Chinese could not purchase it no matter how good the offer was. Americans simply did not want their green paper back in exchange for real assets.

This trade deficit of the USA is only continuing because of the puppet governments around the world, and huge economic lie about USA economic power – it is only a fog.

Please, read this one article on CNOOC’s bid, and you might get the matter.

mamur
Lecturer, Economics
Chicago, the USA

billwald November 29, 2005 at 11:44 am

“On the other hand, US economy is so full of debts that no real increase of the interest rate will be feasible without causing widespread bankruptancy…”

I suspect that American personal debt per family doesn’t plot on a normal curve but is high on the ends. When the crash comes some will do just fine.

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