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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

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.

deleted 7y ago
[deleted]
nine_zeros 7y ago
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.
- wyxuan 7y ago
  No, it includes capital inflow. I believe (and I may be wrong here), foreign investment in the US counts as an addition to the deficit.
- s_Hogg 7y ago
  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.
- jotto 7y ago
  Can you expand on why it would be pretty bad for the US?
  - wyxuan 7y ago
    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.
    - selectodude 7y ago
      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.
    - alasdair_ 7y ago
      The very act of printing too much currency would cause the dollar to become less and less safe. A low levels of quantitative easing, it won’t matter much, but there is definitely an inflection point.
  - nine_zeros 7y ago
    Very good question. 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.
- burfog 7y ago
  "resources" is an oversimplification. These are incredibly different: 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.
- AnthonyMouse 7y ago
  > 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.
  - mooreds 7y ago
    > However, without this trade deficit, US dollar will start declining as the major reserve currency. 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.
    - nine_zeros 7y ago
      > 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.
      - mooreds 7y ago
        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.) For more on that, this is an excellent read: https://www.worldcat.org/title/absent-superpower-the-shale-revolution-and-a-world-without-america/oclc/970659463 https://www.worldcat.org/title/absent-superpower-the-shale-r...
- NovemberWhiskey 7y ago
  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.
  - Retric 7y ago
    > 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-dollar_bill 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.
- ykevinator 7y ago
  Buying is not capital its expense.
jotto 7y ago
Why do you think there's not more discussion around forfeiting the privileged position? Or am I wrong, and is there a lot of discussion on it already?
- dustingetz 7y ago
  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.
EGreg 7y ago
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 :)
- onlyrealcuzzo 7y ago
  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.
  - dnautics 7y ago
    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.
    - adrianN 7y ago
      Japan is also a country with excellent infrastructure, low crime, clean streets, and great universities.
      - plumednom 7y ago
        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.
    - chrischen 7y ago
jrs95 7y ago
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.
- ThomPete 7y ago
  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.
  - TaylorAlexander 7y ago
    Do you have a source for the claim that low wages are rising more quickly than that of the managers? That would be good news if true. I’ve heard wages are very low. 44% of Americans earn $18,000/yr.
    - caseysoftware 7y ago
      There's lots of sources around it: 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-scale-getting-most-benefit-from-rising-wages.html 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-departments-new-report-isnt-so-gloomy/599491/ 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/US/report.pdf https://www.goldmansachs.com/insights/pages/outlook-2020-f/U...
csomar 7y ago
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.
deepsun 7y ago
Nope, trade deficit is capital outflow. US spends dollars (or gold reserves) to buy goods that are mostly consumed.
- hylaride 7y ago
  But those dollars need to be spent and the easiest place to either spend or stash them is back in the US. Also, the trade deficit doesn’t measure services, of which the US has a surplus last I checked.

deleted 7y ago

[deleted]

nine_zeros 7y ago

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.

wyxuan 7y ago
No, it includes capital inflow. I believe (and I may be wrong here), foreign investment in the US counts as an addition to the deficit.
s_Hogg 7y ago
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.
jotto 7y ago
Can you expand on why it would be pretty bad for the US?
- wyxuan 7y ago
  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.
  - selectodude 7y ago
    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.
  - alasdair_ 7y ago
    The very act of printing too much currency would cause the dollar to become less and less safe. A low levels of quantitative easing, it won’t matter much, but there is definitely an inflection point.
- nine_zeros 7y ago
  Very good question. 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.
burfog 7y ago
"resources" is an oversimplification. These are incredibly different: 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.
AnthonyMouse 7y ago
> 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.
- mooreds 7y ago
  > However, without this trade deficit, US dollar will start declining as the major reserve currency. 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.
  - nine_zeros 7y ago
    > 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.
    - mooreds 7y ago
      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.) For more on that, this is an excellent read: https://www.worldcat.org/title/absent-superpower-the-shale-revolution-and-a-world-without-america/oclc/970659463 https://www.worldcat.org/title/absent-superpower-the-shale-r...
NovemberWhiskey 7y ago
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.
- Retric 7y ago
  > 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-dollar_bill 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.
ykevinator 7y ago
Buying is not capital its expense.

jotto 7y ago

Why do you think there's not more discussion around forfeiting the privileged position? Or am I wrong, and is there a lot of discussion on it already?

dustingetz 7y ago
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.

EGreg 7y ago

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 :)

onlyrealcuzzo 7y ago
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.
- dnautics 7y ago
  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.
  - adrianN 7y ago
    Japan is also a country with excellent infrastructure, low crime, clean streets, and great universities.
    - plumednom 7y ago
      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.
  - chrischen 7y ago

jrs95 7y ago

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.

ThomPete 7y ago
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.
- TaylorAlexander 7y ago
  Do you have a source for the claim that low wages are rising more quickly than that of the managers? That would be good news if true. I’ve heard wages are very low. 44% of Americans earn $18,000/yr.
  - caseysoftware 7y ago
    There's lots of sources around it: 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-scale-getting-most-benefit-from-rising-wages.html 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-departments-new-report-isnt-so-gloomy/599491/ 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/US/report.pdf https://www.goldmansachs.com/insights/pages/outlook-2020-f/U...

csomar 7y ago

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.

deepsun 7y ago

Nope, trade deficit is capital outflow. US spends dollars (or gold reserves) to buy goods that are mostly consumed.

hylaride 7y ago
But those dollars need to be spent and the easiest place to either spend or stash them is back in the US. Also, the trade deficit doesn’t measure services, of which the US has a surplus last I checked.