At the aggregate level, every trade deficit is a capital inflow. IMO, talking about this in terms of capital flows is far more illuminating - over the last few decades, massive amounts of money has flowed into the US, primarily seeking the perceived safety of the dollar. The narrowing of the deficit is pretty worrying to me, since the privileged position brings a ton of benefits to the US.
That seems incorrect to me. Trade deficit means US is giving money to other countries to buy their resources. Thus, it is capital outflow.
However, without this trade deficit, US dollar will start declining as the major reserve currency. There just won't be as many dollars around in the world for other countries to hold.
As you surmised, yes, that will be pretty bad for the US.
You're both kind of right, just that there's a difference between the current account (trade) and capital account (cross-border investment flows).
In the current account you're just looking at the value of goods and services going each way across the border. In the capital account you're looking at investment going one way and the returns flowing back.
If US wants to finance their deficits, they can turn on a new printing press and people wouldn't be able to do much about it. They can't just say, we want you to pay us in <safer currency>, because the USD is that currency. Other countries have to pay their debts (usually) in USD, which is controlled by US.
ie it’s not pretty bad. sending worthless pieces of paper in exchange for goods and services that the recipient needs to then turn around and either loan back or use in the US is a net good.
Let's say that being a single nationalistic reserve currency gives inordinate power in the hands of a few.
Some societal benefits are:
- There will never be shortages or famines like the Irish potato famine. You need potatoes, you print money and go get them
- There will never be shortages of labor. You need services and companies to support the massive infrastructure, you pay cheap labor and get them. This is why even very small counties in the US can handle online utility payments while it's not common in Germany or Japan
- Any time there is a recession, just print money out of it without worrying about inflation. For ALL other countries, the more they print, the lesser their currency goes in valuation. Think Argentina, Asian countries. US has been printing quite a bit as well but all those extra dollars don't cause inflation. They just provide liquidity. The inflation is exported to other countries. This is why so many countries have so many dollars in reserves now
- This printing press minus the inflation is the reason the US nominal GDP is so high. A haircut in US is the same as haircut in India. But a $70 haircut counts more towards GDP than a Rs 70 haircut
- This currency is also the reason why so many countries give visa on arrival to US citizens. Those countries need dollars and they want to make it easy for people to give it to them. The freedom to travel around the world with such a strong currency is uniquely American. Perhaps only bested by the British in the past
- US currency goes through US banks. Which means it is under US purview. This is how the US imposes sanctions on whoever they don't like. This is enormous power honestly. Japan and Korea are in a trade war but they can't really impose sanctions on each other as much as US on Iran.
Overall, being the reserve currency is an undue advantage that the US has. The standard of living in the US is abnormally high because of it.
I really don't know why you think we can just print dollars at will without it causing inflation: if that was an option, we would, because it would be stupid not to.
The US has been printing lots of dollars, with little inflation, because the rate of demand has matched the rate of printing. But it would be easy to print more dollars than are in demand, and that would cause inflation on the dollar just like any currency.
> - This currency is also the reason why so many countries give visa on arrival to US citizens. Those countries need dollars and they want to make it easy for people to give it to them. The freedom to travel around the world with such a strong currency is uniquely American. Perhaps only bested by the British in the past
This is nationalist nonsense. The US wasn't the strongest passport in 2019[1] and hasn't been in the past 4 years[2][3][4].
Hint, global assets are all available for purchase on dollars. As more and more products get built in China and other countries and they are all willing to accept dollars for them, the rate of demand for dollars increases.
As for visa on arrival, most countries on it are similar GDP-wise. Which means their citizens have a low cost to convert to USD and their capital accounts are open so citizens can freely chnage into USD.
So their domestic currencies are almost as good as USD (or even Euros to some extent)
> Hint, global assets are all available for purchase on dollars. As more and more products get built in China and other countries and they are all willing to accept dollars for them, the rate of demand for dollars increases.
This doesn't contradict anything I said.
Yes, I understand why demand for dollars is going up. No, that doesn't mean we can just print dollars faster than demand and expect no inflation.
> As for visa on arrival, most countries on it are similar GDP-wise. Which means their citizens have a low cost to convert to USD and their capital accounts are open so citizens can freely chnage into USD.
So would it be fair to say that you're retracting your statement that this is "uniquely American"?
>There will never be shortages or famines like the Irish potato famine.
There will, because the potato famine wasn't caused by lack of money, it was caused by monoculture, historically poor land management practices encouraged by foreign interests, and genocidal tendencies on the part of the English.
If the Irish people had the ability to arbitrarily print money the way you suggest, they still would have been starving because the English would have taken the money AND the food.
> However, without this trade deficit, US dollar will start declining as the major reserve currency.
How true is that when the only thing that has happened is that the trade deficit is smaller? There is still an outflow, and meanwhile all of the US dollars that moved into foreign hands over the past century are all still out there.
It's more like a reduction in growth rate rather than the cessation of growth, and not a decline at all.
If it went to a trade surplus, sufficiently large to pull back a significant proportion of the dollars already out there, that would be much more of a concern.
> Not to mention that there is no other currency out there to be the global reserve currency.
This is accurate. However, let's not fool ourselves. Having a single large reserve currency is not the only trading solution out there.
Most countries in close proximity, like south east asian countries for example, can easily trade in their local currencies. In fact, the more that China becomes the biggest importer of goods in Asia, the more irrelevant the dollar would become.
This is a strong argument. Do we need one global reserve currency, especially as we retreat from a global trading system? (Or at least from a global trading regulator, the WTO.)
I get the idea the British would absolutely love it if the pound became the global reserve currency. Especially since a lot of people would really like it if it appreciated in value again after its serious Brexit drop.
This article talks about some of the costs of becoming a reserve currency:
"...I do not think that the role of the dollar provides for the US any “exorbitant privilege”, contrary to what many suppose. Rather, I have argued, it creates an exorbitant burden for the US economy, one that forces the US to choose between higher debt and higher unemployment whenever a country takes steps to force up its savings rate or, which is pretty much the same thing, to force up its current account surplus."
https://carnegieendowment.org/2012/11/17/is-there-asian-rmb-...
Strictly speaking there is no need to have any reserve currency. Trade between two countries can happen directly and prices can be denominated locally.
In a true crisis scenario international trade can fall back to a fixed standard (gold, crypto, whatever) for settling things.
In practice though I'd be surprised if all those countries were really unhappy with their currencies becoming the reserve. Being the reserve creates demand for paper which can be exchanged for real goods - a substantial win for the creators of the currency.
One of the big reasons to use the US dollar as the global reserve is the US government exerts itself to make that happen. If they stopped, others would cheerfully fill the gap. The real point of resistance is replacing the SWIFT system.
Fair point. My understanding is that all members have veto power over EU decisions and that Germany, France, Italy, Poland and Spain are first among equals due to size. But that is focused on an understanding of the EU, not a detailed understanding of the ECB.
But I imagine aiming to be a reserve currency would be a political as well as a monetary decision.
Goods and services are on the current account side of the balance of payments. Savings and investments are on the capital account side. The two should sum to zero (otherwise stuff is being given away for free, which we assume probably doesn't happen).
US consumers buy stuff with US dollars. Where do those US dollars go if the consumers spend them on imported goods? They end up invested in the US (or, depending on your political bent, "the Chinese buy up all of our companies").
The net international investment position (the amount of stuff the US owns abroad minus the amount of stuff other countries own in the US) is about -$11tn as a result of the persistent current account deficit and capital account surplus.
> otherwise stuff is being given away for free, which we assume probably doesn't happen
It sort of does, in that we export USD. Using USD outside the US requires holding USD. Inflation means you need a continuing flow of USD to maintain that balance. Thus, on net the US is actually selling USD for goods.
“Federal Reserve data from 2017 showed that the number of $100 bills exceeded the number of $1 bills. However, a 2018 research paper by the Federal Reserve Bank of Chicago estimated that 80 percent of $100 bills were in other countries.“ https://en.wikipedia.org/wiki/United_States_one_hundred-doll...
This is countered by people in the US holding foreign currency, but the US is very much exporting currency on net.
there is bipartisan support for defending the trade deficit through military expansion, so there is no political will to be gained by drawing attention to this. there is a lot of discussion of this on macro econ podcasts.
That’s because a thorough analysis would need to include Dollars as US exports. That’s our biggest one in fact.
Bretton Woods has led to a US life of luxury and the economists’ joke that the American consumer drives the world economy. It was a nice run. But once we have to print money to service the astronomical debt, it will devalue both the treasuries and the dollar, reducing our purchasing power and putting us to work for others — like they have been doing for us.
Let’s hope we have robots and automation by then :)
Japan has been in worse debt than the US with much worse demographics for 30 years, and they're somehow doing just fine. I think we have plenty of legs still.
I wouldn't say that. They have been suffering from a lost decade that has lasted 30 years. Social stagnation is the highest it's ever been. Yes, there is still a lot of social cohesion but that's maybe just... because they're japanese? Japan is the country where fining families for an suicide that stops the train works because suicidal individuals don't want to inconvenience their families.
Why do people mention "clean streets" all the time? Whether it's sparkling white or covered in grime, it's not as if you're going to roll around on it. It's the street, of course, it is filthy.
The Japan government has a huge debt. But it is mostly owned by Japanese people and firms. If you look at the whole Japan country, state, people and companies together Japan is not in debt, but is a net creditor. So very different from the US as a whole.
The Social Security Trust Fund used to soak up most of the U.S. deficit, but it switched to net outflows 1 or 2 years ago.
For the past 5 months the Federal Reserve has increased its treasury holdings by $250 billion[1], after selling them steadily for the past 2 years as part of QE reversal. Everything I've read said that the recent inability for the Treasury to clear short-term bonds is a technical issue. But I wonder if these two matters are purely coincidental. Perhaps the removal of the SS Trust Fund buffer is starting to catch up with our massive and dramatically increasing (since the Trump tax cut) deficits? Any linkage would have to be indirect, I suppose, but still....
It's a country of two billion people that grew from mostly rural to partly very modern in very short time. Of course they need a much larger money supply than before.
This is sort of ignoring who has the dollars though. Reduced wages for U.S. workers for cheap and often disposable goods where the profits go to rich foreign investors doesn't really sound like a win to me regardless of the capital flow.
The lowest wages are finally rising faster than managers. Also of importance is that the administration is actually deregulating. One new rule means 8 old goes out. On top of that finally dealing with China.
From March 2019:
"The recent jump in paychecks has come with an unusual characteristic, as workers at the lower end of the pay scale are getting the greater benefit."
From October 2019:
"According to analysis by Nick Bunker, an economist with the jobs site Indeed, wage growth is currently strongest for workers in low-wage industries, such as clothing stores, supermarkets, amusement parks, and casinos. And earnings are growing most slowly in higher-wage industries, such as medical labs, law firms, and broadcasting and telecom companies."
Problem is, do you consider outflow dollars as export or debt. Technically, they can be brought back to the US and be used there. That’s not how it works with exports (you are not likely to have a car returned to the US after 20 years), an exported item is an exported item.
I’m still waiting on the doomsday trade war predications from last New Years. I’m not a fan of any politician but it sure seems like the doom and gloomers were wrong in this case.
I didn't support the trade war myself, but I listen to NPR and in the last few months heard them do a number of stories about how the war is affecting consumer prices and how we're all supposed to be impacted. Yet I don't notice any inflation from the war at ground level. I don't think the listeners noticed either. It seemed like the story was designed to point something out that otherwise would have no impact on people.
One more anecdote but a family member's company was put out of business due to the trade war.. small shop, only a handful of employees sourcing factories in China (and Honduras / Italy / Vietnam) for much larger US companies to produce goods for sale worldwide. Think when a large US Firm wants to start producing furniture or fixtures from speciality materials (brass, sustainably sourced mahogany, etc), someone has to be on the ground vetting techniques and doing QA. Sourcing in China had grown to be >50% of their business.
It's the type of thing that won't make the news but certainly devastating to a group of hard working people. My family member had carved out a decent little niche as a manufacturing specialist after the globalization wave off-shored all production at the furniture company they had previously worked for.
One more anecdote... our company makes things entirely in the US by choice. Our competitors bring knockoff garbage in from China, they have been hurting, we’re doing very well.
Which is great and commendable.. that's what the industry my family member worked in used to be like. Until the decision-makers offshored it all and decimated huge swaths of working class US. There are tons of people who don't make decisions about this kind of thing trying to get by.
Maybe the trade war was worth it, maybe not, but there are real people with their livelihoods on the line suffering the whims of some really apathetic people.
I'm curious what industry is making things entirely in the US anymore? Even something like a Tesla Model 3 is 50% non-US these days.
Cant we agree that shipping of jobs to china was wrong and that trying to correct it is right? On more or less all metrics the economy is doing better lowest paid salaries are rising faster then managers, people are starting to save again, jobs are coming back. The trade war is necessary to save the US economy from the same faith Europe is about to get if they dont start taking a stance against china.
Sure, If there’s something that can be done to level trade, let’s do that. It’s just unfortunate that many of the same people whose industries were ravaged by outsourcing had found ways to exist in the post outsourced world, and were again ravaged by this new trade war.
Maybe that’s a necessary cost but it sure is a cost on the backs of people who’ve already paid a lot.
Peter Navarro, who’s directing White House policy in China, was literally hired by Jared Kushner googling for experts who were China critics and finding his ‘Death by China’ book. He is essentially a crank with no academic support and as soon as he was elevated to the national stage, people found substantial fabrications in that book. I have next to zero faith that this crew is the one who is going to right the trade ship.
Aside from his many obvious and damaging fabrications that he has since admitted. The crank reputation is the consensus of just about everyone, left or right, in the international trade world. He doesn't even understand the basics of macro, insisting somehow that reducing imports would increase GDP?
I'm not really trying to argue about China policy.. just provide some context to the people being impacted by the trade war any my skepticism of this administration's ability to fix anything. We're two years into the trade war, which we all know are "good and easy to win", so hopefully we get some progress soon.
So you argument is pointing to someone who disagrees with him? Someone like Krugman who repeatedly have been wrong on almost anything.
Why don't you point to something Navaro has been wrong about in the context of this discussion.
Despite the trade war, the economy is doing great so it's a little puzzling where you get your certainty about their inability to do this when they've actually proved you wrong.
I did point to something Navarro was wrong about, e.g. his insistence that reducing imports would increase GDP, a mistake that a 1st year econ grad student wouldn't make.
But as I've said about 4 times, I'm not trying to argue with you as I'm not an international trade expert, which is why I referred to a bunch of people who are, with my own personal anecdote of this trade war bankrupting a family member's business. Maybe take a less confrontational tone though, it's pretty obnoxious.
Sorry but you seem to be the one with the strong language calling people cranks. The point was China though and it's ok if you don't feel you are in a position to talk about that but then you don't really have a base for knowing whether they make sense or not.
> but there are real people with their livelihoods on the line suffering the whims of some really apathetic people.
Yea. People like my company who for years have been getting hammered by cheap garbage coming in from China because our government basically incentivized that. We chose long term national interests by making our products in USA instead of a short term exploitation of oppressed people and promoting their authoritarian government... now it’s paying off.
the tarrifs are mostly being eaten by china deflating their currency in order to continue selling to the us market. China is more relying on us for their economy than we are on them.
I don't like trump and don't think he reads enough to deserve any credit but the policy is good. We have lived in fear for too long of this doomsday trade war.
Right, but the number itself is useless. If you as a homeowner hire the neighbor kid to mow the lawn, you have a trade deficit with him/her unless he/she pays you to do some task for the same amount.
To say that it is somehow better to have no deficit in the above example is just as absurd as applying the concept to international trade.
Also, trade is complex and involves many countries. Supply chains involve imports and exports from many different countries.
To arbitrarily declare that trading flows should be symmetrical is simply a political weasel meant to inspire people to support policies favoring exporters over those that favor importers.
Bottom line: government meddling in trade is bad for everyone and makes everyone worse off.
This is not about a trade deficit with a specific country, it is about a trade deficit with the rest of the world. It is as if you pay your neighbor kids more than you make yourself.
Well, the logical argument is reductio ad absurdum:
Suppose the US has a trade deficit over the long term. This means that dollars flow out of the US to other countries and goods come in.
How long can this continue? Why would it continue?
Anyone wishing to sell goods to Americans must be willing to accept dollars. Why would anyone be willing to accept fiat money with no intrinsic value in exchange for goods?
The only reason anyone would do this is if there was a widespread expectation that the dollars would continue to have value in the future. Why would they?
Only if there would one day be US exports that would be purchased with these dollars. Those transactions would reduce the trade deficit.
So the value of the fiat currency used to buy imported goods hinges upon the eventual redemption of those dollars for American exported goods and services.
Sure, there are other uses for the dollars (sources of demand for dollars) in the short or medium term, such as for underwriting capital, speculation, etc., but if the markets didn't expect the dollars to be redeemed, they would not be used to accrue a trade deficit in the first place, since there would be the expectation that they would be useless (valueless) in the future.
There is also a pragmatic argument:
You can draw a box around a moment in time or a small group of countries and say "the US has a trade deficit and is worse off", but the question then becomes who in the US is worse off. If Americans import foreign manufactured televisions, millions of Americans save money on a TV, and hundreds or thousands (perhaps) don't find employment manufacturing TVs domestically.
Also, as a brief tangent, calls for domestic steel manufacturing with the goal of protecting national interest are among the most absurd claims. Bulk steel could be purchased and stockpiled by the government for a tiny fraction of the cost of the protectionism. In essence, enough steel for 500 years of skyscrapers, monorails and aircraft carriers could be purchased for the cost of a few months of tariffs.
Economic specialization is what has elevated us out of the stone age. At scale we call this trade. We draw arbitrary boundaries and call them countries and declare "trade deficits", but any suggestion that someone has been harmed must also acknowledge the many others who have benefitted.
The current administration has a highly nationalistic rhetorical strategy. Historically, extreme nationalist movements are accompanied by calls for trade protectionism, because the rhetoric sounds good. People who can't find work find it easy to imagine that if only foreign manufactured goods were manufactured domestically, there would be plenty of employment. In reality, the factors that lead to economic specialization are not evenly or fairly distributed. Some nations have more resources, cheaper labor, more skilled labor, better infrastructure, better laws, etc. Production goes to the place where it can occur most efficiently.
What's interesting to me about the current administration's nationalistic rhetoric on trade protectionism is that there is no effort to talk about fairness (working conditions, workplace safety, environmental externalities) and a simple focus on dehumanizing foreign people. The anti-China trade rhetoric is another way of saying "those people are beneath us", and it is of course as ugly as the rest of the administration's rhetoric.
How much of this is trade policy, ie politics, and how much is the changing tech economy? The US has the strongest corporate IP protections. How much of this shift is because the planet is spending less on physical items and more on IP? Software instead of hardware? Downloadable movie licenses rather than physical DVDs? That would mean Americans importing fewer physical goods and, conversely, non-Americans sending more money into the US in exchange for IP licenses?
Such changes look good at scale, but mean less to people on the ground. I'd rather see someone in the US get a job building something than iTunes sell more music overseas. The sale of IP doesn't trickle down to the shop floor as quickly as the sale of physical objects. It's an economic reality we have yet to properly address but one that can hide in such statistics.
I'm curious how much the swine influenza epidemic in Chinese hogs plays a factor. They have been hit hard, and that is a major protein source in their food supply.
Since “orange man” was president in each of the last three years and all three featured a larger trade deficit than pre-“orange”, this is just total nonsense.
Also, assigning credit (or blame) for jitter in a giant flow doesn’t make sense unless there is particular action taken the effects of which are isolated. So, for example, slapping on some dumb tariff adding $X00 billion to a trade deficit that otherwise fell by $X01 billion due to continuation of existing economic trends isn’t an accomplishment to crow about.
Trade deficits were started by former presidents, what the current administration is doing will hopefully reverse a lot of that. China needs the us more than the other way around. What is dumb is letting the chinese criminal regime continue to cheat and lie their way to more power. Forced technology transfer, no ip enforcement, currency manipulation, unfair advantages as a developing nation status. That none if the previous presidents dealt with that is astounding.
Some very naive questions here from a layperson not skilled in macroeconomics: what's going on here? What's driving this and why is this a problem? What do you view as likely to happen?
This is "US holding foreign assets" - "foreigners holding US assets". It's the other side of the trade deficit (because if you're consuming more than you're producing then inevitably there must be some imbalance created somewhere).
Also being in the red here is often referred to as being a "debtor country". US by far the greatest debtor country in the world at -$10T, next in line is Spain with -$1T, so an order of magnitude less. Main creditor countries are Japan, China, Germany.
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[ 3.1 ms ] story [ 154 ms ] threadHowever, without this trade deficit, US dollar will start declining as the major reserve currency. There just won't be as many dollars around in the world for other countries to hold.
As you surmised, yes, that will be pretty bad for the US.
In the current account you're just looking at the value of goods and services going each way across the border. In the capital account you're looking at investment going one way and the returns flowing back.
A low levels of quantitative easing, it won’t matter much, but there is definitely an inflection point.
Let's say that being a single nationalistic reserve currency gives inordinate power in the hands of a few.
Some societal benefits are:
- There will never be shortages or famines like the Irish potato famine. You need potatoes, you print money and go get them
- There will never be shortages of labor. You need services and companies to support the massive infrastructure, you pay cheap labor and get them. This is why even very small counties in the US can handle online utility payments while it's not common in Germany or Japan
- Any time there is a recession, just print money out of it without worrying about inflation. For ALL other countries, the more they print, the lesser their currency goes in valuation. Think Argentina, Asian countries. US has been printing quite a bit as well but all those extra dollars don't cause inflation. They just provide liquidity. The inflation is exported to other countries. This is why so many countries have so many dollars in reserves now
- This printing press minus the inflation is the reason the US nominal GDP is so high. A haircut in US is the same as haircut in India. But a $70 haircut counts more towards GDP than a Rs 70 haircut
- This currency is also the reason why so many countries give visa on arrival to US citizens. Those countries need dollars and they want to make it easy for people to give it to them. The freedom to travel around the world with such a strong currency is uniquely American. Perhaps only bested by the British in the past
- US currency goes through US banks. Which means it is under US purview. This is how the US imposes sanctions on whoever they don't like. This is enormous power honestly. Japan and Korea are in a trade war but they can't really impose sanctions on each other as much as US on Iran.
Overall, being the reserve currency is an undue advantage that the US has. The standard of living in the US is abnormally high because of it.
The US has been printing lots of dollars, with little inflation, because the rate of demand has matched the rate of printing. But it would be easy to print more dollars than are in demand, and that would cause inflation on the dollar just like any currency.
> - This currency is also the reason why so many countries give visa on arrival to US citizens. Those countries need dollars and they want to make it easy for people to give it to them. The freedom to travel around the world with such a strong currency is uniquely American. Perhaps only bested by the British in the past
This is nationalist nonsense. The US wasn't the strongest passport in 2019[1] and hasn't been in the past 4 years[2][3][4].
[1] https://www.atlasandboots.com/best-passport-to-have/
[2] https://www.telegraph.co.uk/travel/news/powerful-passports-2...
[3] https://www.telegraph.co.uk/travel/lists/most-powerful-passp...
[4] https://www.weforum.org/agenda/2016/09/how-powerful-is-your-...
Hint, global assets are all available for purchase on dollars. As more and more products get built in China and other countries and they are all willing to accept dollars for them, the rate of demand for dollars increases.
As for visa on arrival, most countries on it are similar GDP-wise. Which means their citizens have a low cost to convert to USD and their capital accounts are open so citizens can freely chnage into USD.
So their domestic currencies are almost as good as USD (or even Euros to some extent)
> Hint, global assets are all available for purchase on dollars. As more and more products get built in China and other countries and they are all willing to accept dollars for them, the rate of demand for dollars increases.
This doesn't contradict anything I said.
Yes, I understand why demand for dollars is going up. No, that doesn't mean we can just print dollars faster than demand and expect no inflation.
> As for visa on arrival, most countries on it are similar GDP-wise. Which means their citizens have a low cost to convert to USD and their capital accounts are open so citizens can freely chnage into USD.
So would it be fair to say that you're retracting your statement that this is "uniquely American"?
There will, because the potato famine wasn't caused by lack of money, it was caused by monoculture, historically poor land management practices encouraged by foreign interests, and genocidal tendencies on the part of the English.
If the Irish people had the ability to arbitrarily print money the way you suggest, they still would have been starving because the English would have taken the money AND the food.
a. non-renewable resources like copper ore
b. renewable resources like hydroelectric power
c. the result of low-skill labor, such as assembling plastic toys
d. the result of high-skill labor, such as assembling jet aircraft
e. data that can be licensed, with trivial cost to produce each copy
To be in the best shape we need to have a mix that allows independence, employs people of all skill levels, and generally gives high profit.
How true is that when the only thing that has happened is that the trade deficit is smaller? There is still an outflow, and meanwhile all of the US dollars that moved into foreign hands over the past century are all still out there.
It's more like a reduction in growth rate rather than the cessation of growth, and not a decline at all.
If it went to a trade surplus, sufficiently large to pull back a significant proportion of the dollars already out there, that would be much more of a concern.
Not to mention that there is no other currency out there to be the global reserve currency.
The euro? No thanks say the Germans, who want to continue to run trade surpluses.
The yuan? No thanks say the Chinese, who want to control their exchange rate.
The yen? See the euro.
Sdrs? Not sure how a basket of currencies with no central bank to manage crises is a good solution.
The pound? Thanks, but we have enough issues right now, bugger off.
Any other currency? The market isn't big enough.
This is accurate. However, let's not fool ourselves. Having a single large reserve currency is not the only trading solution out there.
Most countries in close proximity, like south east asian countries for example, can easily trade in their local currencies. In fact, the more that China becomes the biggest importer of goods in Asia, the more irrelevant the dollar would become.
For more on that, this is an excellent read:
https://www.worldcat.org/title/absent-superpower-the-shale-r...
"...I do not think that the role of the dollar provides for the US any “exorbitant privilege”, contrary to what many suppose. Rather, I have argued, it creates an exorbitant burden for the US economy, one that forces the US to choose between higher debt and higher unemployment whenever a country takes steps to force up its savings rate or, which is pretty much the same thing, to force up its current account surplus." https://carnegieendowment.org/2012/11/17/is-there-asian-rmb-...
In a true crisis scenario international trade can fall back to a fixed standard (gold, crypto, whatever) for settling things.
In practice though I'd be surprised if all those countries were really unhappy with their currencies becoming the reserve. Being the reserve creates demand for paper which can be exchanged for real goods - a substantial win for the creators of the currency.
One of the big reasons to use the US dollar as the global reserve is the US government exerts itself to make that happen. If they stopped, others would cheerfully fill the gap. The real point of resistance is replacing the SWIFT system.
Periodic reminder that contrary to forum wisdom, Germany cannot just do whatever it wants in Europe (and France will certainly see to that).
When it comes to monetary policy: the Governing Council of the ECB has 25 members, two of which are German.
But I imagine aiming to be a reserve currency would be a political as well as a monetary decision.
US consumers buy stuff with US dollars. Where do those US dollars go if the consumers spend them on imported goods? They end up invested in the US (or, depending on your political bent, "the Chinese buy up all of our companies").
The net international investment position (the amount of stuff the US owns abroad minus the amount of stuff other countries own in the US) is about -$11tn as a result of the persistent current account deficit and capital account surplus.
It sort of does, in that we export USD. Using USD outside the US requires holding USD. Inflation means you need a continuing flow of USD to maintain that balance. Thus, on net the US is actually selling USD for goods.
“Federal Reserve data from 2017 showed that the number of $100 bills exceeded the number of $1 bills. However, a 2018 research paper by the Federal Reserve Bank of Chicago estimated that 80 percent of $100 bills were in other countries.“ https://en.wikipedia.org/wiki/United_States_one_hundred-doll...
This is countered by people in the US holding foreign currency, but the US is very much exporting currency on net.
Bretton Woods has led to a US life of luxury and the economists’ joke that the American consumer drives the world economy. It was a nice run. But once we have to print money to service the astronomical debt, it will devalue both the treasuries and the dollar, reducing our purchasing power and putting us to work for others — like they have been doing for us.
Let’s hope we have robots and automation by then :)
For the past 5 months the Federal Reserve has increased its treasury holdings by $250 billion[1], after selling them steadily for the past 2 years as part of QE reversal. Everything I've read said that the recent inability for the Treasury to clear short-term bonds is a technical issue. But I wonder if these two matters are purely coincidental. Perhaps the removal of the SS Trust Fund buffer is starting to catch up with our massive and dramatically increasing (since the Trump tax cut) deficits? Any linkage would have to be indirect, I suppose, but still....
[1] https://fred.stlouisfed.org/series/TREAST
I’ve heard wages are very low. 44% of Americans earn $18,000/yr.
From March 2019: "The recent jump in paychecks has come with an unusual characteristic, as workers at the lower end of the pay scale are getting the greater benefit."
Ref: https://www.cnbc.com/2019/03/13/workers-at-lower-end-of-pay-...
From October 2019: "According to analysis by Nick Bunker, an economist with the jobs site Indeed, wage growth is currently strongest for workers in low-wage industries, such as clothing stores, supermarkets, amusement parks, and casinos. And earnings are growing most slowly in higher-wage industries, such as medical labs, law firms, and broadcasting and telecom companies."
Ref: https://www.theatlantic.com/ideas/archive/2019/10/labor-depa...
And Goldman Sachs says the same as of November, check out page 7 specifically: https://www.goldmansachs.com/insights/pages/outlook-2020-f/U...
Also, the trade deficit doesn’t measure services, of which the US has a surplus last I checked.
We ate most of the tariffs in 2019 but you can bet that most of our prices increased in 2020 to reflect the tariffs.
So just wait a little bit longer...
It's the type of thing that won't make the news but certainly devastating to a group of hard working people. My family member had carved out a decent little niche as a manufacturing specialist after the globalization wave off-shored all production at the furniture company they had previously worked for.
Maybe the trade war was worth it, maybe not, but there are real people with their livelihoods on the line suffering the whims of some really apathetic people.
I'm curious what industry is making things entirely in the US anymore? Even something like a Tesla Model 3 is 50% non-US these days.
Maybe that’s a necessary cost but it sure is a cost on the backs of people who’ve already paid a lot.
Peter Navarro, who’s directing White House policy in China, was literally hired by Jared Kushner googling for experts who were China critics and finding his ‘Death by China’ book. He is essentially a crank with no academic support and as soon as he was elevated to the national stage, people found substantial fabrications in that book. I have next to zero faith that this crew is the one who is going to right the trade ship.
He literally predicted the issue with China and got no credit for it.
I don't see a single argument in your post.
Noah Smith: https://www.bloomberg.com/opinion/articles/2016-12-28/trump-...
Cato: https://www.cato.org/publications/commentary/navarros-trade-...
AEI: https://www.aei.org/carpe-diem/donald-trump-and-peter-navarr...
Krugman: https://www.nytimes.com/2018/07/07/opinion/how-to-lose-a-tra...
Kevin Williamson: https://www.nationalreview.com/2017/04/peter-navarro-trump-c...
> I don't see a single argument in your post.
I'm not really trying to argue about China policy.. just provide some context to the people being impacted by the trade war any my skepticism of this administration's ability to fix anything. We're two years into the trade war, which we all know are "good and easy to win", so hopefully we get some progress soon.
Why don't you point to something Navaro has been wrong about in the context of this discussion.
Despite the trade war, the economy is doing great so it's a little puzzling where you get your certainty about their inability to do this when they've actually proved you wrong.
But as I've said about 4 times, I'm not trying to argue with you as I'm not an international trade expert, which is why I referred to a bunch of people who are, with my own personal anecdote of this trade war bankrupting a family member's business. Maybe take a less confrontational tone though, it's pretty obnoxious.
Yea. People like my company who for years have been getting hammered by cheap garbage coming in from China because our government basically incentivized that. We chose long term national interests by making our products in USA instead of a short term exploitation of oppressed people and promoting their authoritarian government... now it’s paying off.
[1] https://tradingeconomics.com/united-states/goods-trade-balan...
https://www.marketwatch.com/story/us-trade-deficit-in-goods-...
https://www.youtube.com/watch?v=MGQaH3-LK54
In fact, economic specialization is the main reason we progressed beyond the simplest hunter gatherer existence.
To say that it is somehow better to have no deficit in the above example is just as absurd as applying the concept to international trade.
Also, trade is complex and involves many countries. Supply chains involve imports and exports from many different countries.
To arbitrarily declare that trading flows should be symmetrical is simply a political weasel meant to inspire people to support policies favoring exporters over those that favor importers.
Bottom line: government meddling in trade is bad for everyone and makes everyone worse off.
Suppose the US has a trade deficit over the long term. This means that dollars flow out of the US to other countries and goods come in.
How long can this continue? Why would it continue?
Anyone wishing to sell goods to Americans must be willing to accept dollars. Why would anyone be willing to accept fiat money with no intrinsic value in exchange for goods?
The only reason anyone would do this is if there was a widespread expectation that the dollars would continue to have value in the future. Why would they?
Only if there would one day be US exports that would be purchased with these dollars. Those transactions would reduce the trade deficit.
So the value of the fiat currency used to buy imported goods hinges upon the eventual redemption of those dollars for American exported goods and services.
Sure, there are other uses for the dollars (sources of demand for dollars) in the short or medium term, such as for underwriting capital, speculation, etc., but if the markets didn't expect the dollars to be redeemed, they would not be used to accrue a trade deficit in the first place, since there would be the expectation that they would be useless (valueless) in the future.
There is also a pragmatic argument:
You can draw a box around a moment in time or a small group of countries and say "the US has a trade deficit and is worse off", but the question then becomes who in the US is worse off. If Americans import foreign manufactured televisions, millions of Americans save money on a TV, and hundreds or thousands (perhaps) don't find employment manufacturing TVs domestically.
Also, as a brief tangent, calls for domestic steel manufacturing with the goal of protecting national interest are among the most absurd claims. Bulk steel could be purchased and stockpiled by the government for a tiny fraction of the cost of the protectionism. In essence, enough steel for 500 years of skyscrapers, monorails and aircraft carriers could be purchased for the cost of a few months of tariffs.
Economic specialization is what has elevated us out of the stone age. At scale we call this trade. We draw arbitrary boundaries and call them countries and declare "trade deficits", but any suggestion that someone has been harmed must also acknowledge the many others who have benefitted.
The current administration has a highly nationalistic rhetorical strategy. Historically, extreme nationalist movements are accompanied by calls for trade protectionism, because the rhetoric sounds good. People who can't find work find it easy to imagine that if only foreign manufactured goods were manufactured domestically, there would be plenty of employment. In reality, the factors that lead to economic specialization are not evenly or fairly distributed. Some nations have more resources, cheaper labor, more skilled labor, better infrastructure, better laws, etc. Production goes to the place where it can occur most efficiently.
What's interesting to me about the current administration's nationalistic rhetoric on trade protectionism is that there is no effort to talk about fairness (working conditions, workplace safety, environmental externalities) and a simple focus on dehumanizing foreign people. The anti-China trade rhetoric is another way of saying "those people are beneath us", and it is of course as ugly as the rest of the administration's rhetoric.
Such changes look good at scale, but mean less to people on the ground. I'd rather see someone in the US get a job building something than iTunes sell more music overseas. The sale of IP doesn't trickle down to the shop floor as quickly as the sale of physical objects. It's an economic reality we have yet to properly address but one that can hide in such statistics.
Also, assigning credit (or blame) for jitter in a giant flow doesn’t make sense unless there is particular action taken the effects of which are isolated. So, for example, slapping on some dumb tariff adding $X00 billion to a trade deficit that otherwise fell by $X01 billion due to continuation of existing economic trends isn’t an accomplishment to crow about.
Also, trade deficits aren't a meaningful issue in and of themselves.
https://fred.stlouisfed.org/series/IIPUSNETIQ#
Also being in the red here is often referred to as being a "debtor country". US by far the greatest debtor country in the world at -$10T, next in line is Spain with -$1T, so an order of magnitude less. Main creditor countries are Japan, China, Germany.
As to what it means you can read Warren Buffet's article from 2003, it's still relevant today (and the situation is far more advanced): https://fortune.com/2016/04/29/warren-buffett-foreign-trade/
Or Bob Prince from Bridgewater: https://youtu.be/DuTm1WA09uk?t=52