Sunday, December 4, 2016

Rather than reflecting the failure of American economic policy, the trade deficit may be better viewed as a sign of success.

See Want to Rev Up the Economy? Don’t Worry About the Trade Deficit by Greg Mankiw.
"The most important lesson about trade deficits is that they have a flip side. When the United States buys goods and services from other nations, the money Americans send abroad generally comes back in one way or another. One possibility is that foreigners use it to buy things we produce, and we have balanced trade. The other possibility, which is relevant when we have trade deficits, is that foreigners spend on capital assets in the United States, such as stocks, bonds and direct investments in plants, equipment and real estate.

In practice, these capital inflows from abroad have been large. Net foreign ownership of American capital assets has risen to about $8 trillion from $2.5 trillion at the end of 2010."

"It is easy to understand why foreigners are eager to buy American assets. Despite the meager recovery from the financial crisis and recession of 2008-9, the United States remains one of the more vibrant economies of the developed world. And if you want a safe place to park your wealth, United States Treasuries are your best bet.

The trade deficit is inextricably linked to this capital inflow. When foreigners decide to move their assets into the United States, they have to convert their local currencies into American dollars. As they supply foreign currency and demand dollars in the markets for currency exchange, they cause the dollar to appreciate."

"many of the policies proposed by Mr. Trump will increase the trade deficit rather than reduce it. He has proposed scaling back both burdensome business regulations and taxes on corporate and other business income. His tax cuts and infrastructure spending will most likely increase the government’s budget deficit, which tends to increase interest rates. These changes should attract even more international capital into the United States, leading to an even stronger dollar and larger trade deficits."

"When American consumers facing higher import prices from tariffs stop buying certain products from abroad, they will supply fewer dollars in foreign-exchange markets. The smaller supply of dollars will drive the value of the dollar further upward."

"The United States had a large trade deficit in 2009, when the unemployment rate reached 10 percent, but it had an even larger trade deficit in 2006, when the unemployment rate fell to 4.4 percent."

"the trade deficit may be better viewed as a sign of success. The relative vibrancy and safety of the American economy is why so many investors around the world want to move their assets here. (And similarly, it is why so many workers want to immigrate here.)"

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