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Look, there are some table stakes before diving in with strong opinions, so the first thing to understand is the balance of payments identity, namely current ac

by rsj_hn 5y ago

Look, there are some table stakes before diving in with strong opinions, so the first thing to understand is the balance of payments identity, namely current account + changes in capital account = 0 http://www.econ.yale.edu/~ka265/teaching/UndergradFinance/Spr11/Slides/Lecture1-2%20Balance%20of%20Payments.pdf http://www.econ.yale.edu/~ka265/teaching/UndergradFinance/Sp... Now if there was zero foreign investment, then the U.S. deficit spending a lot (please don't use the word "printing money") would cause demand for foreign goods to rise. You are right about that! But - does that mean that we buy more foreign goods or that the value of the dollar falls so that the money spent on foreign goods (in dollar terms) is the same as the money spent by foreigners on our goods? You see, there is another degree of freedom, namely the exchange rate! The exchange rate is all that is needed to clear exports and imports so that there is no trade deficit, and that is true regardless of how much "money printing" happens. So whether or not you get a (net) trade deficit is going to be determined by (net) foreign investment, which raises the dollar and prevents it from falling enough to equalize imports with exports. The residual is the trade deficit. Viewed a different way, the demand for the dollar is the demand for american goods + the demand for american assets. If the demand for assets is zero, then the price of dollars is whatever it needs to be so that our deflated dollar makes our goods sufficiently cheap and foreign goods sufficiently expensive so that the stimulus spending does not cause a trade deficit. Trade deficits are always and everywhere determined by net capital inflows. That is what the Balance of Payments identity is telling you. They are not caused by deficit spending, declines in productivity, failures of our educational system, etc. It really is just capital inflows. All the other stuff is important, as it effects the exchange rate, but it's not important for determining trade deficits.

Jensson 5y ago
> If the demand for assets is zero, then the price of dollars is whatever it needs to be so that our deflated dollar makes our goods sufficiently cheap and foreign goods sufficiently expensive so that the stimulus spending does not cause a trade deficit. This ignores the fact that dollar is used as a reserve currency. Since the dollar is a reserve currency people will want to keep it stable, so even though USA abuses its position as a keeper of this reserve currency by printing a lot of dollars other players still plays along and keeps sending goods to keep the value of the dollar high. But what do you think happens when they stop putting up with how USA abuses them? Well, they stop buying dollars, the dollar crashes, Americans can no longer buy Chinese goods and the American economic dominance ends overnight. Of course this would affect the rest of the world as well so they wont do it that quickly, but even if it happens slower it will still cause a massive crash. I just don't understand why USA keeps digging their hole ever deeper, the more they dig the worse it will get, since right now they are building their economy on top of of a bubble that can be popped by China whenever China wants.
- rsj_hn 5y ago
  > This ignores the fact that dollar is used as a reserve currency. No, it's my whole damn point. Please re-read and stop it with the US "abusing" China by forcing them to run huge surpluses against us. These discussions are not helped with such emotional outbursts -- we are talking about currency markets, not your kids' tuba recital. >Well, they stop buying dollars, the dollar crashes, Yes, the whole point is to get them to stop buying dollars. That's the goal. And no, the dollar doesn't "crash", the dollar falls to its true value, the one in which exports = imports. That is the only possible sustainable value of the dollar. > USA keeps digging their hole ever deeper The only "hole" the U.S. is digging is allowing China to purchase an unlimited amount of dollars. You think China allows the U.S. to do that? It is capital inflows into the US that need to be reigned in, just as China does not allow unrestricted capital inflows into its capital markets.
  - naveen99 5y ago
    > The only "hole" the U.S. is digging is allowing China to purchase an unlimited amount of dollars. You think China allows the U.S. to do that? It is capital inflows into the US that need to be reigned in, just as China does not allow unrestricted capital inflows into its capital markets. What if the us pressured China and India to allow capital to flow to them instead ? Does this make any sense ?: https://twn.my/title/mai1-cn.htm https://twn.my/title/mai1-cn.htm

by rsj_hn 5y ago

Jensson 5y ago

> If the demand for assets is zero, then the price of dollars is whatever it needs to be so that our deflated dollar makes our goods sufficiently cheap and foreign goods sufficiently expensive so that the stimulus spending does not cause a trade deficit. This ignores the fact that dollar is used as a reserve currency. Since the dollar is a reserve currency people will want to keep it stable, so even though USA abuses its position as a keeper of this reserve currency by printing a lot of dollars other players still plays along and keeps sending goods to keep the value of the dollar high. But what do you think happens when they stop putting up with how USA abuses them? Well, they stop buying dollars, the dollar crashes, Americans can no longer buy Chinese goods and the American economic dominance ends overnight. Of course this would affect the rest of the world as well so they wont do it that quickly, but even if it happens slower it will still cause a massive crash. I just don't understand why USA keeps digging their hole ever deeper, the more they dig the worse it will get, since right now they are building their economy on top of of a bubble that can be popped by China whenever China wants.

rsj_hn 5y ago
> This ignores the fact that dollar is used as a reserve currency. No, it's my whole damn point. Please re-read and stop it with the US "abusing" China by forcing them to run huge surpluses against us. These discussions are not helped with such emotional outbursts -- we are talking about currency markets, not your kids' tuba recital. >Well, they stop buying dollars, the dollar crashes, Yes, the whole point is to get them to stop buying dollars. That's the goal. And no, the dollar doesn't "crash", the dollar falls to its true value, the one in which exports = imports. That is the only possible sustainable value of the dollar. > USA keeps digging their hole ever deeper The only "hole" the U.S. is digging is allowing China to purchase an unlimited amount of dollars. You think China allows the U.S. to do that? It is capital inflows into the US that need to be reigned in, just as China does not allow unrestricted capital inflows into its capital markets.
- naveen99 5y ago
  > The only "hole" the U.S. is digging is allowing China to purchase an unlimited amount of dollars. You think China allows the U.S. to do that? It is capital inflows into the US that need to be reigned in, just as China does not allow unrestricted capital inflows into its capital markets. What if the us pressured China and India to allow capital to flow to them instead ? Does this make any sense ?: https://twn.my/title/mai1-cn.htm https://twn.my/title/mai1-cn.htm