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Whoa! I got to the end of this article and was surprised to see that the offer is an econ professor. I've never written a comment this long, but just had to thi

Whoa! I got to the end of this article and was surprised to see that the offer is an econ professor. I've never written a comment this long, but just had to this time. Comparing an international trade deficit to buying books at a Barnes & Noble in a different town? I understand the schema, but it is nowhere near complete or accurate in its intention. Buying books vs. running a trade deficit with Mexico. sure on a micro level the author can run a deficit with the city of Pittstown and still be OK, just as the US could run a deficit with Mexico and still be Ok. I'm assuming that the author is running a surplus in the city where he earns his living. That is the reason the deficit in Pittstown is manageable. The US is running a large deficit overall and therefore the situation is much less manageable. This is a better analogy. The author has a job which makes $50k a year, yet he spends $75k a year = earnings < spending. How does he spend more than he earns? With credit card debt of course. The US issues and sells bonds as debt. The author argues that a deficit is better than a surplus because credit will eventually be cut, but someone can save forever not living to their full utility (economics term for enjoyment). If these scenarios play out, here are the outcomes. The person running a deficit is in debt without the earning power to get out. In this situation they have to cut their spending significantly and hope they can afford to feed themselves. Remember they cannot borrow any more and eventually their assets may be repossessed. The person running a surplus can maintain his current standard of living forever. Depending on the size of his savings, he may be able to quit his job and live off the interest of the savings. He has no debt, only savings, and can most likely increase his utility/standard of living without any further effort or consequences. Both scenarios are equally good?

angryprofessor 19y ago
One important fact you miss (and the author missed also). All US bonds are dollar denominated assets. The dollar was hugely overvalued (and still is, but less), as a direct result of China (and others) buying all this debt. By the time we repay this debt, the dollar will be less overvalued. This means that China gave us a $1=100 yuan loan, and gets back $1=80 yuan (numbers strictly made up, interest neglected). To push the analogy way too far, it's as if I bought stuff on a credit card, with payments due in AngryProfessorBucks (which I can print as many of as I want). So in short, it's good for us, but sucks for China. We get cheap products now, and pay for it with low value currency later.
mhartl 19y ago
This is a better analogy. The author has a job which makes $50k a year, yet he spends $75k a year = earnings < spending. That's not a good analogy for a trade deficit. One way of increasing the trade deficit is to borrow money and spend it. If you mortgage your house to buy books, that certainly increases the "trade deficit" with Barnes & Noble. But someone with, say, a $500K/yr. job could easily afford to spend $75K a year on books, and would run a massive "trade deficit" with B&N without going into debt. It's a potential problem if US individuals or the US government go into massive debt, of course, but whether they use that debt to buy foreign or domestic goods is immaterial. If some of that debt happens to finance the purchase of foreign goods, it drives up the trade deficit, but the problem is the debt, not the deficit. This looks like a linguistic problem as much as anything---people get so hung up on the word "deficit". Given its pervasiveness, though, I suspect that causation actually goes the other way: mercantilism is so intuitively appealing that the imprecise terminology seems almost inevitable.

angryprofessor 19y ago

One important fact you miss (and the author missed also). All US bonds are dollar denominated assets. The dollar was hugely overvalued (and still is, but less), as a direct result of China (and others) buying all this debt. By the time we repay this debt, the dollar will be less overvalued. This means that China gave us a $1=100 yuan loan, and gets back $1=80 yuan (numbers strictly made up, interest neglected). To push the analogy way too far, it's as if I bought stuff on a credit card, with payments due in AngryProfessorBucks (which I can print as many of as I want). So in short, it's good for us, but sucks for China. We get cheap products now, and pay for it with low value currency later.

mhartl 19y ago

This is a better analogy. The author has a job which makes $50k a year, yet he spends $75k a year = earnings < spending. That's not a good analogy for a trade deficit. One way of increasing the trade deficit is to borrow money and spend it. If you mortgage your house to buy books, that certainly increases the "trade deficit" with Barnes & Noble. But someone with, say, a $500K/yr. job could easily afford to spend $75K a year on books, and would run a massive "trade deficit" with B&N without going into debt. It's a potential problem if US individuals or the US government go into massive debt, of course, but whether they use that debt to buy foreign or domestic goods is immaterial. If some of that debt happens to finance the purchase of foreign goods, it drives up the trade deficit, but the problem is the debt, not the deficit. This looks like a linguistic problem as much as anything---people get so hung up on the word "deficit". Given its pervasiveness, though, I suspect that causation actually goes the other way: mercantilism is so intuitively appealing that the imprecise terminology seems almost inevitable.