Explain trade deficits to me

[The_Librarian]

In “normal” economic theory any trade deficit or surplus will be corrected by rising or falling currency prices. If you run a deficit too high nobody will want any more of your currency and the price will start falling. Same with a trade surplus; if everyone is buying your stuff nobody can’t find enough of your currency to pay for it and your currency will rise in price.

In the real world China is printing yuans like there is no tomorrow and the US Dollar has a mythical “reserve currency” status meaning everybody still wants them even when they are drowning in the stuff.

These realities block “normal” mechanisms to correct the trade surplus/deficit. China, Japan, the Middle East are sitting on stupid large mountains of US Dollars that they can’t use for fear of tanking the market. So they just keep buying more US paper.
The US meanwhile has effectively stopped caring and is printing dollars with abandon.
Sometimes this unsustainable and irresponsible stuff leaks through to consumer goods. Then everyone is complaining about high prices, when your government and the FED have been YOLOing with the debt (and therefore the amount of dollars in the world) since Reagan. That the US is not experiencing Zimbabwe level inflation is unexplainable by classic economics.
There is no real benefit for China to keep buying stockpiling dollars and every other large currency look better managed. But still oil is paid for in Dollars.

Trump only sees the currency manipulation on one (the other) side. He sees the negative trade balance and simply doesn’t understand what weird stuff has to happen to keep that going for as long as it has. He thinks that the world extending the US an endless line of credit is unfair to the US while it has allowed the US to live well above their means since the 80s.

[Chronos]

@Measure_for_Measure

Part of GDP growth - a large part of it - is putting together matter in ever cleverer and more convenient ways. I see no limits to that sort of growth. As an example, laptops have gotten lighter over time - lower mass. They’ve also grown more capable. No contradiction there.

Anyone who says they know what the limit of exponential growth is, is probably wrong. But I still confidently assert that there is a limit, somewhere. And it’s in the nature of exponential growth that that limit will probably come quicker than anyone expects, and when it hits, it’ll hit hard and suddenly. Prudence then dictates that we should be preparing now for what happens when we hit that limit. Prosperity without growth is possible. We need to try to transition to that. It won’t just happen on its own: If we rely on it happening on its own, then what we’ll get is poverty without growth.

[Northern_Piper]

@Chronos

And it’s in the nature of exponential growth that that limit will probably come quicker than anyone expects, and when it hits, it’ll hit hard and suddenly.

As Hemingway said in The Sun Also Rises:

“How did you go bankrupt?” Bill asked.
“Two ways,” Mike said. “Gradually and then suddenly.”

[Measure_for_Measure]

@Chronos

Prosperity without growth is possible.

This is a claim with zero empirical support. It might be true. But there is no evidence for it. At the very least there are no examples of it.

Also and again, economic growth does not imply mining ever larger amounts of iron or pumping ever larger amounts of CO2 into the air. I say this because much of long term growth is technological, in terms of simple growth models a big driver is total factor productivity (and much of the capital input is technological as opposed to purely resource based).

You can see this effect by comparing world energy usage vs GDP growth. Over the past 25 years economic growth has surpassed energy usage growth. That might not be especially reassuring, but it supports my contention that economic growth is not synonymous with more matter.

@Chronos

And it’s in the nature of exponential growth that that limit will probably come quicker than anyone expects, and when it hits, it’ll hit hard and suddenly.

Not if we have good price signals (which we don’t - there’s disturbingly little attention to resource scarcity 20 or 30 years out). I sort of agree with you, if you consider the 1974 and 1978 oil price shock to be hitting hard. But they really aren’t if you thinking in terms of, say, a 50% reduction in productive inputs.

@Chronos

Prudence then dictates that we should be preparing now for what happens when we hit that limit.

I’m all for prudence and long term thinking. But we need to think clearly about this. What’s needed is a shift in the type of growth - more technology, less mining of energy fuel - not a halt to growth altogether, whether that be done fast or slow. If you followed the Limits model, you would be focused on metals and misapplying estimates of resource abundance.

[Measure_for_Measure]

Back to the OP:

How can trade deficits even exist? We trade our bonds for the foreigner’s goods on net. Foreigners buy our bonds with their excess savings. Savings (or dis-savings) can come from governments or corporations, but households are a big source.

The flip side of household savings is household consumption. US household consumption is high (savings low). China is the reverse. Here’s a chart from the Economist Magazine:

Eyeballing that’s about 39% vs 68% of GDP. That’s quite a difference. Germany is an export powerhouse and hey, look at their low household consumption (high household savings).

China is currently boosting consumption. They’ve already burst their housing bubble so they won’t have to deal with a housing crisis and a Trump crisis simultaneously. The Chinese government is encouraging its companies to pass on the full costs of the tariffs on to American customers. They anticipate a US recession and acknowledge that Chinese exports to the US tends to be more output sensitive than price sensitive. The Chinese are feeling confident, not welcoming these shocks to the world economy, but taking them in stride and strengthening counter-cyclical policies, per Politburo directions.

Tariffs are a tax on exports, since much of advanced country production involves a global supply chain. The US is applying a negative supply shock to itself. So don’t expect the US and Germany to trade places.

[Measure_for_Measure]

@Chronos

But the other side of that is that, eventually, the economy stops growing. Or at least, the growth slows. Exponential growth is never sustainable indefinitely.

Back to the tangent: prices can rise by a fluctuating percentage indefinitely. In fact, I expect that they will. Ok, ok, prices are intangible, conceptual, not firmly tied to physical matter. But so is a big chunk of real GDP growth. Improved design makes some consumer durables lighter, leading to growth in the economy but not growth in mining raw materials for the economy.

[md-2000]

@The_Librarian

In “normal” economic theory any trade deficit or surplus will be corrected by rising or falling currency prices. If you run a deficit too high nobody will want any more of your currency and the price will start falling. Same with a trade surplus; if everyone is buying your stuff nobody can’t find enough of your currency to pay for it and your currency will rise in price.

This is the key. As long as the USA has bonds for sale, and foreigners see value in buying them, this treadmill would go on. Otherwise, what will happen is the US dollar will decline to the point where imports become more expensive and local manufacturing can compete.

I think one piece missing in the discussion is government policy encouraging industry to invest. China - and before them, Japan and then Korea, not to mention Taiwan - did not accidentally become economic powerhouses through low wages. Assorted government direction and support helped bigly. (Japan’s MITI was notorious for this in the 1980’s when Japan was going to dominate the world…)

But the thing that feeds this cycle for the USA is that the Republicans for decades have refused to rais taxes to pay for the level of government necessary for a large industrial society. the 1890’s had no income taxes, just tariffs. But at the time, it was the biggest single market in a world where every country walled off its industry with tariffs, and it had most of the needed resources, and was criss-crossed by rail for distribution. Now, the whole world is like that. Meanwhile, unlike 1890’s, the government has the FCC, FAA, NASA, FTC, SEC, FDA, NIH, NOAA , Social Security, high cost medical care, and a high tech navy and air force to support.

So instead of taxing, the government borrows and this balances the excess purchases from abroad. This will go on until foreign entities decide the USA is a bad investment. An echo of this was seen in the bond market sell-off the last few days.

@Measure_for_Measure

Also and again, economic growth does not imply mining ever larger amounts of iron or pumping ever larger amounts of CO2 into the air. I say this because much of long term growth is technological, in terms of simple growth models a big driver is total factor productivity (and much of the capital input is technological as opposed to purely resource based).

But what then is growth? does it need bigger populations, etc.? (The world is due to find out) Consider the computer technology market. It’s gone from almost nothing ( afew punchcard machines) to a major component of the economy… as did rail in the late 1800’s, automobiles in the mid 1900’s, air travel in the later 1900’s, etc. Cycles of increasing technology. I have a book on critique of Limits to Growth buried somewhere in my basement. It’s premise is just that - technology replaces resources. Not enough copper? we’re about to recycle thousands of miles of copper cable replaced by fiber optic - basically, sand. Oil? Replaced by electric vehicles as much as possible. And telecommuting. and so on. Automation increases production cheaply. It’s a miracle of modern automation that a few percent of the population produce massive surpluses of food for the world, where agriculture used to be the primary occupation of almost everyone.

[Measure_for_Measure]

@md-2000

But what then is growth?

Growth is growth in the value of economic output. You can increase it with more labor. You can increase it with more resources. You can increase it by buying factories and machinery and research facilities. And you can increase it with more technology. (Generally, we’re most interested in per-person economic growth, so adding population roughly speaking doesn’t work so well for that.) If you want sustainable growth, make sure that you put a price on the inputs or necessities of production. That would include a price on pollution emissions, currently priced at zero in the US (we control pollution with requirements. Except for SO2, which has tradable emission permitting to limit acid rain.).