Re: Is it possible to have trade deficits WITHOUT having a budget deficit?
- From: Michael Coburn <mikcob@xxxxxxxxxxx>
- Date: 28 Oct 2008 18:04:04 GMT
On Mon, 27 Oct 2008 22:25:49 -0700, 2.7182818284590... wrote:
I would think that the two phenomena are *NOT* related at all. Trade
deficits occur when you import more than you export. The USA happens to
import close to a trillion dollars a year. Incidentally, we run a
deficit slightly lower than this.
Most people can easily understand a budget deficit, and the
ramifications of a budget deficit.
However, a trade deficit - which I can easily understand - seems to be
equated with a lavish lifestyle, running up deficits, and an economy
unable to save.
Here are my questions:
1. How and why do people correlate a trade deficit with a low savings
rate?
To "save" an entity must first live within its means. A trade deficit
means that the people of a sovereignty are not producing enough output to
warrant their consumption. It has nothing to do with mercantilism or
nationalism. It is merely one group measured against another.
2. Is the savings rate at the consumer level or at the governmental
level?
Both. But it important to understand that a government CANNOT save as
this term is used in the common vernacular. Governments can go deeply
into debt, but they cannot ever "save". The SS trust fund is an example
of this fallacy. Inevitably, taxes or deficit spending will be used to
support the SS system. All the smoke and mirrors will make no difference.
3. Finally, here's a hypothetical scenario - please tell me what you
think: The USA imports $1B in goods/services from a country, and that
country imports $1B from the USA as well. There is neither a surplus/
deficit with this country for either parties. The USA, however, imports
a goods/services that the exporting country has no profits. Their net
profits in doing business is 0%. However, the USA is selling something
very lucrative to this nation, and the shareholders have made $100M from
the exporting of $1B (10% profit margins).
On paper, both countries have the same trade deficit/surplus. But the
Americans are in a much better predicament. Please clarify if my
assessment is correct - that the USA is benefitting more from this trade
relationship?
NO. This is not definitive enough and it is the primary failure of
current analysis of "comparative advantage" and "absolute advantage".
Those terms are macro econ terms and they apply to groups as you have
done. In spite of the Republican effort to convince Americans that we
are to be an "ownership society", many people are not owners and to a
large degree is is not because they are spendthrifts. In your example
you say that the American stockholders received a bounty from the trade
relations and the other country did not. But inside the group that
supposedly had a profit the individuals did not benefit equally. Only
the owners benefit. Comparative advantage and group deficits and
surpluses say nothing about the common people of the groups.
But in the real world even at a macro level the Chinese are the savers
and the profit makers. They hold the T-Bills that will be receiving
interest and we will be working to pay that interest. Within the USA the
profit makers are the owners of the means of production (land for
instance, but also patents and copyrights and monopoly rights). The
common people may own a very small amount of this through home ownership
and a smattering of stocks in a 401K, but most of the ownership is vested
in a very small number of people. What has been happening is that that
this small group has indeed been profiting from the current relationships
(the trade deficit and the budget deficit) while the rest of America goes
deeply into debt.
The leadership is not entirely to blame for this but they have been more
than complicit in the activity. It is always "Shop till you drop and
support the economy". Without that "leadership" the United States would
be in a lot better shape.
.
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