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Additionally when we import from China, we pay with dollars. China can either buy US goods with the dollars, or buy US assets (typically Treasury bonds) with t

by JackFr 8y ago

Additionally when we import from China, we pay with dollars. China can either buy US goods with the dollars, or buy US assets (typically Treasury bonds) with the dollars. If you end the trade surplus with China, you end a cheap source of funding for the US government. Not clear if this is a feature or a bug.

adventured 8y ago
China hasn't net added much to its treasury holdings in 15 years (it hit around $1 trillion back in 2003, it's now at ~$1.2 trillion). In that time they've probably run a $4 trillion trade surplus. Clearly that isn't how it works at this point, they're intentionally avoiding buying more US paper. In that time US debt has gone from $6.7t to $21t. Their share has gone from 15% or so, to 5.7%. They're no longer a funding source for new US debt, and are no longer a critical funding source of existing debt (although hey, it's nice to have them squatting on that trillion dollars and not liquidating it).
- rsj_hn 8y ago
  The Rest of the World has never been a funding source for the U.S. It's impossible, because to purchase a treasury, the Rest of the World must first obtain dollar from an American, which decreases our income. Then, they purchase the treasury instead of the american. If someone grabs your wallet and then buys a share of stock with the money inside, they aren't funding the stock market and you don't need to be grateful to them.
  - gonvaled 8y ago
    You are giving the dollars to foreigners, in exchange of goods. Nobody is forcing you to do that. If you feel those products are not worth your dollars, do not buy them.
    - rsj_hn 8y ago
      Nobody is forcing you, but the forex rate adjusts so that the appropriate amount of goods is bought voluntarily. If country A bans foreign capital inflows and purchases $10 of foreign assets, then that forces a trade surplus of $10. Yes, that $10 transaction will be voluntary because it's currency will adjust so that the transaction is made. But from the macro point of view, the foreign capital flows drive the "voluntary" transactions.
      - gonvaled 8y ago
        Well, that is how much the dollars are worth then.
        rsj_hn 8y ago
        The dollars are worth whatever the relative foreign policies set. If China has a policy to depreciate against the dollar, by printing Yuan and buying dollars with them (what happens now) then the dollars end up being "worth" more, but the underlying capacity to produce of the U.S. hasn't increased, indeed it starts to decrease as people start to buy cheaper foreign output. So it's a bit disingenuous to say "well, people like these cheap goods" -- I mean, of course they do, but the story here is the foreign capital inflows which create an excessively expensive currency leading to a preference for certain types of goods. The whole ground is moving underneath you as a result of international policies and you don't see it, you just see people "choosing" to act.
        gonvaled 8y ago
        The US manipulates the currency market in other, more powerful and more fundamental ways, by controlling the global currency. You do not need to hold foreign reserves, you do not need to pay exchange commissions, you are not blocked to do business with third parties by having capital flows stopped ...
        rsj_hn 8y ago
        I don't think you understand what you are saying here. Yes, the U.S. has the world's reserve currency _because_ it allows unrestricted foreign capital inflows and has a long respect for property rights and rule of law. Try, as a foreigner, buying a house in China. It's illegal. Try, as a foreigner, to buy a house in the U.S. -- no problem. The U.S. opens it's markets to the rest of the world to purchase American assets while the rest of the world closes its markets. If you are a foreigner, you can buy all the corporate and government bonds you want. You can repatriate money out of the U.S. in unlimited amounts. In China, this is illegal. They don't even allow their own citizens to move more than a small amount of money out of their country. There is a great black market of people smuggling money into and out of china because the government restricts cross border capital flows -- like hiding money in your socks or trick suitcases, bribing border guards to let you through stuff. This is why the U.S. is the reserve currency, and it is also why we have a trade deficit, because as the rest of the world's capital pours into the U.S., that forces our currency to be overvalued enough to have an equal sized trade deficit on the way out. Whereas you seem to think that that the U.S. "manipulating" it's currency by making U.S. currency more attractive to hold for foreigners -- is somehow a counter or offsets what China is doing, which is making its currency less attractive to hold. But it's not, these two work together to cause the same distortion and large trade deficits.
rsj_hn 8y ago
This is completely backwards. There is a trade deficit with China, not a trade surplus, and the result of that deficit is lost private income which increases the U.S. government deficit as we then pay more benefits to the displaced workers. So trade deficits create budget deficits. Second, it is impossible for a foreign nation to "fund" the U.S., which is a currency issuer. Rather, because we have open capital markets, we allow foreigners to purchase U.S. assets -- something that most other nations don't allow, including China. What this means is that there is a demand for dollars other than the trade demand, but an asset demand. This allows trade deficits to occur. If you want to stop trade deficits, then don't impose tariffs, but do what China does and ban capital inflows. With no foreign capital inflows, there are no trade deficits -- the golden rule of international trade is that the changes to the capital account plus the changes to the current account must equal 0. No change to one implies no changes to the other, as a mathematical identity. The way to understand this mathematical relationship is that when the rest of the world sells a good to the U.S., it gets a dollar, and now it has a choice of using that dollar to buy an asset or using it to buy a good. If it is very hard to buy assets, then you buy a good. In this way, the exchange rate adjusts so that the rest of the world doesn't have a trade deficit or surplus. The reason why you want balanced trade is that when the foreigner gets a dollar by selling a good, but doesn't spend the dollar on buying an american good, then american economy has 1 dollar less income and it needs to sell off $1 of an asset. Selling assets does not produce income but selling goods does produce income. This is why nations like China basically ban selling assets to foreigners and so it's impossible for them to have trade deficits. There are very few nations that have the open capital markets of the U.S. -- really no nation, and our unique policies on capital are why we have such a uniquely large trade deficit.
gonvaled 8y ago
This is a bug exploited as feature. Pretty sure this happened organically, it was not a dollar design decission, but it has, and is, exploited to the advantage of the US, economically and politically. If we want fairer international trade, the dollar must be ditched.

by JackFr 8y ago

adventured 8y ago

China hasn't net added much to its treasury holdings in 15 years (it hit around $1 trillion back in 2003, it's now at ~$1.2 trillion). In that time they've probably run a $4 trillion trade surplus. Clearly that isn't how it works at this point, they're intentionally avoiding buying more US paper. In that time US debt has gone from $6.7t to $21t. Their share has gone from 15% or so, to 5.7%. They're no longer a funding source for new US debt, and are no longer a critical funding source of existing debt (although hey, it's nice to have them squatting on that trillion dollars and not liquidating it).

rsj_hn 8y ago
The Rest of the World has never been a funding source for the U.S. It's impossible, because to purchase a treasury, the Rest of the World must first obtain dollar from an American, which decreases our income. Then, they purchase the treasury instead of the american. If someone grabs your wallet and then buys a share of stock with the money inside, they aren't funding the stock market and you don't need to be grateful to them.
- gonvaled 8y ago
  You are giving the dollars to foreigners, in exchange of goods. Nobody is forcing you to do that. If you feel those products are not worth your dollars, do not buy them.
  - rsj_hn 8y ago
    Nobody is forcing you, but the forex rate adjusts so that the appropriate amount of goods is bought voluntarily. If country A bans foreign capital inflows and purchases $10 of foreign assets, then that forces a trade surplus of $10. Yes, that $10 transaction will be voluntary because it's currency will adjust so that the transaction is made. But from the macro point of view, the foreign capital flows drive the "voluntary" transactions.
    - gonvaled 8y ago
      Well, that is how much the dollars are worth then.
      - rsj_hn 8y ago
        The dollars are worth whatever the relative foreign policies set. If China has a policy to depreciate against the dollar, by printing Yuan and buying dollars with them (what happens now) then the dollars end up being "worth" more, but the underlying capacity to produce of the U.S. hasn't increased, indeed it starts to decrease as people start to buy cheaper foreign output. So it's a bit disingenuous to say "well, people like these cheap goods" -- I mean, of course they do, but the story here is the foreign capital inflows which create an excessively expensive currency leading to a preference for certain types of goods. The whole ground is moving underneath you as a result of international policies and you don't see it, you just see people "choosing" to act.
        gonvaled 8y ago
        The US manipulates the currency market in other, more powerful and more fundamental ways, by controlling the global currency. You do not need to hold foreign reserves, you do not need to pay exchange commissions, you are not blocked to do business with third parties by having capital flows stopped ...
        rsj_hn 8y ago
        I don't think you understand what you are saying here. Yes, the U.S. has the world's reserve currency _because_ it allows unrestricted foreign capital inflows and has a long respect for property rights and rule of law. Try, as a foreigner, buying a house in China. It's illegal. Try, as a foreigner, to buy a house in the U.S. -- no problem. The U.S. opens it's markets to the rest of the world to purchase American assets while the rest of the world closes its markets. If you are a foreigner, you can buy all the corporate and government bonds you want. You can repatriate money out of the U.S. in unlimited amounts. In China, this is illegal. They don't even allow their own citizens to move more than a small amount of money out of their country. There is a great black market of people smuggling money into and out of china because the government restricts cross border capital flows -- like hiding money in your socks or trick suitcases, bribing border guards to let you through stuff. This is why the U.S. is the reserve currency, and it is also why we have a trade deficit, because as the rest of the world's capital pours into the U.S., that forces our currency to be overvalued enough to have an equal sized trade deficit on the way out. Whereas you seem to think that that the U.S. "manipulating" it's currency by making U.S. currency more attractive to hold for foreigners -- is somehow a counter or offsets what China is doing, which is making its currency less attractive to hold. But it's not, these two work together to cause the same distortion and large trade deficits.

rsj_hn 8y ago

This is completely backwards. There is a trade deficit with China, not a trade surplus, and the result of that deficit is lost private income which increases the U.S. government deficit as we then pay more benefits to the displaced workers. So trade deficits create budget deficits. Second, it is impossible for a foreign nation to "fund" the U.S., which is a currency issuer. Rather, because we have open capital markets, we allow foreigners to purchase U.S. assets -- something that most other nations don't allow, including China. What this means is that there is a demand for dollars other than the trade demand, but an asset demand. This allows trade deficits to occur. If you want to stop trade deficits, then don't impose tariffs, but do what China does and ban capital inflows. With no foreign capital inflows, there are no trade deficits -- the golden rule of international trade is that the changes to the capital account plus the changes to the current account must equal 0. No change to one implies no changes to the other, as a mathematical identity. The way to understand this mathematical relationship is that when the rest of the world sells a good to the U.S., it gets a dollar, and now it has a choice of using that dollar to buy an asset or using it to buy a good. If it is very hard to buy assets, then you buy a good. In this way, the exchange rate adjusts so that the rest of the world doesn't have a trade deficit or surplus. The reason why you want balanced trade is that when the foreigner gets a dollar by selling a good, but doesn't spend the dollar on buying an american good, then american economy has 1 dollar less income and it needs to sell off $1 of an asset. Selling assets does not produce income but selling goods does produce income. This is why nations like China basically ban selling assets to foreigners and so it's impossible for them to have trade deficits. There are very few nations that have the open capital markets of the U.S. -- really no nation, and our unique policies on capital are why we have such a uniquely large trade deficit.

gonvaled 8y ago

This is a bug exploited as feature. Pretty sure this happened organically, it was not a dollar design decission, but it has, and is, exploited to the advantage of the US, economically and politically. If we want fairer international trade, the dollar must be ditched.