Does the "trade deficit" really harm the economy? or cause higher national debt? When was any nation ever harmed by a trade deficit, historically?

[Horatio Parker]

National Debt, excuse me, THE National Debt = private savings.

Deficits are neither good or bad. It depends on the other sectors.

 

[barbos]

Deficits are neither good or bad. It depends on the other sectors.

Chronic deficit will add up to a sizable "external" debt which is most certainly bad.

 

[Horatio Parker]

Deficits are neither good or bad. It depends on the other sectors.

Chronic deficit will add up to a sizable "external" debt which is most certainly bad.

Why? What's going to happen?


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[barbos]

Chronic deficit will add up to a sizable "external" debt which is most certainly bad.

Why? What's going to happen?

Ask greeks

 

[Horatio Parker]

Why? What's going to happen?

Ask greeks

Ridiculous answer.

Greece does not issue their own currency. Therefore, they can't use the usual remedy: devaluation. A monetarily sovereign nation can always pay debts denominated in their own currency.

That you consider the two comparable indicates you don't understand.


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[barbos]

Ask greeks

Ridiculous answer.

Greece does not issue their own currency. Therefore, they can't use the usual remedy: devaluation. A monetarily sovereign nation can always pay debts denominated in their own currency.

LOL, so your solution to debt is to say to your creditors "Fuck you!" Well, greeks can to that too.

That you consider the two comparable indicates you don't understand.

Oh, I understand, I just don't see the difference.

 

[Horatio Parker]

Ridiculous answer.

Greece does not issue their own currency. Therefore, they can't use the usual remedy: devaluation. A monetarily sovereign nation can always pay debts denominated in their own currency.

LOL, so your solution to debt is to say to your creditors "Fuck you!" Well, greeks can to that too.

How do you get "not pay" from "always pay"?

That you consider the two comparable indicates you don't understand.

Oh, I understand, I just don't see the difference.

Thanks for proving my point.


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[barbos]

LOL, so your solution to debt is to say to your creditors "Fuck you!" Well, greeks can to that too.

How do you get "not pay" from "always pay"?

That you consider the two comparable indicates you don't understand.

Oh, I understand, I just don't see the difference.

Thanks for proving my point.

You have no point

 

[Lumpenproletariat]

What's the real reason for hating the trade deficit?

Trade deficit = China has lots of extra dollars ≠ national debt.

So then we agree. [The trade deficit is] not debt and not the national debt. You own dollars, I own dollars. But that doesn't mean the government owes us something. Or, it just means we can spend those dollars. They're not part of the national debt.

No, we agree that I was right and you were wrong - It's national debt.

But not THE national debt, i.e., not part of the 20 trillion US debt.

but by your "national debt" term, everyone is holding national debt who has any dollars. And ALL the dollars in circulation (not just currency, but ALL the money) is debt held by anyone who has any dollars.

Pretty useless concept. Has nothing to do with the $20 trillion national debt we keep hearing about.

Nope, the useless concept is thinking that having chronic trade deficit is not bad.

But you haven't said what's bad about it. You were imagining that it causes the national debt, or makes the debt worse, which it does not.

Here's the only thing bad about the trade deficit:

It is a SYMPTOM of a possible problem, which is that maybe the U.S. is not productive enough, or not competitive enough. Because not enough foreigners are buying U.S. products, while the U.S. is importing so much because it is not producing very well, and so U.S. consumers are relying more on the imports rather than domestic production.

This might mean the U.S. is deficient in production and needs to improve its performance. And the trade deficit indicates this.

But the trade deficit itself is not the problem. It's the uncompetitiveness of the U.S. or low performance which is the problem and needs to be corrected -- i.e., the U.S. needs to become more competitive.

Blaming the imports, or the trade deficit, is like blaming the thermometer for the temperature being too high or low. Smashing the thermometer does not correct the temperature problem, because it is only an indicator of the problem, not the problem per se.

Hammering down imports with artificial barriers/tariffs only punishes consumers without making U.S. production improve.

No one has been able to say what is bad about the trade deficit even though they hate it. They hate it because it is a symptom of the problem. It's like BAD NEWS, and so people who don't like bad news choose to shoot the messenger instead of addressing the real problem.

 

[SimpleDon]

China holds a lot of U.S. dollars. But is that a DEBT the U.S. owes to China?

What you seem to be saying is "You can't screw China by not paying debt back because other non-china countries would get screwed too, therefore it's not debt". It's a weird logic.

No, not "because other non-china countries would get screwed too," but because EVERY person or entity in the world who holds any dollars would get screwed.

There's virtually no one who would NOT get screwed, considering how widely dollars are circulated.

Obviously ALL Americans, no exception, would get screwed, because all their dollars would be made worthless. Only Americans who have no dollars or assets valued in dollars would be left unscrewed.

So is that what a "debt" is? Is that what "not paying debt back" means?

Something which is impossible to default on without also defaulting on billions of other creditors at the same time?

When in history did someone DEFAULT on a debt they owed where they also defaulted on a huge percent of the world population, like half or 1/4, hundreds of millions or even billions of "creditors" who also were holding the same debt?

How can all those dollars (not bonds!) China holds be made worthless without making every dollar in circulation worldwide worthless?

That can't be what a "debt" is. It has to be something owed to a certain particular creditor, not to the whole world, or half the world population.

Yes, what you, Lumpenproletariat, are saying in this thread is true. The Chinese are exchanging real goods for dollars. Little rectangles of paper and mainly small impulses of electromagnetic memory in a computer network in The Federal Reserve Bank. And yes, the Bank of China, who is holding these ethereal storages of value have only a limited range of options of what they can do with the dollars in whatever form that they hold. And yes, the trade deficit isn't like the common debts that we are all familiar with, it can't be defaulted on and we can't pay it back. And yes, there isn't any practical difference between a dollar bill and a Treasury bill, they are both essentially obligations of the US government, i.e. debt, and both are just slightly different forms of money.

Now, I am going to hold you to maintaining these perfectly valid points in a different discussion. I suspect that I can have you denying the very same points that you and Milton Friedman so vigorously defend in this, "the trade deficit isn't debt, it is a benefit" discussion.

But first I must take care of the "trade deficit isn't debt" discussion.

In summary, all of this discussion on whether the trade deficit is in bonds or currency not is somewhat less important, because whatever form they are in, the dollars are no longer circulating in the US economy. The money has been taken out of circulation in the economy and put into a bank account, into storage, into savings.

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And I am sorry, but savings isn't investment. Personal savings doesn't spur investment by providing the banks with money to loan through the money multiplier effect.

Savings is deferred consumption. It reduces investment because it reduces demand.

Which is the most common, in your opinion, for the economy that we have today. A corporate board room discussion that results in a decision to invest of,

1. "We should go ahead and build that new plant because the bank called and they have money to lend to us, and we know that if we produce more consumers will buy the new products produced because of Say's law, supply creates its own demand in aggregate."
2. "The demand for our product is increasing and we are selling all of the product that we can produce, we must build that new plant, call the bank and arrange a loan."

Number one is how the economy works according to neoliberal theory. The economy is constrained by too little money available to invest or by too much deflation and is supply driven.

Number two is how the economy really works. It is constrained by too little demand or too much inflation and is driven by demand.

The transcripts of the Federal Reserve Bank interest rate committee during the height of the Great Recession showed these good mainstream economists were counting on the money multiplier effect to pull the nation out of the recession! It is incredible.

They produced trillions of dollars of money that they deposited into the reserve accounts of banks with the firm belief that the banks would lend the money to consumers and companies who would then spend the economy out of the recession.

One of the more obvious mistakes was putting the money into the banks' reserve accounts. People, the clue is in the name of the account. Banks don't lend money from their reserve accounts because the money in them are being held, drum roll please, in reserve!

(Banks do loan excess reserves to other banks that need additional reserves. But even this limited loan activity disappears when every bank has an excess of reserves, as happened during the Great Recession.)

Another mistake is that banks don't create the demand for loans, they rely on people and companies needing money to consume and to build. Pretty much the definition of a recession is that people and companies are not consuming and are not building.

I recently read a citation of an article by a fresh water economist who said that the lessons from the Great Recession are that mainstream economists have to reevaluate their negative positions on two lessons from the Great Depression, the need for tight regulation of the financial sector and adherence to the lessons of Keynes' "Paradox of Thrift," that savings while a 'good' for individuals is not so good for the economy as a whole because it reduces demand and that people and companies demonstrate much more demand reducing thrift at the very worse time for the economy, during a recession.

No shit, Sherlock.

Such is the strength of the Friedman monetarist free market delusion that these fresh water economists didn't even realize that the Japanese had tried to boost their economy by increasing bank reserves ten years before and that it had failed, as it again failed in the Great Recession. As common sense should have told them that it would fail.

Instead they were obsessed with idea that they would produce run away inflation by doing this and later the QEs that most of their discussions during the Great Recession and presumably up to today were about when to start increasing interest rates, not the more obvious, why isn't this working?

The Bank of China is using the dollars in the Fed accounts is as value against their creation of yuan for their economy. It is true that in theory the Bank of China could do many things with the money, but practically they are limited by their own laws, regulations and their voluntary participation in international banking treaties and conventions into holding on to their dollar accounts to support the value of their own currency. These dollars won't be invested in the US. They won't be spent on US real estate or US manufactured goods. They will sit in bank account for as long as the Bank of China needs to maintain the value of their own currency. That is forever.

The money that left the economy must be replaced in the economy. Someone gleefully said that the Chinese buying T-Bills proves me wrong. That sales of the T-Bills allowed the US government to spend the money from the trade deficit. No, the sales of the T-Bills that allows the government to spend the money into the economy is what proves me right, that the trade deficit increases the national debt.

Money is created by debt, but not any debt. Only by banks making loans and by the federal government running a budget deficit.

For the economy to grow the money lost to a trade deficit* must be replaced in the economy. If the federal government doesn't create the money by running a budget deficit, the economy has to increase private debt to replace the money lost to the imbalance of trade.

Private debt is much more dangerous to the economy as a whole than the national debt. It increases the instability of the economy, it dampens growth, it deepens recessions and increases the time to recover from them. The countries that have a trade deficit and who practice budget austerity have the highest private debt loads, for example, the UK.

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Which brings us to your discovery that the trade deficit can't hurt us because it isn't a normal debt like the national debt. That no one can force default on us for the trade deficit.

We are closer to mutual understanding than you think. Yes, you were wrong about the trade deficit not increasing the national debt, it does. But you are right that the trade deficit is not debt as you and I know debt, it isn't a normal debt like home mortgages or a car loan. It is not a debt that anyone can force into default. It is not a debt that can be paid off, except by running a trade surplus. For example, we can't increase taxes to pay it off.

How can this be that the trade deficit increases the national debt and yet it is not a normal debt? The answer is simple. The national debt is not a normal debt like the debt that we know. Like the trade deficit, the national debt is not a debt that anyone can force us into default. And as long as we don't have a trade surplus, we can't pay down the national debt, it is impossible to do by raising taxes or reducing spending.

There is no reason for the federal government to have to default on the national debt as long as it is denominated in dollars. The Federal Reserve Bank can print all of the money that is ever required to pay the interest on the debt.

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There is no one who can force a default on the US national debt except for ourselves, if we stupidly decide that we should. While there is no reason for us to do it, we have come close to doing it repeatedly. Or I should say that the Republican majority in the House flirted repeatedly with plunging the nation into default by repeatedly refusing to raise the debt limit. Why did they do this? Because they are idiots, dangerous idiots who want to prove what already has been repeatedly proven, that the Republicans are incompetent when it comes to running the government.

And if we increase taxes to pay off the national debt and we are running a trade deficit* there is only one place that the budget surplus can come from, it has to reduce private savings and/or increase private debt. The national debt is the sum of all of our private savings. Reduce the national debt and you are guaranteed a major recession or a depression within three years. A downturn that will cause the budget deficit to balloon, leaving the national debt higher than it was before the attempt to pay it off.

It is common these days for neoliberals to say that the government can't save. They arrived at this conclusion when the payroll taxes collected weren't sufficient to cover the Social Security benefits going out. That the money that the surplus payroll tax passed in 1986 to build up a reserve to handle the retirement of the baby boomers was instead spent as soon as they were received on the various normal expenditures of the government, defense, infrastructure, etc. and that the bonds held in the Social Security Trust Fund are worthless, money that the government owes to itself. And they are right, it would require another tax increase or spending reduction to pay off the special bonds held in the SSTF.

But if it is true that the government can't save doesn't it also stand to reason that the government can't be in debt? (of course, in its own currency, in our case, in dollars). And since you say that the bonds held by the Chinese are just another form of currency, and not in anyway a debt that the US owes to the Chinese, then I can assume that you will agree with me to extend this conclusion to say that the entire 20 trillion dollars of T-Bills and other long term government bonds isn't a debt.

And that the US government can't be in debt in its own currency, dollars, to anyone.

And we would have to stop calling the Treasury bills and other government bonds like the ones in the SSTF "the national debt" since we now agree that these bonds aren't debt, they are just a different form of currency that pays a small amount of interest (trades at a discount, actually, for those that must be accurate) to compensate for the small loss in liquidity compared to the more common currency notes. Why don't we call the T-Bills what they really are, savings bonds. And the aggregate of all of the savings bonds would be something like the national savings instead of the national debt.

I am impressed that you came up with this on your own. I had been tossing around this concept and how to present it here for more than a year. I never know how much people understand about economics here. Or how much they think about economics. Most here don't try to think through what I present, they just dismiss it out of hand because it leads to uncomfortable conclusions that conflict with ideologies and beliefs.


* actually to a broader measurement, the balance of payments, that takes into account all of the money entering or leaving the country, but the trade deficit is the largest part of the balance of payments.