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nice finds...
A couple of article's I think you will find interesting on trade deficit.
Losing Sleep over the Trade Deficit?
By John Stossel
Wednesday, January 17, 2007
I'm told to worry about the trade deficit.
Commentators and populist politicians are wringing their hands. The trade deficit is a "malignant tumor in the intestines of the U.S. economy," says Pat Buchanan. Lou Dobbs is very upset that "We're borrowing about $3 billion a day just to pay for our imports"!
Economists had taught me that the trade deficit is not a big deal. (The budget deficit may be a big one, but that's a different issue.) But with all the pundits and politicians alarmed, I began to wonder if I was out of touch.
Then I thought about my local supermarket. I buy stuff from the Food Emporium every week. I spend thousands of dollars a year there. But the supermarket never buys anything from me. Not one thing.
And yet that is no problem. It's better than no problem -- it's fantastic! Imagine if I could only buy from the store to the extent that it needed my services. I'd starve. That would be barter, and mankind dumped barter for the money economy eons ago precisely because it is so inconvenient.
Trade statistics obscure reality. Individuals exchange only when each expects to benefit. If they didn't expect it, they wouldn't trade. That's true even if one party is American and the other Chinese. Trade is trade.
If we don't care about trade balances at the individual level, why does it matter if in a given year Americans as a group buy more from the Chinese than they buy from us?
It doesn't.
In fact, it's a good thing. Foreigners trade cool products (and capital goods) for paper money. They can do only three things with our dollars: buy American goods and services, save them, or invest in the United States (including buying U.S. government debt).
In other words, most of what foreigners don't spend here, they invest here. The trade deficit is mirrored by the capital-account surplus .
Should we be concerned that foreigners see the U.S. economy as a good place to invest their money? I can't see why. I think we should see it as a wonderful thing: They trust America's future enough to invest in it. Investment creates new products and better jobs.
Especially absurd is Dobbs's idea that the trade deficit means we are in debt to foreigners. Except for the T-bills foreigners buy, this just isn't true. As George Mason University economist Donald Boudreaux wrote in the December issue of The Freeman magazine, "If Mr. Sony uses the $2,000 he receives from selling computers to Americans to buy $2,000 worth of equity in Exxon, the U.S. current-account deficit rises by $2,000, but no real indebtedness is created. No American owes Mr. Sony anything. ... It just ain't so that the so-called trade deficit is debt!"
Boudreaux adds, "If we applaud when citizens of Wisconsin save and invest in software firms in California or orange groves in Florida, why should we not be equally pleased when citizens of Shanghai save and invest in these same American firms?"
Good point, especially when you consider that the only way to shrink the trade deficit is for the government to prohibit us from buying whatever we want.
What the trade fearmongers don't say is that countries with trade surpluses often don't do very well. Japan had a trade surplus all during its long recession, which began in 1990 and is only now ending. By contrast, countries running trade deficits often experience economic booms. A Cato Ins ute study shows, "Contrary to prevailing assumptions, 'worsening' trade deficits are associated with faster GDP and manufacturing growth and more rapidly declining unemployment, while 'improving' trade deficits are associated with slower GDP and manufacturing growth and rising unemployment.
Adam Smith was right when he wrote, "Nothing, however, can be more absurd than this whole doctrine of the balance of trade."
John Stossel is an award-winning news correspondent and author of Myths, Lies, and Downright Stupidity: Get Out the Shovel--Why Everything You Know is Wrong.
Second article:
Trade Deficits: Good or Bad?
By Walter E. Williams
Wednesday, January 17, 2007
Two recent articles ought to give pause to current political and journalistic ignorance, perhaps demagoguery, about our international trade deficit. In a December Wall Street Journal article led "Embrace the Deficit," Bear Stearns' chief economist David Malpass lays additional waste to predictions of gloom and doom associated with our trade deficit.
Since 2001, our economy has created 9.3 million new jobs, compared with 360,000 in Japan and 1.1 million in the euro zone (European Union countries that have adopted the euro), excluding Spain. Japan and euro zone countries had trade surpluses, while we had large and increasing trade deficits. Mr. Malpass says that both Spain and the U.K., like the U.S., ran trade deficits, but they created 3.6 and 1.3 million new jobs, respectively. Moreover, wages rose in the U.S., Spain and the U.K.
Professor Don Boudreaux, chairman of George Mason University's Economics Department, wrote "If Trade Surpluses Are So Great, the 1930s Should Have Been a Booming Decade" (www.cafehayek.com). According to data he found at the National Bureau of Economic Research's "Macrohistory Database", it turns out that the U.S. ran a trade surplus in nine of the 10 years of the Great Depression, with 1936 being the lone exception.
During those 10 years, we had a significant trade surplus, with exports totaling $26.05 billion and imports totaling only $21.13 billion. So what do trade surpluses during a depression and trade deficits during an economic boom prove, considering we've had trade deficits for most of our history? Professor Boudreaux says they prove absolutely nothing. Economies are far too complex to draw simplistic causal connections between trade deficits and surpluses and economic welfare and growth.
Despite all the criticism from abroad and the doom-mongers at home, the world finds our economy attractive. Just as we've been chomping at the bit to buy foreign goods and services, foreigners have been chomping at the bit to invest trillions of dollars in the U.S. Mr. Malpass says our 10-year government bonds yield 4.6 percent per year compared with Japan's 1.6 percent; our government debt is 38 percent of GDP versus 86 percent in Japan; and while Europe's debt to GDP ratio is not as extreme as Japan's, it's not nearly as favorable as ours.
Here's a smell test. Pretend you're a man from Mars knowing absolutely nothing about Earth and you're looking for a nice place to land. You find out that there's one country, say, country A, where earthlings from other countries voluntarily invest and entrust trillions of dollars of their hard earnings. There are other countries where they're not nearly as willing to make the same investment. Which one of those countries would you deem the most prosperous and with the greatest growth prospects? You'd pick country A, which turns out to be the United States. As such, you'd be just like most of the world's population who, if free to do so, would invest and live in the U.S.
The late Professor Milton Friedman said, "Underlying most arguments against the free market is a lack of belief in freedom itself." Some people justify their calls for protectionism by claiming that they're for free trade but fair trade. That's nonsense. Think about it: When I purchased my Lexus from a Japanese producer, through an intermediary, I received what I wanted. The Japanese producer received what he wanted. In my book, that's a fair trade.
Of course, an American auto producer, from whom I didn't purchase my car, might whine that it was unfair. He would like Congress to impose import tariffs and quotas to make Japanese-produced cars less attractive and available in the hopes that I'd buy an American-produced car. In my book, that would be unfair.
Dr. Williams serves on the faculty of George Mason University as John M. Olin Distinguished Professor of Economics and is the author of More Liberty Means Less Government: Our Founders Knew This Well.
Be the first to read Walter Williams' column. Sign up today and receive Townhall.com delivered each morning to your inbox. Sign up today!
Copyright © 2006 Salem Web Network. All Rights Reserved.
nice finds...
did you guys read how china got us$1 trillion in reserves atm......
There isn't anything wrong with the trade deficit itself. However, there are 2 major problems that are directly caused by the trade deficit/free trade.
Problem #1 - When American corporations are allowed to move their manufacturing bases to other countries and hire foreign workers the American blue-collar workers are hit big time. There is simply no way for an American factory worker to compete with a Chinese or Mexican or Vietnamese, etc. factory worker with the massive differences in wage rates. Many of these ex-industrial workers are forced to get lower paying service jobs. Many of the recently created jobs that Bush and Co. take credit for are low-skill service jobs. Any American whose job is secure benefits from this relationship because of the lower consumer prices. However, saving a few bucks at wal-Mart isn't such a good deal if you can't get a good job. This is the problem Pat Buchanan focuses on. Buchanan is a commentator and historian, not an economist.
Problem #2 - The American economy as a whole benefits greatly from being able to issue the world's reserve currency and then trading that paper money for foreign goods. You all probably know how we got into that position, so I'll leave it at that. Developing countries have been able to grow thier economies by exporting to the U.S., so they have benifited as well. These exporting nations can't simply hold on to these dollars because they know that inflation will eat away at their wealth, and they can't convert them into their own currencies because that would weaken the dollar and strengthen their own currencies. Countries such as Mexico and China intentionally keep their currencies weak against the dollar to keep the exporting game going. So, that leaves them only one real option: convert their dollars into U.S. dollar-denominated assets. As long as they can find profitable investments in the U.S., the game keeps going. If a time comes that they can't, which must happen eventually, then they must start converting the dollars into their own or other countries currencies.
This will cause the dollar to sharply decline and the exporting countries won't be able to export nearly as much, so they won't do this unless they have to, but they will eventually have to. China recently announced that they will convert a large amount of their dollars and dollar assets into Euros and gold. Bush sent the Fed Chairman and others to try to talk them out of it, but word is they were unsuccessful. It's no surprise then that the European markets have started out the year strong.
This U.S. trade deficit game simply cannot go on forever. If it could then we could simply print dollars and buy foreign goods and no one would have to work. Interestingly (and frighteningly), the Romans had a similar situation. They looted the gold of conquered lands and used it to pay for bread and circuses for the citizens. Eventually they ran out of gold. Sorry this was so long, I actually summarized some stuff and tried to keep it short.
Last edited by BradLohaus; 01-17-2007 at 05:53 PM.
problem 1 is not a problem. why would i pay an american 20 bucks an hr to do something that a mexican can just as good or better for 6? it is a waste of human resources.
problem 2 the market will eventually work itself out.
Well, count Macro-economics as another thing John Stossel can't do.
Continued trade imbalances deflate the dollar. Forcing American consumers to pay more for that Honda, Nissan and barrel of oil than they would other-wise, and Stossel must be smoking some good yuppie- if he thinks that countries like Saudi Arabia, which own almost a trillion dollars of american debt, don't use that trigger to leverage pull with American politicos.
Add Russia and Iran to the list of Euros seekers (for gas and oil).
Add Spain's sharp and spectacular decline in the 17th century to the historical example.
The rest of the picture is absolutely perfect.
One question comes to mind.
What EXACTLY is this George Mason University?
Last edited by temujin; 01-21-2007 at 05:12 PM.
...but, but, all were sending over there is worth-less money!
Idiot!
#1 - Wow. You're a true American patriot, huh? Why should you care more about your fellow countrymen than a foreigner? That reminds me of something an American CEO said about his company moving its manufacturing to China. Something like, "Why should I care more about some guy I've never met in Detroit than I do about some guy I've never met in Shanghai?" When we all have to start paying global taxes I'll know at least 2 people I'll be able to thank.
But I guess I can't appeal to a person's sense of loyalty if they don't have one. But think about this: If you think it's okay to pay a Mexican 6 bucks to do something an American won't do for less than $20, then why not just pay a Chinese citizen $2? Or better yet, pay an Indonesian $1. Or better still, you could probably find plenty of people in African countries to do this hypothetical job for less than a dollar. I hope you can see my point: the law of comparative advantage has been distorted in this era of free trade. The only "comparative advantages" that companies are finding in foreign countries are much lower wage rates, none of the environmental protections found in the U.S., Canada and western Europe, and none of the benefits that companies would have to pay American workers such as health insurance, dental insurance, vacation time, maternity leave, etc. Do you really think Nike has its shoes made in Asia because they have a "comparative advantage" in shoe making? Or Wal-Mart brands because of Asia's incredible ability to make clothing better than Americans? They operate there because the governments allow them to run sweat shops and pay the workers . The long run result of this is, and will continue to be, a shrinking middle class as a percentage of the population and stagnant real wage rates.
#2 - "The market will eventually work itself out" You're right about that. But that's the problem. We don't really live in a free market economy. The money market is controlled by the Federal Reserve because they have control over the supply of money, and they and the federal government have been sustaining this trade deficit policy. But eventually the market forces will correct this imbalance and it won't be pretty, and the dollar may not survive the massive devaluation.
Nice stuff Brad. Devaluating the dollar is what all this is about. It helps corporations in the U.S. become more compe ive in the global market place by making American products less expensive. However, there is also debt-side benefits. The government knows that sooner or later, the already shakey U.S. housing market and it's out of control appreciation will self-correct itself and some people are gonna find themselves in lots of debt that their home can no longer pay-off. Well, by making the dollar worth half of what it is today, which is what I think the ultimate goal is, what you effectively also do is cut everyone's debt load in half since most creditors don't correct for dollar devaluations."The market will eventually work itself out" You're right about that. But that's the problem. We don't really live in a free market economy. The money market is controlled by the Federal Reserve because they have control over the supply of money, and they and the federal government have been sustaining this trade deficit policy. But eventually the market forces will correct this imbalance and it won't be pretty, and the dollar may not survive the massive devaluation.
What concerns me is that the “Middle Class” is disappearing...We keep purchasing cheap foreign goods & we are outsourcing American jobs....
^ Yeah, the U.S. housing bubble will pop and the value of the dollar will fall, and by half is probably a good guess. It's just a matter of time and there is no way around it. The debt-side benefits will help, but the shock the American consumer will experience when he has to drastically cut back his consumption will be tough. There's a pretty scary quote from Austrian economist Ludwig von Mises about credit bubbles and a nation's currency: "There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved."
Our current boom is in the housing market and the Dow. Both were brought about by foreigners re-investing their dollars back in the U.S., which is the financial account surplus John Stossel talks about that offsets the trade deficit. What Stossel is dead wrong about, however, is the reason for our financial account surplus. It's not because foreigners are so eager to invest in America, it's because they have no choice but to invest their dollars back into America if they don't want to kill the exporting-to-trade-deficit-America system that is growing their economies, as I mentioned in my first post.
Now, this is obviously an unsustainable system because over-capacity in America will eventually limit the investment opportunities for foreigners. The only thing that has kept Americans borrowing to create these investment opportunities is the Federal Reserve keeping interest rates artificially low to stimulate borrowing. If we had a free money market interest rates would be much higher, but you can't keep the free market down forever, so they will be one day.
Back to von Mises. Given that Fed Chairman Bernake has said that he will do whatever it takes to get dollars in the hands of Americans and prevent a deflationary recession (something the Fed did not do about 75 years ago when they allowed the 1920's stock market bubble to pop), it would seem that the most likely outcome of this economic bubble will not be an abandonment of further credit expansion by the Fed raising interest rates to allow the stock market and housing bubbles to deflate. Instead it looks like the Fed will continue to keep rates artificially low to keep the bubble inflated. Von Mises prediction with respect to this approach is the abondonment of the currency system involved. Temujin above mentioned that Russia and Iran are seeking Euros instead of dollars for their oil, along with China seeking to convert much of their dollar assets into euro assets. There's obviously a political side to Iran's desire for Euros, as well as Venezuela's. But given the dollar's current and sliding strength to the Euro, it's not all politics.
Is this the beginning of an international abondonment of the dollar? I don't know, but I do know that if Saudi Arabia and our other Persian Gulf allies like Kuwait ever start to demand euros instead of dollars for their oil then that will be the end of the dollar as the world's reserve currency and the beggining of the euro reserve era. The fact that these oil exporting nations insist on dollars for their oil gives the dollar a solid foundation. It protects the wealth of all Americans (and non-Americans who hold dollars), at least somewhat. And not to get too political, but that's one reason why we have a strong interest in maintianing a strong military presence in the Persian Gulf, and in maintaining the legitamacy of the regimes in power there. If these regimes decide that it would in their interest to end the petro-dollar arrangement that they have with us and start taking euros, then Americans will understand just how beneficial it is to us to issue the world's reserve currency. There's a reason why gas is so much more expensive in Europe, and it ain't all taxes and environmental regulations.
Again, this current dollar-reserve international trade system is completely economically unsustainable. The Euro will someday replace the dollar as the world's reserve currency, and it may be someday soon instead of decades from now. Of course, a Euro reserve system is unsustainable in the long term as well (like all fiat money systems) and something will eventually replace it. Just as the Euro was created by merging the economies of a continent, the next reserve currency after the Euro would probably be some kind of North American or Asian money. Eventually there will be one world-wide fiat currency issued by a global central bank established by the IMF or World Bank. If you think that I'm making a wild prediction or am taking this a little too far, there have been calls for a global central bank by very powerful, very influential people for awhile now. George Soros and other currency traders and international banking leaders for example. They can make an okay case for it with economic arguments, but there's the obvious sovereignty issues. I guess I kind of got off track, but you really can't separate the trade deficit issue from the dollar-reserve issue; they are directly related as one causes the other.
Last edited by BradLohaus; 01-22-2007 at 04:54 PM.
Holy , this thread has been by far one of the more interesting and credibly written on this board.
Great info, Mr. Lohaus. Well framed, layman terms, informative....well done.
Incidentally, here is one fact that happened already and one that will happen.
In seven years the US money has gone from .84 to 1.30 (pretty stable for the moment) against the Euro. That soounds like a pretty robust devaluation to me.
When the dollar will cease being the world reference money, the most immediate consequence will be that the US -technically the Fed but at large, the whole country- will actually have to pay for the checks it has so long enjoyed issuing with such a spectacular nonchalance.
The longer the troops in Irak, the sooner that moment will come.
Too far.
Way too far.
The Soros of the world can't control it more that what they do now.
Excellent discussion, though.
Thanks for the compliments. Temujin's right that I probably went too far with the last paragraph of my last post. I had written alot and I guess I got carried away at the end, but I'll try to defend it a little.
I can see only 2 outcomes of mankind's experiment with worldwide fiat money that has been going on for about 35 years now: 1.) events, economic or otherwise, persuade the world to go back to money that is backed by at least gold, or gold and other precious metals 2.) Eventually (and I should have said before that this would probably take centuries), if the global paper money system keeps adapting and surviving somehow, then it (global paper money) will only do so by combining economies under the same currency to strengthen them, just as Europe has done with the Euro. I can't offer any real scientific evidence for this, I'm just speculating based on what I've read about monetary history. As economies and currencies combine, there will obviously be fewer currencies, and then it's not a stretch to say fewer governments. Remember that the EU started as the European Coal and Steel Community in the early 50s. There isn't a government of Europe yet, but if there aren't any major setbacks, there will be. As the number of governments and fiat currencies decrease, it will become obvious that economic transactions would be easier if everybody (the world) just used the same paper money, since evrybody's just using paper money anyway. I'm way too far out there for now, no doubt, and I got out of topic. But it is interesting to think about, and if the topic is trade imbalances then you simply can't get away from the question "what is money?"
Temujin - I liked what you said about the Russian spy incident. I'd give anything to know the real details of that. I didn't know that Putin is a big EU seeker. That makes me wonder if he sees the demographic writing on the wall regarding China and control of North Asia.
I saw Pat Buchanan say something interesting about China having a long term desire to gain control of Siberia, an area that they view as having been stolen from them by Russia when China was weak and disunited. Given that China has about a billion more people than Russia (which has a higher death rate than birth rate currently, which Buchanan and others attribute to the high rate of atheism in the country), and that Siberia has so much oil, gold, coal, timber, etc., could Putin be reaching out to Europe to strengthen Russia's long term position on North Asia against China? Basically saying, "We are defining Europe as the Northern portion of the Eurasian landmass, from the Atlantic to the Pacific." Chinese would probably already be invading Siberia in waves trying to claim it de facto style if it wasn't for the nuclear bombs that keep both countries in check. But if China finally decides that they demand access to Siberia's resources then they might be willing to call Russia's bluff on a potential nuclear exchange over North Asia, because it would be a bluff.
Edit: Ah, I just re-read what you said and realized you said "Euro seeker" and not "EU seeker". My bad. Maybe both are true, I don't really know. I don't understand much about that Russian spy stuff. Who would benefit from his death? What was he doing that had powerful people after him? Whose side was he on?
Last edited by BradLohaus; 01-23-2007 at 09:02 PM.
It's not so much the "copout" aspect of this answer that bugs as much as the thoughtlessness of it. Yeah, the market will "work it self out", but not to YOUR benefit.
another of the main reasons the dollar is the reserve currency for oil transactions is because there are enough dollars world-wide in enough reserves to make these huge transactions possible. Not true for the Euro, yet. the EU has been very conservative in it's monetary policy. Also, there are some serious questions about how hard the EU would fight to protect it assets. As we are witnessing in the Persian Gulf, the U.S. will do what-ever it takes to protect the bases for it's currency - the petro-dollar.Is this the beginning of an international abondonment of the dollar? I don't know, but I do know that if Saudi Arabia and our other Persian Gulf allies like Kuwait ever start to demand euros instead of dollars for their oil then that will be the end of the dollar as the world's reserve currency and the beggining of the euro reserve era. The fact that these oil exporting nations insist on dollars for their oil gives the dollar a solid foundation. It protects the wealth of all Americans (and non-Americans who hold dollars), at least somewhat. And not to get too political, but that's one reason why we have a strong interest in maintianing a strong military presence in the Persian Gulf, and in maintaining the legitamacy of the regimes in power there. If these regimes decide that it would in their interest to end the petro-dollar arrangement that they have with us and start taking euros, then Americans will understand just how beneficial it is to us to issue the world's reserve currency. There's a reason why gas is so much more expensive in Europe, and it ain't all taxes and environmental regulations.
^Very true. If the EU was willing to protect a petro-euro arrangement the way we protect the petro-dollar arrangement, and the Persian Gulf states believed them, then they'd be taking Euros and dumping dollars right now. But, the Gulf states' leaders can't be happy about being forced to take dollars that have been declining against the Euro since the Euro was issued in exchange for their protection against the Islamists. They must be constantly trying to think of a better way for themselves, which I guess all countries do. But there isn't one, at least not at the moment.
But what happens when the massive dollar devaluation comes? Temujin correctly pointed out that the dollar has declined quite alot against the Euro in the last seven years. But there's alot of room left for a greater drop against all currencies: the U.S. still has bubbles in the stock market and its housing market that will pop and a Fed Chairman who has shown no signs of a willingness to substantially raise interest rates to slow down credit creation/the money supply, the trade deficits with the export-focused developing countries continue, and the budget deficits have coninued because both parties have become big government, big spending parties, at least for the most part. And we won't be leaving Iraq anytime soon. Iran has the potential to put even more pressure on the dollar. So I'm counting on an even greater decline in the value of the dollar in the future.
All the while, as Nbadan pointed out, the EU has been conservative in its money creation. This may hurt its ability to be a reserve currency for now, but it allows the EU room to loosen up on the Euro in the future if neccessary and still remain strong against the dollar. All of this will increase the demand for Euros over dollars. How much can our oil producing allies stand? I don't know, but it is true that for the moment and the immediate future there is far too much trouble in the ME for them to have any leverage against the U.S./dollar, despite the declining dollar. But how long will that be the case?
I looked up Reserve Currency at wikipedia.com and found an interesting quote:
"The UK's pound sterling was the primary reserve currency of much of the world in the 18th and 19th centuries. But perpetual current account and fiscal deficits financed by cheap credit and unsustainable monetary and fiscal policies and the relative decline of Britain from being the world's pre-eminent military and economic power led to the pound losing this status. In mid 2006 it was the third most widely held reserve currency, having seen a resurgence in popularity in recent years."
And history continues to repeat itself.
http://en.wikipedia.org/wiki/Reserve_currency
Note the chart concerning the International Ac ulation of Foreign Reserve currencies at the top. The dollar was strong and moving on up during the technology bubble in the late 90s. Then the Euro is created, and the tech bubble pops, and the Euro has been moving on up ever since.
Last edited by BradLohaus; 01-24-2007 at 06:01 PM.
Having your man -Saddam- running an ethnic puzzle core country -Irak- and having him going to war against what you perceive as a threat -Iran- while pumping all the oil you need, is an excellent finesse strategy.
Removing him for the sake of fighting someone, and, by OBVIOUS consequence, precipitating the core country into caos, while at the same time pumping into it billions of dollars,
IS NOT
what I would call "protect the bases for your currency."
Last edited by temujin; 01-24-2007 at 08:16 PM.
You should read "American teocracy" by Phillips, former Pres. Nixon's advisor.
Excellent book.
Basically, the key to knowing when the dollar will seriously devaluate is knowing when oil production will peak.
It looks like it's a very well kept secret.
^Good link. All those Ron Paul articles at that site are good, and there are alot. The ones like yours where he questions the Fed Chairman are some of the best.
http://www.lewrockwell.com/paul/paul-arch.html
Here's my favorite Ron Paul article that I've come across. It's kind of long, but it's great. I probably should have just linked to it in the first place.
"The End of Dollar Hegemony"
http://www.house.gov/paul/congrec/co...6/cr021506.htm
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