Tuesday, January 03, 2012

Now Its The Trade Deficit

Dean Baker is of the “Krugman School” of government debt economics, “it’s money we will be paying ourselves,” but with a slight twist. He says that, “the foreign ownership of US financial assets, including government debt, is determined by our trade deficit, not our budget deficit.”

Again with the pretense that there is no difference between government debt and private corporate assets, and he even goes so far as to include government debt as a “US financial asset.” If somebody owns the Bank of America, they own a “US financial asset.” (Well, maybe.) If they own US government debt, they own a “US financial liability.” Their ownership of that debt is an asset to them, but it is a liability on the US side of the equation.

And that debt has nothing whatever to do with the trade deficit.

If we owe $600 million to Japan, we are going to owe that money to them no matter what the trade deficit does, because the government does not participate in the trade deficit. Private companies import and export goods and services, and it is that import and export which creates the trade deficit. That’s why it is called the “trade deficit,” because it is caused by trade. Get it? If that trade deficit drops to zero, we still owe $600 million to Japan.

Krugman at least had enough sanity to pretend that our government owing money to China was balanced by American companies owning subsidiaries located in China. Baker tries to tell us that our government owing money to China is balanced by our population buying televisions made in China, and that everything will be okay if we just make our money worthless. We won’t have to pay our debt if nobody wants our money.

“Ha, ha. Fooled you, didn’t we? Bought all your televisions on credit, then turned our money into garbage. That’ll teach you to mess with America.”

He then goes on to talk about the enormous debt which we are passing on to our children in the form of the effects of climate change, and that is a point with which I am in total agreement. I suspect, in fact, that we are underestimating the damage that has already been done. It seems odd to me that someone who is as clearheaded about that can be so stubborn about the need to serve the immediate economic wishes of a greedy generation and unwilling to seek financial stability.


Pete Murphy said...

Bill, the trade deficit and the national debt are actually very closely linked, the former the direct result of the latter. It's no mere coincidence that, since our last trade surplus in 1975, the growth in our national debt almost exactly matches the growth in the cumulative trade deficit - now approximately $11 trillion.

Every dollar that leaves the U.S. as a result of the trade deficit has to return to the U.S. If they didn't, the U.S. would steadily be drained of all its financial resources. Those dollars return in one of several ways:
1. Direct investment, as in the building of factories in the U.S. (A Toyota or Hyundai factory is an example.)
2. Indirect investment, as in the purchase of stocks and corporate bonds.
3. The purchase of U.S. treasuries.

Regarding no. 1, there is actually a net outflow of "direct investment," the direct result of the dismantling of our manufacturing sector as more and more work is outsourced. The result is that more dollars must return in the form of points 2 and 3.

Regarding point no. 2, again, there is little incentive for foreigners to invest in U.S. companies that are steadily being whittled down by foreign competition.

So, virtually all dollars return in the form of purchases of U.S. treasuries (U.S. debt). The U.S. issues these bonds to cover its deficit spending. Much of the deficit spending is done to offset the negative consequences of the trade deficit: safety net programs to offset the loss of income and benefits. It is literally impossible to balance the federal budget without first restoring a balance of trade. Otherwise, we'd go into a deep recession or even a depression as hundreds of billions of dollars per year were sucked out of the economy without being replaced by federal deficit spending.

Our indebtedness to countries like Japan, China and Germany is no reason to not take tough action, including the use of tariffs to restore a balance of trade. While they may attempt to retaliate by "dumping" their treasury holdings, the issuance of new treasuries would also slow, leaving the supply of and demand for U.S. bonds essentially balanced. Besides, as the Federal Reserve has proven, it has the ability to simply print money and buy U.S. bonds. So threats by China and others to dump their treasuries in retaliation against tougher U.S. trade policy is a hollow threat.

Regarding the trade deficit, our economists and business and political leaders have been blaming currency manipulation and cheap labor for decades, yet nothing ever changes. That's because, as my own exhaustive studies have found, there is absolutely no relationship between currency exchange rates and cheap labor and trade imbalances. Trade imbalances are caused by disparities in per capita consumption that are caused by the inverse relationship between population density and per capita consumption. In other words, trade deficits are inescapable (without resorting to tariffs) when attempting to trade freely with overpopulated nations like Japan, Germany, China and a host of others.

You can read more about all of this on my blog.

Pete Murphy
Author, "Five Short Blasts"

Pete Murphy said...

Bill, in my first sentence, I should have said "the latter being the direct result of the former." In other words, the federal budget deficit (and national debt), is a direct result of the trade deficit.

Jayhawk said...

So, my buying a Korean television is the cause of the government borrowing money to bomb Afghanistan. Of course it is. How silly of me not to recognize that.

Which has nothing to do with the point of my essay. That point being that Paul Krugman's claim that "the lower trade deficit means that the higher debt is not a problem", is bullshit. Oh wait... Did you catch that?

Our trade deficit has diminished even as our dent has increased, so how does "the latter [our debt] being the direct result of the former [the trade deficit]" actually work, then?

Post a Comment