Wednesday, October 04, 2006
Contrarian Economics
I'm lost at how the trade deficit is a bad thing (for the US).
We get stuff. They get cash, which because of the continued implicit devaluation of US currency means that the cash we sent them becomes worth less over time. So when they go to buy stuff with their cash, they'll get less bang for the buck, so to speak. So it looks like to me they're (they being the ones running a trade surplus with us) getting the raw end of the deal.
Of course over time, the currency devaluation would drive up the cost of imports meaning we'll import less, but if that's a bad thing, then why is the trade deficit also a bad thing?
Or suppose the money is reinvested in capital purchases in the US. Is foreign investment now a bad thing?
Or suppose they buy debt (FYI, only about 1/3 of the national debt is foreign owned). But doesn't the increased demand for debt drive down interest rates? And aren't lower interest rates a good thing?
As calculated, a trade deficit reduces GDP which makes sense by the theory that the money spent overseas could've been spent on an equivalent (but presumably more expensive/inferior good)domestic good and theoretically increasing domestic employment and furthering later GDP gains from added productivity gains. But I'm dubious that this effect negates the positives of a trade deficit and globally, it's a clearly less efficient use of resources (the deficit is assumed to have occured because a better/cheaper good is made overseas than in the US) and artificially reducing trade deficits clearly decreases gross domestic consumption.
Now if we were on a gold standard so that the currency wasn't devaluing and we had some non-market priced good we had to exchange for the cash, then we could have a problem.
Tell me where I'm wrong.
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We get stuff. They get cash, which because of the continued implicit devaluation of US currency means that the cash we sent them becomes worth less over time. So when they go to buy stuff with their cash, they'll get less bang for the buck, so to speak. So it looks like to me they're (they being the ones running a trade surplus with us) getting the raw end of the deal.
Of course over time, the currency devaluation would drive up the cost of imports meaning we'll import less, but if that's a bad thing, then why is the trade deficit also a bad thing?
Or suppose the money is reinvested in capital purchases in the US. Is foreign investment now a bad thing?
Or suppose they buy debt (FYI, only about 1/3 of the national debt is foreign owned). But doesn't the increased demand for debt drive down interest rates? And aren't lower interest rates a good thing?
As calculated, a trade deficit reduces GDP which makes sense by the theory that the money spent overseas could've been spent on an equivalent (but presumably more expensive/inferior good)domestic good and theoretically increasing domestic employment and furthering later GDP gains from added productivity gains. But I'm dubious that this effect negates the positives of a trade deficit and globally, it's a clearly less efficient use of resources (the deficit is assumed to have occured because a better/cheaper good is made overseas than in the US) and artificially reducing trade deficits clearly decreases gross domestic consumption.
Now if we were on a gold standard so that the currency wasn't devaluing and we had some non-market priced good we had to exchange for the cash, then we could have a problem.
Tell me where I'm wrong.
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