The US trade deficit has been declining recently but is still huge with respect to China.

Trade Deficit Story

Most of the members of the "chattering class" including the liberal media establishment, liberal democrats, and "moderate" republicans have openly declared that this amounts to a "crises" and is a state of affairs that is dangerous to the long-term financial health of the USA.

But is it?

For debate:

1. Is the US trade deficit a bad thing, good thing, a non issue? Why?

For debate:

1. Is the US trade deficit a bad thing, good thing, a non issue? Why?

I think your link might be incorrect - I got a story on small business confidence which didn't as far as I could make out, mention the trade deficit.

Like many things, the answer is more complex than you're making out. The economy is growing and there's a deficit, which indicates that there's a weakness in the supply side that cannot produce enough goods or services to satisfy domestic demand. On the other hand, because the manufacturing has been outsourced to cheaper countries, is has had a significant restraining effect on inflation, which is, by and large, a good thing.

A trade deficit is not really a problem in and of itself - certainly, Germany has had a trade surplus for decades now, as has Japan, but their economies have been in the doldrums for some time, though they do now seem to be picking up. I dare say that the economic prospects for an individual in Japan or Germany were, if anything, slightly worse under their consistent surpluses during this time than those of an individual American during the same period under the deficit.

However, in times of deficit, domestic demand tends to be fuelled by debt. (This is also true of government spending, especially if you cut taxes and increase spending within the same cycle.) Sooner or later, you have to pay back those debts.

What's worrying about the deficit is not so much it's sheer size, though that boggles the mind, but that it is debt-fuelled, that it coincides with record government deficits, and that it is ultimately funded by mostly foreign lenders. Whether the landing is soft or hard, the future of the USA is going to involve not being able to spend some of the money you earn (as individuals and as a country as a whole) on your own domestic priorities, no matter what they are, because someone else - the lender - will have first call on it.

So, in summary, I'd say that the trade deficit is not something to panic about, but is something that requires management (the same way the economy as a whole does). It is certainly not a non-issue. It'll only turn out to be a bad thing if it's badly-managed. (In which case, it won't be the deficit itself that's "bad", but the management of it.)

Ding! Ding! Ding! Ding! We have a winner, Johnny!

Yes, that is exactly the problem we are facing. Our trade deficit has created trade surpluses in other countries, notably China and Japan. They have needed someplace to put that money, and one of the main places they've put it is into our governmental debt instruments. In essence, our budget deficit is being funded by foreign entities. Of course, there is a simple solution to this problem...stop having budget deficits. Unfortunately, our Congress is full of people who don't grasp the simple economic concept you outlined above: 'Sooner or later, you have to pay back those debts'. Maybe this should be a litmus test added for running for Congress: Do you understand that all debts must eventually be repaid? But, until that happens, then the government is only too happy to have a willing customer to fund its largesse. Which is why there hasn't been a tremendous effort to reduce the trade deficit...doing so would actually negatively impact the ones who would have to make that effort.

There is also a global economic impact that is generally ignored in discussions of the trade deficit. That being that it is probably a self-correcting phenomenon. As other countries expand economically by selling their goods here, they become a bigger market for U.S. interests. The standard of living in these other countries rises, making their goods less competetive here, and our goods and services more competetive there.

I would be curious to know what the historical precedent for these things is. I suspect the ancient Roman empire ran a huge trade deficit, with goods flooding into Rome from around the empire. While that empire eventually met its demise, it wasn't because of the trade deficit.



Whew, we're safe then!

Here is the mention in the article...
Trade Gap Narrows



Why is it troubling that our debt is "funded by foreign lenders"? We're buying their goods. They get our money in return. Why is that a bad thing per say? Do the foreign lenders have a stake in making sure that paper money has value? Or not?

And what do you favor to "manage" the trade deficit? Should trade be restricted? How would that help the global economy?

LordHelmet, what exactly do you think the foreign lenders want with all those American Dollars? If America is running up multibillion dollar deficits year after year, the foreign lenders are not buying American products. And America hasn't been on the Gold Standard for decades now so American Dollars don't have any intrinsic value.

You asked the question, "should trade be restricted?". Let me ask you a question. Do you want Saudi Arabia buying American-made missiles, or American-made F-16s http://www.fas.org/asmp/profiles/saudi_arabia.htm

Do you want Chinese lobbyists influencing American foreign policies?
http://www.freerepublic.com/forum/a38ced0883c82.htm

If you're answer to those questions is no, then America better start restricting trade. If foreign countries don't want to buy American cars or American computers or American food, then they better not be trading with us.

Well, answer your own question. What do foreign leaders want with all those dollars if they have no intrinsic value? We're getting computers, clothes, TV's, etc,. They are getting paper with "no instrinsic value". Don't you think the Chinese (and other countries) have a stake in making sure the security of all that paper does not disappear?

Gold standard? What is gold? What intrinsic value does it have?

Should Saudi's buy F16's? Why not? They already do, don't they?

Do we want Chinese lobbyists influencing foreign policy? Well, they sure did from 1992-2000. In fact, they sent Clinton bags full of illegal campaign contributions. But what does that have do with free trade?

And what would Americans gain from restricting free trade? How would that make the average citizen's life better if suddenly the products at Walmart become more expensive as a result of tarrifs?

Please explain.

The fact that Saudi Arabia is buying F-16s doesn't outrage you 1 bit? This is a National Security issue that trumps free trade. When Saudi Arabia buys weapons from America, some of those American-made weapons end up in the hands of fanatics who hate America. America should not be compromising its national security just so that Americans can have cheap gasoline for their cars.

For countries that need certain resources like oil and other commodities, the have to keep an on hand cash supply. Pretend we are talking about weekend spending cash. You might be going to a movie, doing some shopping, and or stocking up on cigarettes. What do you do? You take out a little more and leave it in a reserve known as your wallet.

The same holds true but on a larger scale for countries, they do this because they need certain things and they are not always sold in their default currency. The default currency for the last half century has been the dollar.

The message I want to get across is that A ) a transaction takes place and B ) the customer then attempts to get his money back by convincing the person he just paid to reinvest in his country. That is how mortage debt is handled in this country LH.



The value of gold is that it is the oldest known currency in existence. At one time it linked a tangible thing to set amount of human labour. That is it's intrinsic value. The dollar only has the confidence of the day behind it. At one time it offered to be exchanged for gold but that time ended over 30 years ago. The point of having money is that it allows one to accumulate goods and services. The problem is the value shuffles and drops as time goes on. This happens because their is more money printed then what demand wants.

When plasma screens were 3000 plus what happened? More producers came online flooded the market and demand dropped through competition. Now we can afford to pick a nice one up for a 1000. With a tangible commodity like gold you can't overprint, you either have it or you don't. This is crucial point LH that fixes the real cost of gold. When gold actually does go down, it is because people "lease it out" while the real gold never moves. Banks then do this multiple times and run it as a fraction. This "virtual gold" floods the market driving the price down.

To answer you question;

QUOTE

1. Is the US trade deficit a bad thing, good thing, a non issue? Why?

The trade deficit is a bad thing. It means that more comes in than ever goes out past the borders. This means when faced with inflation that:

1) When the value of your currency drops, it drops against other currencies making imports more expensive. Domestically if you produce things you can mute the effects. Where people start getting nervous is when you stop producing things. That means you neither have the infrastructure nor the manpower to guide your own destiny. It is in the hands of someone else.

2) If an economy drops in value, it presents an undercut - a perceived advantage that you can afford to export more and import less. Now on things that cannot be produced at home this creates a problem. It also forces other countries to step in a devalue their own currency if the currency in question is the default for world trade. Trade is based on approximate ranges of value, take that away and the seller can't move their goods and the buyer cannot afford to purchase them. If this is 20s Germany everything becomes a downward spiral and people elect a nutcase to fix their turmoil. This is how a problem in one country can spill over to multiple countries.

This is the depreciation which causes unrest, poverty and social upheaval which leads to wars. You need oil? Your money isn't any good here. You need water because the midwest is turning into a dustpile? Trade me something useful other than cash. Got nothing? Too bad.

3) Devaluation. At some point someone with money says "hey, that factory you have costs 30 million, but since your currency is one 30th of my own - I'll take ten". This opens the door to foreign investment. This can be a double edged sword depending on the buyer. This happens in Africa more often than I'd like to think about. Doesn't sit well with prideful nationals who are sensitive to others buying their stuff. Think Nigeria and Somalia. Think Unocal. Think Argentina and to a lesser extent, Russia.

None of my arguement places control at the grassroots level. This path is what turns prosperous countries into shadows of their former selves.

Again, why is this a *bad* thing? Americans have plasma TV's, computers, clothing, manufactured goods of all shapes and sizes and the Chinese have.... pieces of paper with dead American presidents on it that will mean absolutely NOTHING unless they *invest* it and thus keep it valuable.

I repeat, why is this a bad thing?




But why does gold have a tangible value? It's just a metal. Labor on the other hand *does* have a tangible level as does technology. But gold? paper money? Currency of ALL types has no tangible value. Do you understand the concept of currency?

And you declared the trade deficit to be "bad" but you still haven't given any reasons why. You claim that our currency would become depreciated? Why? How? Why in the world would the Chinese, who hold all that paper money (in exchange for all those plasma TV's, computers, clothes, tools, etc.) do *anything* that would make that US printed paper less valuable on the world market? Wouldn't they be screwing themselves? How would they buy the oil and other resources that they need if the money became worthless?

We have a trade deficit with China because they are making attractive low-cost items that American consumers want. And consumption is what makes the world go round... not "saving". How would imposing tariffs on countries such as China help the American (and Canadian who need the help even more due to that country's oppressive VAT and other tax schemes) consumer if the price of clothes, TV's, computers, tennis shoes, etc, were artificially raised?

Again, explain to me in *real* terms why our trade deficit is a bad thing.

You do understand that the Chinese are probably not dumb enough to be selling their exports to America in exchange for worthless pieces of paper. In fact, you said that the Chinese would be screwing themselves if they accumulated all those worthless pieces of paper. So this brings up the question, if the Chinese are not buying American products, what are they using those dollars for? Remember, we're talking about over a trillion dollars here. What do the Chinese want with all those dollars? Do they want to influence American politicies? With America's extreme dependency on Chinese imports, the Chinese are certainly in a position to blackmail America if they wish. Do the Chinese want American strategic assets like our remaining oil supplies or some of America's military technology? Do they want to buy out some of America's public assets and do something like buy the mineral rights to our National Parks?

There's a lot more to the future than getting plasma TVs at a discount. And so I think it would do some good to question exactly what the foreign countries want with all those trillions of dollars if they're not buying American products. A free market shouldn't mean that you sell a gun to everyone who can pay for it. As a religious conservative, you need to explain why Saudi Arabia, a radically islamic country, should be buying American F-16s instead of American cars.

What are the Chinese using those dollars for? Massive construction of cities, oil, natural resources, cars, cell phones, etc. And American companies *are* selling products to the Chinese... but from factories in that country. GM, for example, has seen huge rises in their China business. But again, the issue is whether the trade deficit is a "bad" thing as so many people apparently believe.... at face value without giving any reason for that argument. Anything that the Chinese do in order to retain the value of that currency is a *good* thing for the US economy, not a bad thing.

And don't you think that you have it backwards? What you're saying essentially is that the customer is dependent on the supplier. That's not the case when it comes to China just as it isn't the case for you and me. If we find a supplier that is better, provides better products for a better value, we will buy from them, not the Chinese. It is the US who is holding the power over China, not the reverse. If we take our business elsewhere.... or if our currency is devalued, who is hurt more? The US or China?

And what exactly is wrong with the US getting "plasma TV's at a discount"? Explain. And why is it a bad thing that China becomes a modern state that is fully intertwined economically (and thus co-dependent) on the West? Would you prefer it as it was? A nuclear armed China with a third world economic system, isolated from the rest of the world?

Should we sell a gun to everyone who can pay for it? Well, if we don't, the Russians (or Chinese or just about every country in the world) will... and do so gladly.

And I reject your characterization of Saudi Arabia as a "radical Islamic country". It clearly is not and it's an important ally of the US and one that we should work to protect from threats from countries like Syria and Iran. Therefore, I see nothing wrong with selling them F16's. That's a win-win situation for the Saudis and American business.

I'm a "religious conservative"? That's a good one that got a laugh out of me in the wee hour of this morning. I guess you really have no idea who I am and what I'm about, do you?

I'm no expert, but I'm curious why something called the "exchange rate" hasn't come up yet. When I buy things overseas, I convert dollars (not much paper anymore, but computer bits) to that currency. That's the case with most overseas transactions. The exchange rate is based on...what? Currency supply and demand. What creates demand for the dollar? Not the nice printing (though the illuminati symbols are kind of cool), but the economy that backs it. What determines the strength of the economy? Doesn't that have a wee bit to do with what it produces compared to what it consumes?

I'm not expert either, but yes, I believe that the value of the currency is only worth the economy that backs it up or the "faith" by others in the economy that backs it up to be more precise. Therefore, if they Chinese did not have faith in the long term economic prospects of the people who continue to buy all those TV's, computers, ipods, and clothes that they are manufacturing, don't you think they'd insist in being paid in Euros? Pesos? Packs of cigarettes? Barry Manilow records?

But how does the comparison of what an economy consumes vs. produces determine that strength? That's the basis of my question as to whether the trade deficit is a good or bad thing. And do the products produced by an economy have to be manufactured goods to be of real value? Or, has Bill Gates, the richest man on the face of the earth proven that "ideas" can be packaged and sold and create economic value using almost no natural resources?

Frankly, I haven't decided personally whether the trade deficit is good or bad but I've learned to be a skeptic when it relates to the "popular wisdom" perpetuated by our left leaning media establishment who treat it as a "face value fact" that the trade deficit is "bad".

Therefore, I thought it might be an interesting topic to debate.

You have entered the 'something for nothing' scenario. That used to be the default reason for linking currency to a non-mutable commodity. By this feature called fiat, one can be as rich as they want to be by simply printing more cash or extending more debt. There used to be limits on what one could accrue. Today there are none.

Here is what makes this behaviour dangerous. At some point whoever is holding that cash is going to ask, what can this buy? If today this lump of cash buys X widgets and if they find out tomorrow the money only buys half as much, they will be forced to spend this lump of cash before it loses all its value.

Where the problem comes in is if we have more than one country doing this, at the exact same time.

This means there will be a spending frenzy and people will be forced to refuse dollar denominations for their stuff if things get really bad. People will be dumping trillions of dollars out into the market place and there be few buyers willing to take them. When this happens the dollars will saturate the market because they will return to the banks. Find their way into the stock market, cause a spending spree on real goods which will drive up their price (symptom inflation) and make everyone spend 100 dollar bills like they are 20s. People at the lower end of the spectrum will now be pushed into a poverty social assistance mode. IE the middle class gets squeezed and the lower class expands.



Gold arrived as the default product of choice to store value because it is hard to come by, cannot be faked easily, is transportable in coin form, durable, and possesses an attractive appearance that pleases the user. More importantly is sets a fixed value on something. Gold represents something that cannot be arbitrarily arrived at that is my point.

The agreed upon criteria that has been around for 5000 years are:



The definition is defined as:


What separates the real things entered into a keyboard from random numbers? Did someone just punch in numbers for the sheer hell of it or did they actually produce something? This is a very crucial point when comparing today's dollar to the 1913 dollar.

A key arguement in getting off the gold standard was replacing the criteria with living standards and technology of the host country. It didn't work well. Why would you say technology has any bearing on this arguement?

When no commodity is present what is to prevent me from saying I have more hours invested into this unit of money than you therefore my currency should value at a premium to yours. This is the curse of floating fiat currencies LH, they shift. They are based on confidence and nothing else.



This was the question:

Is the US trade deficit a bad thing, good thing, a non issue? Why?

This was the answer:

It means that more comes in than ever goes out past the borders.

This is the definition of a deficit. I then went onto describe what happens to a country suffering from a deficit situation when faced with shifting sets of weights and measures throwing prices out of whack. [2] The stifling results a currency with lower purchasing power with respect to things they can produce and things they can't. [3]

What aren't you understanding?

And why are you thinking the Chinese are lowering the value of the dollar? They aren't the ones continually issuing new amounts. What a bizarre statement. They want to be able to buy stuff. They don't want an out but will take an out if things deteriorate on our end.



I never mentioned tariffs how did they get into the arguement? Consumption means nothing if the buyer perceives the seller is trading nothing of value LH. The value of the dollar is based on the ability to pay bills and give a return on investment. Both there criteria are rapidly sinking.

Taxation and tariffs limit overall trade and gdp but have little influence on what their currency buys. This is a reflection of personal management.

I differ, savings represent much of the Chinese economy. The Chinese save a third of every dollar they make. This saving means banks have alot of capital to draw off of if they want to build things. The didn't need to go into debt over it. Savings were the traditional way of determining wealth. Right now the amount of real savings has been offset by debt to such a degree that there is between .1-.3 of a percent savings rate in America. Canada is only marginally better. This means we need between 3-4 dollars of debt to produce 1 dollar of gdp. This is not good. This is what stifles growth. This is the situation the west faces.