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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 thi

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.
  - kerkeslager 7y ago
    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]. [1] https://www.atlasandboots.com/best-passport-to-have/ https://www.atlasandboots.com/best-passport-to-have/ [2] https://www.telegraph.co.uk/travel/news/powerful-passports-2018/ https://www.telegraph.co.uk/travel/news/powerful-passports-2... [3] https://www.telegraph.co.uk/travel/lists/most-powerful-passports-in-the-world/ https://www.telegraph.co.uk/travel/lists/most-powerful-passp... [4] https://www.weforum.org/agenda/2016/09/how-powerful-is-your-passport-2016-rankings/ https://www.weforum.org/agenda/2016/09/how-powerful-is-your-...
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.

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.
- kerkeslager 7y ago
  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]. [1] https://www.atlasandboots.com/best-passport-to-have/ https://www.atlasandboots.com/best-passport-to-have/ [2] https://www.telegraph.co.uk/travel/news/powerful-passports-2018/ https://www.telegraph.co.uk/travel/news/powerful-passports-2... [3] https://www.telegraph.co.uk/travel/lists/most-powerful-passports-in-the-world/ https://www.telegraph.co.uk/travel/lists/most-powerful-passp... [4] https://www.weforum.org/agenda/2016/09/how-powerful-is-your-passport-2016-rankings/ https://www.weforum.org/agenda/2016/09/how-powerful-is-your-...

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.