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Monday, August 08, 2005

Trade Deficit Nonsense

The WaPo, along with all other economic illiterates, are equating the trade deficit with a debt of the US. In their editorial inferring the trade deficit is something owed by the US government or its citizens, they wrote:

The U.S. current account deficit has grown to an astonishing 6.5 percent of gross domestic product... This means that the nation is consuming around $700 billion more than it earns each year and paying for the difference by mortgaging or selling assets.

That is wrong! The trade accounting tracks what is sold in exports with what is purchased as imports. We are buying things made external to the US because presumably the price or value of the good is better than the item produced locally, if ideed it is produced locally. The only way there is debt is if the Chinese person holding US greenbacks purchases a government debt security after the original transaction. But the American owns the thing he bought at Walmart.

Writes Don Luskin:

The claim, in essence, is that a trade deficit necessarily entails debt creation. This is simply not the case. When an American (1) labors or invests to earn money, (2) chooses to spend that money on foreign goods, and (3) the foreign maker of those goods doesn't spend that money on American goods, somehow debt is created. I don't see it. Where's the debt? Or at least, where is the debt that arises uniquely in virtue of the trade deficit? Seems to me that the American buyer in the situation has earned the money fair and square (with no debt necessarily involved), decided to spend it in Taipei instead of Texas (with no debt necessarily involved), and the Taipei seller doesn't immediately spend the money on US goods (again, with no debt necessarily involved).

If you were a salesman, how would you like to know that there are potential buyers out there dieing to buy something you sell? Do you want buyers to have money or not?

3 Comments:

At 9:44 AM, Anonymous Anonymous said...

inferring or implying?

 
At 5:10 PM, Anonymous Anonymous said...

That's a great story. Waiting for more. » » »

 
At 3:07 PM, Anonymous Anonymous said...

Excellent, love it! here

 

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