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Source link: http://archive.mises.org/4638/does-the-widening-us-trade-deficit-pose-a-threat-to-the-economy/

Does the widening US trade deficit pose a threat to the economy?

February 3, 2006 by

Most economists are of the view that the ever-growing US trade deficit and the subsequent expanding foreign debt pose a threat to the well-being of Americans. What is then required, so it is held, is to set in motion policies that will help curtail the widening trade imbalances between the United States and the rest of the world. Focusing on the trade deficit as the supposedly major problem of the US economy only diverts the attention from the real culprit, which is the US central bank. FULL ARTICLE

{ 31 comments }

Marco Saba February 3, 2006 at 12:34 am

One may wonder what the USSS (the intelligence arm of the Department of the Treasury) is waiting for to stop the continuing counterfeiting operations at the Federal Reserve. The USSS is entitled to do that, but somehow it seems they lack Austrian School education. Or, are they in bed with the forgers? Else, are they insane?

Yancey Ward February 3, 2006 at 9:15 am

It clearly appears that “economists” try to blame the actions of private parties for the mistakes being made in the realm of the economy. Apologists for the state, almost every single one of them.

Venkat Manakkal February 3, 2006 at 9:21 am

A look at the DOW index measured in gold, and the decline in value of the dollar as a percentage of its constitutionally mandated value is revealing.

See my blog for the full essay:

https://rayservers.com/new/blog/the-decline-and-fall-of-the-us-dollar

Roger M February 3, 2006 at 1:19 pm

Good insights! Check out ft.com/forumwolf for a taste of the confusion that reins on this issue.

Also, while working on an article about manufacturing, I regressed productivity on private fixed investment and found a .95 r-square. I then differenced each series, tried again and got a still significant r-square of about .27. Then I regressed the merchandize trade deficit on private fixed investment and found the same tight correlation. I don’t quite know what to make of it, but it appears that the merchandize trade deficit is financing investment in manufacturing in the US. Those series are available on FRED, the Fed Reserve web site if you want to try it.

Steve February 3, 2006 at 1:22 pm

Why all this ado about the “printing” of money? Ain’tcha heard yet? Money is mostly electronic these days – the check cards at the Walmarts and the supermarkets, the credit transactions done via the Net, the automatic deposits of our “pychecks” straight to our bank account, et al. Paper money is just for small on-the-go stuff anymore.

Heck, the Feds don’t even have to print money anymore. Why bother when they can increase/decrease the supply of money with a few clicks of a mouse? Printing money is about as archaic as tape drives for back ups in the computer world. Well, ok, so tape drives are still used, but only for long term, rarely accessed records. Most computer back-ups are done remotely with RAID arrays and server rooms. Likewise, printing money is for nothing else than “legacy applications”.

Paul Edwards February 3, 2006 at 4:03 pm

This article is right on the money. I always enjoy an article on money that focuses on the essentials: money creation and how it is at the root of so many interesting symptoms that often get cited as root problems themselves.

“It must be stressed here that it is not trade deficits that undermine the process of wealth formation but rather the loose monetary policy of the central bank.”

“While the widening trade deficit is not the cause of the economic illness, it also doesn’t lead to a fall in the currency rate of exchange as popular thinking has it. The fundamental determinant of the currency rate of exchange is its relative purchasing power, which in turn mirrors the relative average price in an economy.”

“So if the dollar falls as most economists are suggesting, it would have to happen not on account of the trade deficit but on account of the fact that the rate of dollar printing is going to be much faster than the rate of printing of other country’s monies — all other things remaining equal.”

Peter February 3, 2006 at 6:25 pm

Well, of course other countries will print more to avoid their currencies getting “too high” and “hurting exporters”, so they’ll all collapse more or less together. But hard money (gold, silver) will go through the roof.

Stefan Karlsson February 3, 2006 at 6:58 pm

I agree with Shostak that the trade deficit per se is not the fundamental problem, but rather the Fed’s inflating.

But he is also wrong on a number of points. First of all, while a trade deficit does not necessarily reflect lower savings (it could also reflect higher investments), it could reflect lower savings and that is what has happened in America recently. Shostak in his article confuses the issue by conflating savings and investments. For example:

“We have seen that an American individual has exchanged unconsumed final goods, i.e., saved goods for money — claims on real savings. Now if the Chinese producer transfers the received claims in return for his goods to an American corporation this will lift the pool of real savings at the disposal of Americans. Because real savings were obtained from China — via the import of Chinese consumer goods — in addition to the real savings generated by the American producer.”

But this assumes that savings by Americans is unchanged. But borrowing to buy Chinese goods means dissavings, so savings by Americans are falling. This won’t mean reduced investment as this lowered savings is cancelled out by the savings from the Chinese, but it won’t mean a increase either.

And this was even more confusing:

“For instance, Americans are importing tools and machinery from Japan and exporting consumer goods to Japan. In terms of the net flow of money it turns out that the value of American imports from Japan exceeds exports to Japan — i.e., a trade deficit emerges. The conventional wisdom would argue here that Americans are now saving less and are in fact funded by the Japanese. In reality the exact opposite takes place. Americans are in fact supplying real savings — final consumer goods — to Japanese producers of tools and machinery. In other words, it is the American real savings that in fact support (i.e., fund here) the Japanese producers of capital goods. Observe that Japanese tools and machinery do not as yet produce any real wealth, they are just potential future wealth.”

I found it odd to see that only current consumption is here considered to be wealth. Even odder that Shostak tries to deny reduction in savings by re-defining consumption as savings.

Then Shostak tries to deny the significance of the trade deficit by quoting Rothbard that one should be able to reduce it down to individual level. I agree with that, but I disagree with him if he says that individual trade deficits are unimportant. People who borrow (which is to say have what one might call “individual trade deficits”) for reckless consumption and/or for bad investments are likely to get into financial trouble. On the other hand, if they borrow for useful investments, then the loans will benefit them. And as I pointed out in my article on the subject, what is true for an individual is true for aggregates of individuals as well. If the trade deficit reflects reckless consumption and/or malinvestments, then its bad. If it reflects productive investments then it is good (Sometimes a deficit can reflect both things).

And related to this is the fact that while in this article the trade deficit issue is separated from the issue of monetary inflation, in reality they are linked. Trade deficits are again not the underlying problem here, but they are a symptom of
how the Fed have discouraged savings and encouraged malinvestments by manipulating interest rates.

Steve February 3, 2006 at 11:29 pm

Just how is the “saving” rate determined? By normal, old-fashioned passbook accounts? You’ve got to be kidding!! Nobody in their right mind keeps most of their savings in a standard passbook account anymore. They keep most of their savings in a 401k, Roth, or IRA account, or some kind of investment vehicle like mutual funds. The only monies that are kept in a regular savings account are for emergencies like car repair or home maintenance.

So if the economists, Austrian or otherwise, are still using passbook savings accounts as the typical measure of Americans’ saving rate, then they are badly mistaken. Come on, Austrians! It’s time to join the twenty-first century and quit talking about things like “rate of saving” and “printing money”. (I already posted a comment about the printing of money earlier.)

Peter February 3, 2006 at 11:42 pm

Steve: it’s not the fault of “Austrians” that you cluelessly misinterpret things. E.g., the fact that most money is purely electronic, not printed paper, is totally irrelevant; making more electronic money is still “printing money”.

Charles Parker February 3, 2006 at 11:58 pm

Americans are paying for Chinese goods in part by liquidating assets, like home equity. The Chinese are using the dollars received for their goods to purchase American assets.

This will ultimately end badly for both sides. The Chinese will have over invested in capital goods for producing consumer goods for which there are no consumers. They will also own assets declining in value. Americans will have more toys than they need and far fewer assets and means of production.

Paul Edwards February 4, 2006 at 2:56 am

Stefan,

Frank’s point that you found confusing was that trading away present consumption goods for (future) capital goods is investment. And trading away future capital goods for present consumption goods is true blue consumption. So even if there were a measurable trade deficit to the people buying the capital goods, it could still be that nation, on net that is doing the investing, not the consuming nation with the dollar trade surplus.

You disagree with minimizing the importance of trade deficits with “Then Shostak tries to deny the significance of the trade deficit by quoting Rothbard that one should be able to reduce it down to individual level.” Because “what is true for an individual is true for aggregates of individuals as well”

But Frank also quotes Mises as saying

“While an individual’s balance of payments conveys exhaustive information about his social position, a group’s balance discloses much less. It says nothing about the mutual relations between the members of the group. The greater the group is and the less homogeneous its members are, the more defective is the information vouchsafed by the balance of payments. The balance of payments of Denmark tells more about the conditions of the Danes than the United States balance of payments about the conditions of the Americans.”

and Frank sums up the dubiousness of paying attention to national balance of payments with this:

“Luckily we do not have balances of payments between cities and it seems that no one is concerned with this issue. Why then be concerned with the so-called international trade account?”

The point is, we should all individually be concerned about our own debt situation and the soundness of our investments. But as both Mises AND Rothbard agree, “The greater the group is and the less homogeneous its members are, the more defective is the information vouchsafed by the balance of payments.” Interpretation: watch your personal finances yes, worry about national balance of payments no.

Your points that it is a problem to be borrowing for bad investments are true, but Frank’s article shows that national trade deficit numbers simply don’t convey that kind of information. The article does that by showing instances where these numbers are irrelevant to the question of the quality and nature of investments and trade. So the bottom line is that there is no praxeological basis to be concerned about trade balances ever. There are other issues such as inflation which are concrete problems with clear praxeological paths of analysis which lead us to know they will induce economic distortions, reduce capital formation, productivity and wealth. Trade imbalances, for all we ever know are just fine. And if they are not, the source of that problem is banking policy of one or both governments of the nations concerned.

Peter February 4, 2006 at 8:46 am

Peter: I’m not as clueless as you may think, lol. I just wanted to make sure we have the term “printing money” straight. Ok, so “printing money” can also mean an artificial increase in the electronic money supply, too. Now I know we have our syntax straight. The point I was also making is that we need new terms to reflect the current century.

Stefan Karlsson February 4, 2006 at 10:48 am

Paul, you’re attacking a straw man. One shouldn’t of course *only* look at trade imbalances as that could be misleading (All numbers -including money supply- could be misleading if looked at in isolation).

But if you combine it with other indicators like asset prices, debt levels etc. it is a good indicator of just how great distortions have been created-or in the case of “good” trade how helpful it have been. A large and increasing trade deficit in the context of rapid credit expansion and soaring asset prices indicates that the people in that country have been induced to reduce their savings and over-invest.

That individual and corporate balance sheets in any country are heteogenous is true, but irrelevant. Economic imbalances does not require that everyone in a country participates in the trend. Numbers showing rapid credit-driven money supply expansion does not mean that everyone have been taking part in the credit expansion, but surely you wouldn’t argue that money supply is irrelevant because of that?

Gary Anderson February 4, 2006 at 11:06 am

I was thinking that maybe the USA has savings, not just because Bush said we are wealthy to the Japanese recently, but because this savings is actually being held primarily by corporations. But then, the corporations may turn out to be agents of deflation, just like Japanese savers, because it seems that they do not want to spend those savings. If they do not want to spend them, and the consumer is in debt up to his gills, won’t this result in deflation? There will then, not be the handover that so many are counting on.

Paul Edwards February 5, 2006 at 2:45 am

Stefan,

“One shouldn’t of course *only* look at trade imbalances as that could be misleading (All numbers -including money supply- could be misleading if looked at in isolation).”

I’m not saying that we should not *only* look at trade imbalances because they could be misleading. I’m saying we should ignore national trade imbalance figures all together because they are completely and utterly meaningless taken in isolation or not in isolation. They could reflect something very good, bad or indifferent and they cannot ever provide the insight necessary to know which.

The problem is never that there are or are not trade imbalances, the problem is always the respective central bank’s nutty monetary policies as well as how much spending do these governments do. How are these banks inflating their respective currencies?

Talk about trade balances is a distraction that wastes people’s mental bandwidth. I think this article makes a very strong argument for focusing on the fundamentals such as bank intervention in the money supply and avoiding tangential and spurious scrutiny of such things as trade imbalances.

Stefan Karlsson February 5, 2006 at 12:44 pm

Paul, you’re merely asserting your points, you’re not providing any arguments for them.

I agree of course that we should look at central bank (and fractional reserve bank) inflating of the money supply, but if one don’t look at other indicators one will not know what the effect of the inflating is. We cannot a priori know what the effect of a money supply increase will be. It could have the effect of bidding up consumer prices, it could have the effect of bidding up stock prices, it could have the effect of bidding up housing prices or it could end up not raising any prices at all (if the early receivers increase their money holdings by an equivalent amount and do not actually use the money for anything.)The effect of money supply expansion was very different during the 1920s (stock price bubble) and the 1970s (high consumer price inflation).

In the cases where money supply expansion results in asset price bubbles, it tends to be followed by rising debt levels and weakening balance sheets something which manifests itself in a rising trade deficit or a falling trade surplus. We have seen recently how housing price bubbles in America, Australia, Spain, Italy, France and Britain have been associated with rising trade deficit. And recently in Sweden the low interest rate policy of its central bank, Riksbanken, have been followed by double digit increases in house prices and household debt something which in turn have resulted in a dramatic decline in the Swedish trade surplus.

Paul Edwards February 6, 2006 at 12:09 am

Stefan,

You are correct that i was merely asserting my points. But in my defense, I did that because it seemed to me that my point had not been made entirely clear up until then.

I almost entirely agree with your comments in the second paragraph immediately above, with the exception of one: that an increase in the money supply could possibly result in not raising prices at all. Any increase in the money supply, even if it results only in an increase in cash holdings on the part of the first receivers, must result in a decrease in purchasing power of at least those competing for resources with these first receivers increasing their holdings. This is true because these first receivers are able to increase their cash holdings without abstaining from purchasing. Without this new money, they would have to abstain from buying to increase their cash holdings. And if they had abstained from buying, prices seen by their competitors for resources would have been bid down due the reduced demand for goods obtained while cash holdings were increased.

In answer to the third paragraph, again I agree with most of it. However, I would say that if only a single country in question inflated, and all other countries refrained from inflating, there would be very little impact on the trade balance of this inflating nation, over anything other than a very short near term. This is because relative purchasing powers of currencies would change, as Frank’s article points out, and immediately exchange ratios would alter in anticipation of this on the international exchange markets. This change in exchange would make it more costly for the inflating nation to import goods, and make their exports again cheaper. Therefore, imports would be naturally restricted and exports encouraged in this way. The trade imbalances would be governed by these markets, relative currency purchasing powers, and exchange rates.

Our trade deficit with China, for instance is not due to US inflation, but instead Chinese inflation in combination with the Chinese government’s concerted efforts of propping the US dollar up in the foolish pursuit of assisting the Chinese export industry into the US.

In the end, this merely results in a gift to the US consumer from the Chinese government, at the expense of the Chinese consumer. It is interesting to follow the deleterious effects of inflation, and government intervention in the market is always a nasty thing; but a trade deficit per se is nothing to worry about.

Stefan Karlsson February 7, 2006 at 9:57 am

“Any increase in the money supply, even if it results only in an increase in cash holdings on the part of the first receivers, must result in a decrease in purchasing power of at least those competing for resources with these first receivers increasing their holdings. This is true because these first receivers are able to increase their cash holdings without abstaining from purchasing. Without this new money, they would have to abstain from buying to increase their cash holdings. And if they had abstained from buying, prices seen by their competitors for resources would have been bid down due the reduced demand for goods obtained while cash holdings were increased.”

But this assumes that the new receivers didn’t already make all the purchases they deemed necessary and didn’t want to hold all additional money they can get. A assumption which to be sure
is true in most cases, but by no means is necessarily true in all cases. It could be that they in the absence of more money would still have made all of their purchases and instead abstained from increasing cash holdings.

“I would say that if only a single country in question inflated, and all other countries refrained from inflating, there would be very little impact on the trade balance of this inflating nation, over anything other than a very short near term. This is because relative purchasing powers of currencies would change, as Frank’s article points out, and immediately exchange ratios would alter in anticipation of this on the international exchange markets. This change in exchange would make it more costly for the inflating nation to import goods, and make their exports again cheaper. Therefore, imports would be naturally restricted and exports encouraged in this way. The trade imbalances would be governed by these markets, relative currency purchasing powers, and exchange rates.”

True, the initial real exchange rate depreciation would to some extent cancel out the trade deficit increasing/trade surplus decreasing effect of the increased domestic demand for foreign goods created by the credit expansion. But only partially, as the depreciating currency would also entice foreign purchases of domestic assets hoping to benefit from the expectation of future real appreciation that the current real depreciation have created. Even stronger will that effect be in asset price bubbles as many foreigners buy the domestic currency to participate in the bubble initially created by monetary policy.

A empirical case in point is again Sweden, where the sharp drop in the foreign exchange value of the Swedish krona in the wake of the cut in interest rates from 2% to 1.5% June last year, made some people expect that the trade surplus would if anything increase. But instead it have fallen sharply, because of the sharp increase in demand created by the credit expansion.

“Our trade deficit with China, for instance is not due to US inflation, but instead Chinese inflation in combination with the Chinese government’s concerted efforts of propping the US dollar up in the foolish pursuit of assisting the Chinese export industry into the US.”

The case of central banks buying foreign securities to hold down the foreign exchange value
of its currency is a somewhat special case, which again underscores my point about the heterogenous effect of inflating. In this case the short-term depreciation of the currency will be much greater than in other forms of inflation, while there at the same time will be little or no increase in domestic demand from it. So in this case net exports will increase.

But this hardly contradict what I’ve previously said about how trade deficits can have different causes , both sound and unsound (I would btw not list central bank currency interventions as a sound one), and that we can through closer inspection of the data of the specific case see to what extent see which factors that have created it.

Paul Edwards February 7, 2006 at 11:32 am

“But this assumes that the new receivers didn’t already make all the purchases they deemed necessary and didn’t want to hold all additional money they can get. A assumption which to be sure is true in most cases, but by no means is necessarily true in all cases. It could be that they in the absence of more money would still have made all of their purchases and instead abstained from increasing cash holdings.”

But Stefan, it is indeed necessarily true in all cases. We can only do one of three things with our money, and doing more of the one, must necessarily restrict us from doing as much of the other two. All other things being equal, which is the only way to analyze a single perturbation, one must abstain from making one’s funds available in exchange for goods, if one is to increases his cash holdings. An increase in cash holdings, which is as deliberate an action as is spending on consumption or investments, is an increase in the demand for money. It is a decrease in the demand for goods. It should result in the decrease in the price of affected goods. This is a priori economics.

If credit expansion is applied to an increase in cash holdings, this means that a concomitant reduction in the demand for goods that would necessarily have obtained did not. Hence prices will be higher than they otherwise would have been had that fraudulent loan not been made.

nick February 7, 2006 at 11:36 am

“Luckily we do not have balances of payments between cities and it seems that no one is concerned with this issue. Why then be concerned with the so-called international trade account?”

And I suspect each city in these cases doesn’t have its own currency.

Add in foreign exchange, and there are issues.

billwald February 7, 2006 at 12:50 pm

If there was a single world currency then the problem would disappear?

Apparently the Chinese and Japanese know the difference between saving and gambling. Putting money into an IPO or a stock trading at more than 30 times earnings isn’t saving.

Paul Edwards February 7, 2006 at 4:40 pm

“If there was a single world currency then the problem would disappear?”

You bet, with one small proviso: that this currency were a 100% honest and free gold coin standard.

Alex MacMillan February 7, 2006 at 5:33 pm

All right, I can see there has been much discussion of the issue, but I’ve come late to the party. The current account bal=National investment-national saving. Therefore a current account deficit mirrors the fact that national saving is less than national investment. Good or bad? One is tempted to say if national investment has drastically increased to create this situation, then the situation,including the trade deficit, is good. Likewise, one is tempted to say that if a drastic drop in national saving has occurred, then the situation involves trading off future consumption for present consumption. That is to say, augmenting present living standards at the expense of lower future living standards of domestic citizens as future interest and dividends must be paid to foreigners. In the case of the United States, recent dramatic increases in the current account deficit have been caused by the absorption of domestic savings by federal government deficits. Again, one can’t say this is bad, but it will mean future lower American living standards than otherwise when the foreign debt is serviced.

Stefan Karlsson February 9, 2006 at 10:06 am

“If there was a single world currency then the problem would disappear?”

Given that the problems I described were related to the manipulation of interest- and exchange rates by the various national governments, yes indeed, particularly if we’re talking about a world currency based on gold.

Alex MacMillan February 9, 2006 at 5:26 pm

Stefan, are you saying that the federal deficit has had no part in creating the current account deficit?

Alex MacMillan February 9, 2006 at 5:27 pm

Stefan, are you saying that the federal deficit has had no part in creating the current account deficit?

Ryan Pitylak February 20, 2006 at 9:36 pm

The question of whether America will see economic turmoil in the near future depends largely on future consumption, savings, and government spending decisions. If the American deficit is brought under control, then the position of foreigners is not as important. Otherwise, the American deficit can continue as long as investors or central banks are willing to put their surplus savings into America. For the near future, this seems to be what will happen. Gradually, foreigners may reduce the level of savings that they commit to America, which would put strain on the America economy. If America lowers its desired deficit position in tandem with foreigners’ decreased willingness to purchase American bonds, then a hard landing could be avoided. The debt-to-GDP ratio will be a determining factor, which will become a problem in the long-run if the deficit continues. For these reasons, the deficit must lower in the future, but there is no immediate need for this.

Jordi Franch May 23, 2006 at 6:44 am

Professor Shostak says “According to the charts below the yearly rate of growth of American money AMS has been trending down since 2005. In contrast the growth momentum of Japanese and the Euro-zone, money AMS has been trending upwards since 2005. Thus in January 2005 the yearly rate of growth of money AMS stood at 7% in the United States, 10.8% in the Euro-zone and 4% in Japan. In December 2005 the yearly rate of growth stood at 2.1% in the United States, 12.2% in the Euro-zone, and 5.4% in Japan.”
Why, then, to the light of these facts is the euro gaining value relative to the dollar?

Pete Murphy April 28, 2008 at 7:20 am

Our enormous trade deficit is rightly of growing concern to Americans. Since leading the global drive toward trade liberalization by signing the Global Agreement on Tariffs and Trade in 1947, America has been transformed from the weathiest nation on earth – its preeminent industrial power – into a skid row bum, literally begging the rest of the world for cash to keep us afloat. It’s a disgusting spectacle. Our cumulative trade deficit since 1976, financed by a sell-off of American assets, is now approaching $9 trillion. What will happen when those assets are depleted? Today’s recession may be just a preview of what’s to come.

Why? The American work force is the most productive on earth. Our product quality, though it may have fallen short at one time, is now on a par with the Japanese. Our workers have labored tirelessly to improve our competitiveness. Yet our deficit continues to grow. Our median wages and net worth have declined for decades. Our debt has soared.

Clearly, there is something amiss with “free trade.” The concept of free trade is rooted in Ricardo’s principle of comparative advantage. In 1817 Ricardo hypothesized that every nation benefits when it trades what it makes best for products made best by other nations. On the surface, it seems to make sense. But is it possible that this theory is flawed in some way? Is there something that Ricardo didn’t consider?

At this point, I should introduce myself. I am author of a book titled “Five Short Blasts: A New Economic Theory Exposes The Fatal Flaw in Globalization and Its Consequences for America.” To make a long story short, my theory is that, as population density rises beyond some optimum level, per capita consumption begins to decline. This occurs because, as people are forced to crowd together and conserve space, it becomes ever more impractical to own many products. Falling per capita consumption, in the face of rising productivity (per capita output, which always rises), inevitably yields rising unemployment and poverty.

This theory has huge ramifications for U.S. policy toward population management (especially immigration policy) and trade. The implications for population policy may be obvious, but why trade? It’s because these effects of an excessive population density – rising unemployment and poverty – are actually imported when we attempt to engage in free trade in manufactured goods with a nation that is much more densely populated. Our economies combine. The work of manufacturing is spread evenly across the combined labor force. But, while the more densely populated nation gets free access to a healthy market, all we get in return is access to a market emaciated by over-crowding and low per capita consumption. The result is an automatic, irreversible trade deficit and loss of jobs, tantamount to economic suicide.

One need look no further than the U.S.’s trade data for proof of this effect. Using 2006 data, an in-depth analysis reveals that, of our top twenty per capita trade deficits in manufactured goods (the trade deficit divided by the population of the country in question), eighteen are with nations much more densely populated than our own. Even more revealing, if the nations of the world are divided equally around the median population density, the U.S. had a trade surplus in manufactured goods of $17 billion with the half of nations below the median population density. With the half above the median, we had a $480 billion deficit!

Our trade deficit with China is getting all of the attention these days. But, when expressed in per capita terms, our deficit with China in manufactured goods is rather unremarkable – nineteenth on the list. Our per capita deficit with other nations such as Japan, Germany, Mexico, Korea and others (all much more densely populated than the U.S.) is worse. In fact, our largest per capita trade deficit in manufactured goods is with Ireland, a nation twice as densely populated as the U.S. Our per capita deficit with Ireland is twenty-five times worse than China’s. My point is not that our deficit with China isn’t a problem, but rather that it’s exactly what we should have expected when we suddenly applied a trade policy that was a proven failure around the world to a country with one sixth of the world’s population.

Ricardo’s principle of comparative advantage is overly simplistic and flawed because it does not take into consideration this population density effect and what happens when two nations grossly disparate in population density attempt to trade freely in manufactured goods. While free trade in natural resources and free trade in manufactured goods between nations of roughly equal population density is indeed beneficial, just as Ricardo predicts, it’s a sure-fire loser when attempting to trade freely in manufactured goods with a nation with an excessive population density.

If you‘re interested in learning more about this important new economic theory, then I invite you to visit my web site at OpenWindowPublishingCo.com where you can read the preface for free, join in the blog discussion and, of course, buy the book if you like. (It’s also available at Amazon.com.)

Please forgive me for the somewhat “spammish” nature of the previous paragraph, but I don’t know how else to inject this new theory into the debate about trade without drawing attention to the book that explains the theory.

Pete Murphy
Author, Five Short Blasts

supposn June 13, 2009 at 10:47 am

A nation’s global annual trade deficit is always a detrimental to its gross domestic production, (GDP). The detriment to the GDP always exceeds the amount of the trade deficit. Anything detrimental to the GDP is generally detrimental to the median wage.
[Refer to
http://www.USA-Trade-Deficit.Blogspot,Com ].

Annual changes of our GDP adjusted for changing value of the U.S. dollar, (rather than stock market indicators), are our best objective gage of wealth production. Median wage relative to the GDP indicates the extent of that wealth’s disbursement throughout the population. The GDP and median wage are among, (if not the) most significant economic indicators.

No wealth is directly produced by savings or investment. Only after production of goods or services are induced by employing effort and/or resources, (e.g. savings, investment), has any wealth been produced. When such production of wealth occurs, it is fully reflected within the GDP. That is why savings and investment are considered as transfers of wealth and are not reflected within the GDP.

Frank Shostak urges us to ignore trade deficit’s net affects upon our nation and consider only individual global trade transactions. I have no doubt that most principle parties derived net profit from their participation within global trade transactions.

Governments sometimes recognize that a contract advantageous to its principle parties may be contrary to the community’s best interest. That for example is the justification of our zoning, building and environmental regulations. Foreign savings and investments within our nation are beneficial but our trade deficit is certainly a net detriment to or economy.

Respectfully, Supposn

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