Tuesday, February 13, 2007

And the Money Keeps Flowing

It very easy to find data about the US trade deficit. For example, today a major headline on Google News blared "US trade deficit surges to record $763 billion." Most people find this to be a bad thing, which I suppose is why this data--historical and otherwise--are so easy to find.

It's much harder to find data on the US capital account, or the difference between foreign investment in the US and American investment abroad. The money being invested elsewhere is called an outflow and the money commoning in is called an inflow. Most economists realize a trade deficit is the mirror image of the capital account; the numbers are essentially the same, which might be why they are hard to find. If you don't agree, I found a nice pair of graphs.

This is a little rougher than I'd like but bare with me. First, note the second graph (found here) covers about twice as much time as the first one, so pay attention only to the 1990s. Second, ignore the grey bars. They are not important for our purposes. Third and most importantly, pay attention to the difference between the inflow and the outflow--remember that's the capital account.

This difference follows a pattern that mimics the trade deficit. In the 1990s, the trade deficit was small, as was the difference between the capital flows. In about 1997, the deficit took off just as inflow rapidly outpaced outflow. 2001 showed a little bump in the trade deficit when the inflow fell a little sharper than the outflow. Take a close look at the end of the second graph. The difference looks to be about $600 billion, matching the trade deficit in the same time period.

Trade is a cozy relationship. When a country does well, wages go up and it imports a lot, increasing the trade deficit. But wealthy country are also great places to invest and that money is sent back in another form: capital inflow. Some sectors are helped and others are hurt, but in the big picture a trade deficit isn't something to be feared.


B Tween said...

Trade is a cozy relationship.
When a country does well, wages go up and it imports a lot, increasing the trade deficit.

This is precisely why a deficit should be feared.
That "outflow" you mention is money that should be invested in our own economy to strengthen manufacturing and spur productivity at home.
When we run a defcit, there is downward pressure on the dollar - the Fed deliberately devalues the dollar - so the true worth of the money we're sending over to China diminishes over time. This is partly why our government so stridently demands that China let its currency float: so we can rip them off by making the dollars we've sent them worth less.
China says no way, you're not going to screw us the way you've screwed the Arabs who take your progressively worth-less dollars for oil.
If you want a true measure of the *value* of any currency, always remember this:
Since Roman times it's been true that a man could buy a good suit with 1 oz of gold.
That was true during the reign of Ceasar, through the Medieval times and the Enlightenment, and it's still true today.
A real economist will measure *value* not dollars per se.
If you were to measure an index like the Dow against dollars and against something with inherent worth like Gold, you'd see the Dow has actually been trending DOWN, NOT UP.
The Dow isn't going up, the dollar is crashing and it takes more of them to buy one share of the Dow.
The dollar is crashing because of our trade and current account deficits.
You know what China is doing with those dollars?
Lending them to us by buying treasury bonds.
If we continue to devalue our dollar, how long do you think they're going to continue doing that?
And when they stop, where does the money come from to pay for the incredibly reckless spending our government is enjoying?
The answer is probably still China. The difference is we will have to make up for the boondoggle by paying high interest on the loans they're making to us.
Think 10% on treasuries. Then think what that means to American consumers.
You think this deficit isn't something to be feared?
That's crazy talk.
Personally, I've been watching this stuff for years and have been buying gold and silver since they were $200 and $5 an oz respectively.
I'm not worried about it because I'm ready for the bill to come due. But the rest of the country has been pretending all is well, and they will pay dearly for that ignorance.
Good luck!

David said...

If what you are saying is true, then why are businesses giving up perfectly good resources for "progressively worth-less dollars"?

Moreover, why are they sending the money back to invest in the US if the economy, in your mind, is doing so poorly? While it's true that some money goes to fund US debt, much more of it goes to the private sector. But even if this wasn't true, and most went to fund debt, that's a reason to balance the budget deficit, not a reason to fiddle with trade.