Is a trade deficit good or bad?
- Thread starter Remiraz
- Start date
I wouldn't. No one adapts to econ changes like Yanks do. Less Gov intervention, and general biz culture lends itself to that.. We may get in massive debt as a whole, but guess where the money will keep flowing? All it takes is one US recession and China is toast. So is Brazil for that matter. W Europe will never do bettter than a percent or two growth because of socialistic policies (E Europe might). Asia, in general, is a bright spot, but it all depends on the country.
I bet my money that the US will still be the bright engine of economic growth for the foreseeable future. The dollar may get hammered, but the growth will still be there.
Jay
Is a trade deficit good or bad?
It's excellent as long as you keep on finding the necessary fools to accept your IOU's.
It's excellent as long as you keep on finding the necessary fools to accept your IOU's.
Or reasons to hold a gun to their heads to force them to accept your IOU's
As the budget deficit increases, the demand for loanable funds increases causing the interst rate to rise. The rise in the interest rate attracts foreign investment, rasing the capital account. Since the capital account and the current account must always be in balance, as the capital account rises, the current account falls meaning the trade deficit increases. This is the main reason for the huge explosion in US trade deficit in the 1980s, foreign capital was rushing in becasue of the large government deficits leading to a need to import more goods.
This is why I'm more worried about the budget deficit. The trade deficit will work itself out through price mehcanisms fairly easily. However, the US was somewhat protected in the 1980s from facing the full cost of the budget deficit. This is for two reasons. The first is that Social Security and Medicare were running surpluses, meaning there was an automatic increase in the demand for US bonds, keeping the interest rates lower than they otherwise would have been. The second is that there was alot of foreign capital willing to move to the US in the 1980s, so interest rates did not have to move as high to bring it in. However, since the 1980s, foreign investment markets have become more liquid and there are now investment opportunities that really weren't available through out the 1980s, especially at lower levels of risk. So Social Security will actually be selling bonds in the next decade and there are many otehr opportunities for foreigners to invest in. These two combined lead to higher cost of a budget deficit then we faced previously. And so if the Fed maintains a near zero inflation rate target, we may see really high real rates over the next decade if the deficit continues to expand.
This is why I'm more worried about the budget deficit. The trade deficit will work itself out through price mehcanisms fairly easily. However, the US was somewhat protected in the 1980s from facing the full cost of the budget deficit. This is for two reasons. The first is that Social Security and Medicare were running surpluses, meaning there was an automatic increase in the demand for US bonds, keeping the interest rates lower than they otherwise would have been. The second is that there was alot of foreign capital willing to move to the US in the 1980s, so interest rates did not have to move as high to bring it in. However, since the 1980s, foreign investment markets have become more liquid and there are now investment opportunities that really weren't available through out the 1980s, especially at lower levels of risk. So Social Security will actually be selling bonds in the next decade and there are many otehr opportunities for foreigners to invest in. These two combined lead to higher cost of a budget deficit then we faced previously. And so if the Fed maintains a near zero inflation rate target, we may see really high real rates over the next decade if the deficit continues to expand.
And while it doesn't match up well with the expanding deficit of the 1990s, it does follow the 1980s rather well. The 1990s was driven more by the high and safe (in a exchange rate risk sense) returns in the US capital markets. This combined with a decrease in the savings rate was the driving force for the expansion of the trade deficit in the 1990s (that and the implosions of other currencies occasioanlly flooding the market with cheap goods).
When you get right down to it, we're supposed to run a trade deficit. The value (from our point of view) of the stuff coming in should exceed the value of the stuff leaving. Otherwise, there would be no point in trading.
Imports are the reason we engage in international trade - they are the things that we actually want from foreigners. Exports are the price we pay to get imports. We want the price paid to be less than the value received.
Imports are the reason we engage in international trade - they are the things that we actually want from foreigners. Exports are the price we pay to get imports. We want the price paid to be less than the value received.
it seems like the consensus, if there is one, says that the trade deficit is only good until the world devalues the dollar enough to send us into some sort of stagflation.
However, isn't the defecit, at least partally, due to the relative wealth of america versus the rest of the world, and thus confidence in the dollar is relativley strong because of this. I dont see how there will be a dive in the currency of the most wealthy nation in the world. As long, of course, as we stay the wealthiest.
However, isn't the defecit, at least partally, due to the relative wealth of america versus the rest of the world, and thus confidence in the dollar is relativley strong because of this. I dont see how there will be a dive in the currency of the most wealthy nation in the world. As long, of course, as we stay the wealthiest.