Why does the U.S. always run a trade deficit?

https://libertystreeteconomics.newyorkfed.org/2025/05/why-does-the-u-s-always-run-a-trade-deficit/

by jnord • 1 year ago

325 761 1 year ago

libertystreeteconomics.newyorkfed.org

blitzar• 1 year ago

By "always" they mean since the 1970's of course.

More buyers than sellers.

itsoktocry• 1 year ago

And prior to 1870.

rayiner9• 1 year ago

The saving gap framework helps clarify what trade policies can and can’t do. For example, a free-trade agreement encourages exports, and an industrial policy can foster a re-shoring of production to replace imports. Such policies influence the size and composition of cross-border trade, but the difference between imports and exports is only affected if these policies also change the gap between domestic saving and investment spending.

Is there research on the link between the availability of cheap foreign goods and domestic saving and investment? E.g. would people invest more domestically if they could obtain returns making domestically manufactured goods? Doesn’t the availability of cheap Chinese goods arguably suppress domestic investment? E.g. Apple investing tens of billions into its Chinese supply chain.

I’d also be curious why the EU doesn’t consistently run trade deficits.

ta124312• 1 year ago

If iphones were charged with US labor costs then nobody would buy them

rayiner9• 1 year ago

Or we would have automated assembly faster—the investment in which would’ve been counted in domestic investment offsetting the trade deficit, right? I’m trying to verify my mental model of what’s going on.

corimaith8• 1 year ago

iPhones are already heavily overpiced considering how other companies regularly release phones with similar specs at lower prices.

mc322• 1 year ago

Higher end Motorolas were mfg in the US in the early 2000s. It’s possible. Top of the line were ~$700, with inflation that’d afford iPhones. They were top sellers and not niche models.

tonyhart73• 1 year ago

"If iphones were charged with US labor costs then nobody would buy them"

idk, people pay premium for avocado sandwich

a lof of cali folks certainly would do that

kylebenzle2• 1 year ago

Maybe the military could just start forcing people to buy all US made products instead of just our currency?

corimaith8• 1 year ago

https://www.federalreserve.gov/boarddocs/speeches/2005/20050...

The Global Saving Glut hypothesis by Bern Bernanke is an interesting argument about how the glut of demand for US financial assets may have been the major factor in creating the housing bubble in 2008.

mrweasel• 1 year ago

I’d also be curious why the EU doesn’t consistently run trade deficits.

Some EU countries probably do, but because they are smaller economies it seems less critical. Combining the EU economies can hide a Spanish deficit within the German surplus fairly easily. e.g. the German surplus are 10 times higher than the Spanish deficit (if I recall correctly).

The EU viewed as a whole, I don't know, maybe due to a very diverse economy, lower overall consumption, lower EU salaries?

codingbot30005• 1 year ago

See answer above - the EU is less "debt-fueled".

But I also think that EU producers are more competitive. The US has a strong tendency towards local monopolies which are bad for export competitiveness.

GordonAShumway2• 1 year ago

why the EU doesn’t consistently run trade deficits.

It’s because, comparatively, the EU doesn’t run as massive fiscal deficits, nor is the EUR the primary reserve currency.

Keep in mind that what the fed article is calling a “saving gap” is really more of a fiscal gap that been plugged by US Treasuries.

atq2119• 1 year ago

Keep in mind that what the fed article is calling a “saving gap” is really more of a fiscal gap that been plugged by US Treasuries.

They're two sides of the same coin, but the levers of control and causality aren't symmetric.

In particular, the US government doesn't have direct control over the savings behaviour of anybody, especially not of people outside the US.

That's why most policies that aim to reduce the US government deficit are bound to either fail or have undesirable negative effect elsewhere.

User23• 1 year ago

More precisely it’s because the EU has no fiscal unified fiscal policy. Every member is a currency user of a foreign currency it must acquire from the ECB.

Wynne Godley explained this all nicely in Maastricht and All That.

skybrian3• 1 year ago

A country that exports goods to the US earns dollars that can be invested in the US. So, one way to look at it is that American consumer spending funds foreign investment in the US. This consumer spending could alternatively fund US exports, but doesn’t if foreigners prefer to buy US investments. (They might buy Apple stock, for example.)

If Americans spent less and invested more, they might own more of these investments themselves, but they also wouldn’t have as much stuff, and foreigners wouldn’t have as much money to invest in the US.

wonnage• 1 year ago

"Saving" in the accounting identity is just money not spent on consumption. Cheaper imports can increase domestic saving because people now spend less for the same goods. That could then increase domestic investment due to the increased savings.

Or the same situation could reduce savings, if people increasing consumption because the imports are so cheap.

The accounting identity doesn't explain anything other than the mathematical truth that the money needs to add up in the end. Savings are not inherently good, deficits are not inherently bad

nemomarx• 1 year ago

Getting real physical products in exchange for imaginary numbers and services is a good deal? We sell a lot of software?

rayiner9• 1 year ago

Living on a farm and getting three square meals a day is a good deal… until it isn’t.

johnisgood2• 1 year ago

There are always trade offs. I want to live on a farm, but at the same time, I need a relatively quick access to hospitals.

GordonAShumway2• 1 year ago

The US runs a $1T surplus in services.

logankeenan• 1 year ago

Do you have a source for that? Recently, I was trying to understand the trade deficit when consider services, but couldn’t find anything credible

throw0101c• 1 year ago

The US runs a $1T surplus in services.

The total export of services is $1T / $1000B (in 2023):

* https://www.bea.gov/data/intl-trade-investment/international...

It imports $0.7T / $700B worth of services, so the surplus is $300B.

pydry2• 1 year ago

It seems great until those imaginary numbers become worthless overnight.

Then you might have a bit of an "oh shit" moment as you realize that the industrial ecosystem required to substitute those imports would take a decade and a half to build even if your money were worth something, which it now isnt.

Lots of countries collapse due to overreliance on foreign imports. Argentina never recovered from its peak in the 1920s - it just kept bouncing from crisis to crisis. This is looking like an increasingly plausible outcome for the US.

a2128• 1 year ago

Why would they become worthless? The entire world is forever beholden to Microsoft Windows, Office, AWS, X, iOS, Google Play, whether people like it or not. People have made free or cheaper or local or better alternatives and they have never succeeded at dethroning these

mindslight• 1 year ago

So then wouldn't the smart play to be to trade those imaginary numbers for real industrial equipment today while we build out factories? The Trumpist plan seems to be just smash the economy and then hope that will somehow force us to build back.

andomar• 1 year ago

Sales of software to a foreign entity count as export.

corimaith8• 1 year ago

I really don't think discussion of complex topics should be reductively reduced to snarky xkcd comics that aren't even right.

Current account deficit already accounts for both goods & services. From a more formal perspective, deficts aren't neccessairly bad if they're being routed into productive investments at home, as with many developing countries needing to import machinery, but if it's being used to fund consumption, and it's persistent, then it's considered by many (including the IMF) to be unsustainable on the long term, and highly unstable on the short term.

The current account deficit can be also expressed as the gap between investment and savings, of which must be financed by a combination of private and public debt to external investment, of which around 50% comes from the ever-growing US Gov debt. You're basically going into debt to finance your consumption, and it's a big reason why the US credit ratings have been going down this decade. You won't fix the debt without addressing the deficit, and can you really count for growth to exceed the interest forever? When the black swan comes, then it's gonna hurt alot more than it needs to be.

watwut2• 1 year ago

Well, as it happens, US Gov debt is about to become worst. And that part has only little to do with trade deficit.

JackYoustra12• 1 year ago

Not really? Migration exists and is basically bottomless for the US, especially among people with a lot of money. To increase net savings just let them all in!

cjfd• 1 year ago

Too much consumption versus production. One component is the ever ballooning government debt. Essentially in 'trade deficit' the thing that is not taken into account is one very big export article of the US. Pieces of paper with 'IOU' written on them. The whole Trump trade war is the completely preposterous thing of spending more in the shop than you can afford and then blaming the shop for taking advantage of you. This is the concept of 'responsibility' as it appears to exist in Mr. Trumps bug ridden brain.

corimaith8• 1 year ago

We don't really know why the US savings rate is low, but we do know more explicitly why the savings rates of those "shops", aka surplus countries is abnormally high, with weak social spending, financial repression, currency manipulation etc. Their manufacturing capacities exceed their domestic consumption to absorb, that is to say, they need export markets to stave off unemployment.

Is there not an argument that by the virtue of free capital controls and stronger commitments to free trade, the US is taking the inverse of the exportation of domestic imbalances created by these surplus countries?

ta124312• 1 year ago

US assets far exceed US debts

https://www.federalreserve.gov/releases/z1/20250313/html/rec...

If US private assets were used to "pay off" US government debt (much of which is owed to US private asset holders), then Americans would be about as rich as they were in 2020 (with about $140T instead of today's $170T)

mr_toad• 1 year ago

A distorted housing market that sucks up excess money, keeping interest rates low.

Uncap the housing market, free up cash, which will force the Fed to tighten the money supply, freeing investment from the housing market into industry.

whynotmaybe• 1 year ago

Other POV : one of the side effect of the Ukraine invasion, it's now possible for countries to buy oil in other currencies than USD. (1)

Because of this, USD 's power is fading and its value slowly plummeting.

One way to limit damages that could come with a weak $ is for the USA to bring back manufacturing capacities. That could be why Biden already put some protectionist measure in place in 2024. (2)

Yes Trump is who he is, but I think the tariffs stuff is part smoke and mirrors to hide that inconvenient truth.

Or as the Super cool ski instructor might say : "If your money is weak and you rely on foreign countries for the majority of your physical stuff, you gonna have a bad time."

(1) https://www.indiatoday.in/business/story/saudi-arabia-ends-8... (2) https://publicseminar.org/2024/09/bidens-green-protectionism...

adabyron• 1 year ago

Other POV : one of the side effect of the Ukraine invasion, it's now possible for countries to buy oil in other currencies than USD. (1)

I do not know why you're downvoted but I have listened to some very intelligent people who seem to focus on long term thinking & they feel the SWIFT action against Russia will end up hurting the US more than it hurt Russia. Some may argue it was inevitable for countries to start pulling away from the dollar but this increased the speed of it. The current taunting & unfriendly relations is exponentially ruining the USD on top of it.

While the odds were very low for the US to continue it's dominance in the world into the next century, it sure seems our lack of leadership in both parties is accelerating our downfall.

seethishat• 1 year ago

More disposable income/debt in the US (in general).

cess11• 1 year ago

If one wants more equations one might take a look at https://unequalexchange.org/wp-content/uploads/2023/05/The-U... (PDF), Arghiri Emmanuel summarising some of his writings on unequal exchange.

candiddevmike• 1 year ago

We have a service based economy. Or a debt service based economy.

hunglee29• 1 year ago

Using a national currency as the de facto global reserve guarantees a trade deficit for that country.

No one else can manufacture USD's, so other countries have to acquire them by shaping their economies to supply goods and services demanded by the US. They can then use these earned dollars to transact with other countries, as the US itself insists they do.

For the US, this is a simple trade off - gain massive political influence (and market intelligence - all USD transactions go through US institutions regardless of where those transacting partners are located), at the expense of hollowing out domestic industry and running a deficit in physical goods traded.

The solution is a non-national global reserve, calculated on a basket of national currencies. This was Keynes argument at Bretton Woods, but the US would not have it then, and does not want it now.

lotsofpulp3• 1 year ago

The US isn’t forcing anyone else to use USD. People around the world use USD because they are confident it will help them buy products and services they want in the future.

fatbird3• 1 year ago

This. Fundamentally, the USD is the global reserve currency because the US is seen by the rest of the world as the most stable entity able to guarantee the future value of its currency: It's militarily powerful enough to guarantee its independence, and legally predictable as a "rule of law" nation and a stable democracy. If you want to park your assets anywhere, the safest bet is US treasuries. Everything else follows from that.

throw_m2393392• 1 year ago

The US isn’t forcing anyone else to use USD.

I disagree. The petrodollar is a thing.

Symmetry• 1 year ago

The US dollar was the global reserve currency in the 1960s but the US was running a trade surplus then.

hunglee29• 1 year ago

Nixon broke Bretton Woods by coming off the gold standard, leading to massive expansion of the money supply. Lyn Alden has good analysis of this process https://www.lynalden.com/fraying-petrodollar-system/

elteto• 1 year ago

Remnants of the massive industrial effort of WW2 plus China/Japan had not entered the chat yet.

jcfrei• 1 year ago

There were no free floating currencies back in the 1960s nor open capital markets as we understand them today. Cannot really compare the two eras.

codingbot30005• 1 year ago

Adam Smith already pointed out that a trade deficit is not really interesting, so I do not understand the American obsession about it ;)

Also, the often-mentioned US-EU trade deficit is not that big if you count in services. Which I think should be done in the 21st century. Large parts of the US economy are focused on digital high-value services, and they are "exported" worldwide.

hunglee29• 1 year ago

yes indeed - it has been conflated with the decline of US manufacturing. Reality is the most significant export of the US is the USD itself - that is the trade good which everyone must have (at US insistence)

sorcerer-mar21• 1 year ago

The American obsession has to do with its value as a political weapon against the minds of dummies (with votes)

duxup• 1 year ago

It's useful as a political tool, that's about it.

Up until now it was a fairly harmless political distortion. I suspect in the past we maybe had some executives who themselves bought into it but they took input from folks more educated on the matter and just let sleeping dogs lie.

But now we have an administration who at least seems to believe it whole heatedly and isn't interested in anyone who is educated on the subject providing input.

jtc331• 1 year ago

The obsession has at least one interesting question attached: ownership of real property. At the limit, at least, that becomes a genuinely interesting question.

AtlasBarfed2• 1 year ago

- AI will devalue digital services

- Trumpism might be a massive blow to American culture exports (which are also the digital services exports)

- the world is getting less secure, more "interesting" in the chinese proverb sense

- the trade deficit is related to decline in the middle class and manufacturing

jasondigitized2• 1 year ago

There wasn't an obsession. Trump just weaponized the word deficit to justify tarrifs. Anyone with an IQ over 100 and two minutes to listen to an explainer video on this would quickly understand the con.

amluto2• 1 year ago

In fact, according to US government published numbers, the US runs a goods+services surplus with quite a few countries.

FWIW, I’m not sure I believe the official numbers, or at least I don’t believe that they measure anything useful. When a French customer buys an AMD CPU or Nvidia GPU that was made in Taiwan, the physical object may never touch US soil, but a lot of money flows in. Did we export a good, a service, or neither?

What about when a Spanish user sees an ad funded by a German company and four different US intermediaries are involved in showing that ad? What if the US companies play complex accounting tricks to redirect the income to a subsidiary in a low-tax jurisdiction like Ireland and then effectively materialize some of the dollars in the US by buying shares in the parent company’s stock but mostly just let the nominally Irish dollars sit in US accounts and let US people own very valuable stock?

(Interestingly, IMO none of this requires that USD be a reserve currency. One could easily imagine the same type of economy where gold earned in Europe in deposited in a vault in the US, held by an account that is nominally Irish, and used as investment collateral for various US or foreign investments denominated in XAU. Or it could be cryptocurrency or pretty beads or whatever.)

bdcravens• 1 year ago

The average American conflates trade deficits with the loss of domestic industries/jobs.

maeil• 1 year ago

Also, the often-mentioned US-EU trade deficit is not that big if you count in services. Which I think should be done in the 21st century. Large parts of the US economy are focused on digital high-value services, and they are "exported" worldwide.

This is why, in case of reciprocal tarriffs on physical goods, the US ends up the big winner - they don't apply to digital services, which are a huge part of US exports.

Now the world had slowly been catching onto this fact that they'd been getting absolutely rinsed by the FAANGs who have gotten their populace addicted to their opium and made trillions off of them without contributing anything meaningful back. For the first time, we were seeing digital services taxes - a decade overdue. Brazil now has one in place - great on them. The EU was also planning one, but then the tarriffs came, and suddenly voices are saying they might abandon it. If the current US gov was any other US gov, the obvious conclusion would be that they're using tarriffs as a pawn to prevent the rise of digital service taxes.

Obviously, in the current timeline this wasn't the main reason. But there's no way Mark, Satya, Jeff and Tim haven't been whispering into big leader's ear just how "unfair" these DSTs are.

ta202405282• 1 year ago

> all USD transactions go through US institutions regardless of where those transacting partners are located.

Do they? It is my understanding that the (originally London based) Eurodollar market deals in USD without US treasury oversight.

As will Hong Kong soon.

chollida1• 1 year ago

You are correct and the original poster is wrong in this specific regard.

Infact one of the most interesting/scary incidents for the US dollar was China selling USD denominated bonds and getting almost the same rate as the US government gets, which essentially means China can compete for USD with US government.

The implications of this is that if CHina wants, they now have another level to compete with the US. They can now issue USD denominated debt along the yield curve in areas where it would hurt the US hte most.

In the short term that is the frond end of the yield curve(short term under a year) where the US has to roll about $8 Trillion in debt over the next year.

With China competing by offering bonds here they will force up the interest rate the US has to pay pushing yields up with is the exact opposite of what Trump has publicly stated that he wants and making the US's already large fiscal deficit an even larger problem.

pstation• 1 year ago

Correct.

You can open up an USD account in maybe Zambia and transfer funds to another USD account in Dubai without it ever touching the US financial system.

cryptonector6• 1 year ago

Sure, but London is in the UK, and the UK is a member of the Five Eyes, and so is the U.S. It's pretty safe to say that if the U.S> wants that data, the U.S. gets that data. However, all those transactions are settlements transactions, so it's not that useful.

mrtksn5• 1 year ago

US doesn't just get political influence. It gets massive amounts of products and services enabling the US residents live well beyond their means.

China for example, sends huge number of electronics and all kind of other consumer goods that Chinese produce by sweating in 12 hours shifts in 6 day work weeks in exchange for imaginary numbers.

US is definitely not the victim here. There's the risk of this system stop working and that's when the US might have hard times due to being forced to live by its means and have no ability to kickstart its own production when that time comes.

It makes sense to be worried for such an eventuality but US is definitely not being taken advantage here. The situation is more like selling your startup at young age and live a lavish lifestyle with the money without working and studying and risk becoming penniless and unemployable by the 50s.

alephnerd11• 1 year ago

China for example, sends huge number of electronics and all kind of other consumer goods that Chinese produce by sweating in 12 hours shifts in 6 day work weeks in exchange for imaginary numbers

That's more a function of subsidizes instead of foreign preference for USD.

Chinese median household incomes (Yuan 34,000 or around $4,700) are much too low to spend on most goods at scale [0], and most of the money that could be spent on expanding the social safety net (and thus incentivizing Chinese consumers to spend instead of save) is spent on industrial subsidizes like tax holidays, a regressive income tax system comparable to the US, and subsidizing various redundant but provincially influential SOEs that can't compete with domestic private sector players (eg. traditional Chinese automotive players like SAIC and Chery versus BYD), and this is reflected in Chinese spending data as well as StatsChina's breakdown of spending by urban and rural Chinese [0].

You are going to be dependent on foreign exports if your domestic consumers can only spend around Yuan 4000/$550 a year on transportation and telecom combined. Even factoring for PPP, it is difficult as these metrics are low in comparison to peer countries from a developmental standpoint.

A lot of the "overproduction" that has made Chinese goods globally dominant is a result of that misalignment between consumers and production.

Expanding the social safety net in China would dramatically enhance Chinese competitiveness over the long term, but top level leadership remains explicitly opposed to what they call "Welfarism" [1]:

"福利主义典范国家，中产塌陷、贫富分化、社会撕裂、民粹喧嚣，这不乏警示— 防止落入“福利主义”养懒汉陷阱"

"In countries that use a welfare model, the middle class is collapsing, the rich and the poor are polarizing, society is torn apart, and populism is rising. This is a warning - Prevent yourself from falling into the trap of "welfarism" to support lazy people"

[0] https://www.stats.gov.cn/english/PressRelease/202501/t202501...

[1] http://theory.people.com.cn/n1/2021/1116/c40531-32283350.htm...

actionfromafar3• 1 year ago

Even more sad that the US chose NOT to invest this surplus, for instance in infrastructure, education and a sensible health system.

s1artibartfast9• 1 year ago

There's the risk of this system stop working and that's when the US might have hard times due to being forced to live by its means and have no ability to kickstart its own production when that time comes.

I think the risk is greater than that. A concern is not just a regression to the mean, but indebtedness and the future having to pay up for the spending of the past.

I think a different analogy would be a joint credit card where someone can run up the bill and then die. Like national debt, you can always default, but it will be the survivor that takes the hit, not the dead person that spent their life in luxury.

The trade deficit isn't necessarily a problem, but national debt is. It would be one thing if this money was being invested in growth, but it largely isn't. Most of it funds non-growth consumption.

This is largely a self-made internal problem around governmental prioritization and balancing revenue with expenditure. That isn't to say other countries don't also benefit.

The US is trading future prosperity for consumption today. Investing countries are trading consumption today for future prosperity.

hunglee29• 1 year ago

Indeed true - US is 4% of the global population but 25% of the global consumption, if not more. You can see this via the eyeball test - everything is bigger: cars, houses, even the people. US invented 'overproduction' to smear Chinese manufacturing, but did not consider the other side of the coin, which is US 'overconsumption'. Two to tango etc

rayiner9• 1 year ago

It seems like a bit of A and a bit of B, perhaps more A than B.

How do we maintain global reserve status—what is the cost? Is it one of the reasons why have military bases all over the world? Back in the day, people used to say the U.S. went to war in Iraq because Saddam was going to switch away from the petrodollar. Under your reserve-currency theory, that seems quite possible, no?

cryptonector6• 1 year ago

Everyone gets something, or every country anyways. The export-led growth Asian miracles are really just a part of this. Maybe the Chinese worker gets screwed, but China maybe doesn't. Something like that.

starspangled13• 1 year ago

It gets massive amounts of products and services enabling the US residents live well beyond their means.

What does this mean really? That is their means.

For a somewhat topical example, people of Australia get access to cheap medications (in part because they pay to subsidize the cost of them but also because) their government negotiates with pharmaceutical corporations to pay lower prices. This kind of negotiation would be completely out of reach of any private Australian person, but they are not living outside their means. Their means includes the means to elect governments to run the country for the benefit of its own people including doing things like securing lower prices for medications.

China for example, sends huge number of electronics and all kind of other consumer goods that Chinese produce by sweating in 12 hours shifts in 6 day work weeks in exchange for imaginary numbers.

Until 1990, Kenya had a higher GDP per capia than China. It is absolutely not "imaginary". Work produces real value, just because you can represent or trade that for allegedly "imaginary" currency does not mean that the value created was imaginary.

US is definitely not the victim here. There's the risk of this system stop working and that's when the US might have hard times due to being forced to live by its means and have no ability to kickstart its own production when that time comes.

US manufacturing output is double that of China's on a per-capita basis.

It makes sense to be worried for such an eventuality but US is definitely not being taken advantage here.

Seems like that's the popular assertion but I don't see much solid reasoning behind it in this thread (not picking on you specifically), just handwaving about how USD's status as a global currency somehow makes trade deficits inevitable despite simple facts available that US had a surplus trade balance 50 years ago, when the USD has been considered the global / reserve currency for over 60 years.

greenavocado2• 1 year ago

The mental gymnastics here to justify the dollar's reserve status and trade deficits as some kind of genius economic strategy are incredible.

First off, this ridiculous notion that the US "gets products and services enabling residents to live beyond their means" is classic ivory tower cope. Yeah, tell that to the average American worker whose real wages have been stagnant for DECADES while housing, healthcare, and education costs have gone full rocket ship. We're not living large - we're drowning in debt while our industrial base gets hollowed out and our cities rot. But sure, keep telling yourself those cheap plastic crap from China is some kind of economic superpower move.

And this nonsense about "imaginary numbers" - spare me. Try telling the Chinese worker breaking their back in a Foxconn factory that their labor is being exchanged for "imaginary" dollars when those same dollars buy real commodities on global markets. The only thing imaginary here is your understanding of how actual wealth transfer works. The Fed's money printer goes BRRR, Wall Street gets bailouts, and the working class gets hollowed-out towns and opioid epidemics.

This whole "trade deficit is fine because we export dollars" nonsense is cope. We get to print monopoly money and trade it for real goods sounds great until you realize it's turned the US into a hollowed-out consumerist wasteland. Our manufacturing base? Gutted. Middle class wages? Stagnant for decades. But hey, at least Wall Street gets to play financialization games with all those dollars floating around overseas, right? The petrodollar cope is particularly hilarious. "Oh but the USD is backed by oil and military power!" Yeah, how's that working out now that the BRICS nations are openly trading in local currencies? Saudi Arabia taking yuan for oil? Russia and China settling trade in rubles and yuan? The entire Global South is laughing at your "reserve currency" while they quietly build alternative financial systems. But sure, keep telling yourself that 1971 was some genius move rather than the beginning of the greatest wealth transfer scheme in human history.

Spare me the "political influence" argument. You know what else gives you influence? Actually MAKING things. The US used to be the arsenal of democracy because we had real industrial capacity. Now we're the ATM of the world. Sure, everyone takes our dollars, but they're laughing at us behind our backs while they build actual industries. China takes our funny money, build world-class infrastructure and tech, while we get... what? A service economy of Uber drivers and baristas? The MMT shills in this thread claiming deficits don't matter are smoking crack. Yeah, it's all fun and games until the music stops. The dollar's dominance isn't some natural law. It's propped up by petrodollar recycling and military bases in 800 countries. But guess what? The BRICS are building alternatives as we speak, and when the world finds a way to ditch the dollar, the inflation tsunami will make the 70s look like a picnic.

And don't even get me started on the "but manufacturing doesn't pay well" cope. Oh yeah, because working at Amazon warehouses or DoorDashing is such a step up from union factory jobs that could support a family on one income? The deindustrialization of America was the greatest wealth transfer from working people to corporate elites in history, dressed up as "free trade." The 1971 Nixon Shock was the original sin that decoupled money from reality. Since then it's been one giant debt orgy where the rich get richer by financial engineering while the country's real productive capacity withers. But sure, keep telling yourself that running perpetual trade deficits while offshoring our industrial base is "sustainable" because we have the money printer.

China now owns our supply chains, controls key industries, and is busy strong arming its way to global dominance. Walmart shelves full of $2 plastic junk don’t make up for the collapse of skilled labor wages. Go tell a factory worker in Ohio that his job loss was worth it because iPhone assembly got outsourced to Foxconn. The "cheap goods" argument is cope for elites who profit from globalization while real wages stagnate for decades.

The average American gets screwed by this system with stagnant wages, unaffordable housing, and a crumbling infrastructure while the elites jet around on private planes bought with Fed-printed junk money. The dollar's reserve status isn't a privilege. It's a curse that's let us paper over our decline with debt instead of making tough choices. Confidence in the dollar is not an infinitely sustainable glitch. When the world finally gets sick of funding our deficits, the reckoning will make 2008 look like a picnic. No fiat currency survives its own abuse. When the reckoning comes, it won't be the bankers and politicians who suffer.

The reality is brutally simple. Decoupling from gold removed all discipline from the system. Politicians could spend without consequence, financiers could gamble with abandon, and the productive economy got outsourced to slave-labor nations while we became a nation of paper-pushers and baristas. Now we're staring down the barrel of $35 trillion in debt, supply chains we don't control, and a currency that's one crisis away from a Venezuela-style collapse. But yeah sure, keep telling yourself everything's fine because some Keynesian academics drew you a pretty graph. The Romans probably had similar debates while their denarius turned to trash and the barbarians gathered at the gates.

dzonga• 1 year ago

GDP numbers can be "imaginary" but production numbers are not.

China produces more ships in a year than the US. Generates More Power from Hydro than the whole of Africa.

We could dig more -- but that's just on top of my head. Just like how the US was able to help the allies win WW2 by producing more. It will lose a war against China - because of incredible chinese production

IG_Semmelweiss3• 1 year ago

Your statement would be true without nuance.

Yes. The mass of US consumers do benefit from penny subsidies of certain foreign product.

However, for every penny of foreign subsidy benefitting US consumers buying finished iron or steel goods, a US metallurgist is losing a job somewhere.

On strictly numbers, we are better off with foreing-paid subsidies yes, but there are losers, and they take the brunt of the downside.

So id update your analogy by adding a twist: your childhood sitter living on anytown, USA was the virtual receptionist of the business. She had no RSUs in the business. She stayed in anytown and declined a career in a larger, growing city because she found virtual work and it made her happy. Now she's stuck with a mortgage, in a dying town, and with no career prospects locally. And all because you offered her a job that incentivized her to move, and then changed the relationship to her job 180 degrees .

Separately, ive only discussed the trade impact on consumers. We arent going into trade impacting producers, for example matters like producers having their inventions stolen, or their investment nationalized, to name a few examples.. -

mediaman• 1 year ago

The idea that the hard goods are sold for "imaginary numbers" is popular but a bit of a misnomer.

These "imaginary numbers" are actually claims on future income generated by the United States economy. It is true that they are "imaginary", in the sense that any property ownership is imaginary in a way that a toaster is not. The most common form is Treasuries, which the government then pays interest on and which must eventually be either repaid or rolled over.

So it would be more correct to say that China is trading hard work building goods in exchange for claims on future US income.

lurk2• 1 year ago

all USD transactions go through US institutions regardless of where those transacting partners are located

This isn’t true.

rax0m• 1 year ago

Another alternative to a non-national global reserve is of course gold (or dare I say the B asset which must not be named)

corimaith8• 1 year ago

Keynes's argument of the International Clearing Union and the associated Bancor was primairly concerned with the need to manually balance trade balances rather than rely on FX exchanges. That would be achieved via manually setting FX exchange rates to heavily punish surplus countries (which should be happening normally in FX but isn't for various reasons).

The US chose to maintain a reserve USD pegged to gold instead back when they were running a massive trade surplus, but with the collapse of Bretton-Woods the situation in many ways has inverted. In any case, there is increasingly call by many in recent administrations, from Trump's policy advisors to Biden's Katherine Tao to return to the proposals of the ICU. While I don't think Trump's attempt to rebalance trade while still having the US reserve currency will work, I also don't think the Americans are that attached to that prestige to be willing to give it up in order resolve global trade balances and at home. It's not difficult to deal currency freezes with the right friends if you really wish, the real sting of US sanctions has always being barred access to the lucrative US market.

Of course, in the event that the ICU emerges, it would greatly harm the interests of surplus economies like China, Europe, Vietnam, Japan, etc, hence why they largely support the status quo of the US reserve currency rather than changing it, because they've decided that the benefits of surpluses exceeds the benefits of a deficit as a reserve currency.

csomar2• 1 year ago

The issue is that the US now wants to have the cake and eat it too. Trump wants the rest of the world to subsidize the US industry. It'll be interesting how this will pan out.

epistasis4• 1 year ago

You say "interesting" but as a US resident, I say "terrifying."

Biden showed a great way to subsidize industry and catalyzed the biggest expansion of building factories in generations, in forward-looking sectors that will reduce the cost of energy for all future generations in the US, providing us security and reducing the chance of another inflation spike like that caused by Russia starting wars that threaten the energy supply.

All that nascent industry is at risk of being thrown away for being too "woke" all so that we can send all the fired NCI cancer research to factories for assembling iPhones. From pipetting to tiny screws may be slightly related job skills, but it's capturing the least possible value from a generation of highly trained workers...

nitwit005• 1 year ago

No one else can manufacture USD's, so other countries have to acquire them by shaping their economies to supply goods and services demanded by the US.

They can just buy dollars from the other countries that already bought dollars. A huge amount of trade is dollar denominated, so there's no need to directly sell to the US.

For the US, this is a simple trade off - gain massive political influence (and market intelligence - all USD transactions go through US institutions regardless of where those transacting partners are located), at the expense of hollowing out domestic industry and running a deficit in physical goods traded.

That's just false. There's no magic mechanism to force transactions to flow through US banks.

fennecbutt4• 1 year ago

Plus one thing that was never really mentioned during the tariff bs where many American republicans demonstrated a total lack of understanding of what tariffs are and how they work is:

The fact that, yes, China makes iPhones and America has to import them. However that completely ignores the fact that China is making iPhones for _Apple_ and that whilst I'm sure the Chinese factories make a little profit, Apple's is making much much more on their huge mark up when selling iPhones across the world.

Of course those iPhones are imported directly from China to place of sale, say the UK. But who sees the profit? An American company. _Even though_ those imports would not have counted against America's exports specifically as far as I'm aware.

throttlebody• 1 year ago

A lot of corporate US does not declare their earnings in the US, but in tax heavens, thus further skewing the figures.

fennecbutt4• 1 year ago

Follow up: and Trump again today with the 'The president also threatened to impose a 25% import tax "at least" on iPhones not manufactured in America.'

Lmao the profit from Chinese companies (or India, etc) manufacturing the iPhone is so, so much less than the profit that Apple makes selling the iPhone.

Honestly just ridiculous. I was hoping he'd stick with the insane tariffs so I could watch Americans mob & oust him. But he's backpedaled as he is wont to do, the absolute cretin.

nilram• 1 year ago

The solution is a non-national global reserve, calculated on a basket of national currencies. This was Keynes argument at Bretton Woods, but the US would not have it then, and does not want it now.

But what does the US want now? It's government's actions are making it more difficult for other countries to trust it for the global reserve currency. If it really wanted manufacturing to return to it's shores, there's other ways to accomplish that without rewiring the global economy: carrots, not sticks.

materielle• 1 year ago

At the expense of hollowing out domestic industry

This doesn’t seem obvious to me. Trade happens because it mutually beneficial.

The counter factual to reducing trade isn’t that we would manufacture the equivalent amount of goods here and be just as rich.

It’s that we would be poorer. And certain goods would cease to exist, and all of us would have to learn to live with less because it’s simply infeasible to manufacture everything here.

huevosabio• 1 year ago

The counter factual to reducing trade isn’t that we would manufacture the equivalent amount of goods here and be just as rich.
It’s that we would be poorer. And certain goods would cease to exist, and all of us would have to learn to live with less because it’s simply infeasible to manufacture everything here.

This should be in billboards all over the US. I don't get what is so hard to understand.

Globalization made us all richer and gave us the luxury to pursue new technology.

Self-sufficiency points towards subsistence farming.

JackYoustra12• 1 year ago

running a deficit in physical goods traded

This is not a disadvantage. By your own admission: we send dollars overseas in exchange for goods. We never have to actually send goods of our own. We effectively get them for the price of printing dollars, so effectively free.

hahajk• 1 year ago

some one really need to explain this in a way I understand, because this sounds very much like "free lunch". Matt Levine explained it as exporting debt ("The US is better than anyone at manufacturing financial instruments"). He also said we get computers in return for entries in a database.

This sounds... untenable? too good to be true? a shakey foundation on which to build an economy?

bobthepanda3• 1 year ago

I mean, the SDR exists, and currency baskets are not new or unheard of.

USD has mostly been where it is because the alternatives are a lot less appealing:

* CHF - they explicitly would rather not be a strong reserve currency and threaten to print money whenever it starts strengthening

* JPY - they also don't want a strong reserve currency because it would tank their export led economy, plus Japan's debt and economy make the US look very healthy in comparison

* EUR - people remember the Euro crisis, and a lot of the fundamental issues with the currency were just papered over. It wouldn't ake a lot for a new Euro crisis to happen.

* GBP - post Brexit, not that attractive, and not so long ago the whole Liz Truss debacle happened to the currency

* CNY - China flirts with the idea of a reserve currency from time to time but would much rather have the ability to impose strict capitol controls quickly

It's only in the last year or so that USD has started to look very wobbly.

herbst6• 1 year ago

Compared to CHF and EUR the USD was on a downfall for a while now, more or less Corona or the last trump era.

The new thing is that it's really getting worthless comparingly up to the point where it's not interesting anymore to keep any USD and no reason in sight to think it might get better

sgjohnson3• 1 year ago

SDRs exist only on paper. Regular individuals or companies can’t deal in them.

epistasis4• 1 year ago

It is utterly baffling to me that some Americans see the massive amount of free goods that they get as part of being the reserve currency with trade deficits, and somehow think "hollowed out manufacturing" rather than all that cheap stuff we get.

The rest of those countries that are manufacturing things are far far poorer, and desperate to switch to industry higher up in the value chain, where the US is.

And a half-analysis of the situation, and a halfwit in charge of the country that thinks the trade deficit is like a budget deficit, and the US is throwing away the heart of its economic powerhouse over half understanding of the economy.

It's truly breathtaking. Like watching Brexit on repeat. Just utter economic suicide disguised as strength.

trade2play• 1 year ago

Play it forward a half century.

Physical productive capacity is gone. Your global competitor is the de facto production hegemon. Debt has ballooned, and you can’t fund welfare programs. A big chunk of your country’s assets are owned by foreign investors.

But yes, you got a lot of cheap things before the music stopped.

RivieraKid2• 1 year ago

They're not getting free goods and services, they are exchanged for debt, stocks, real estate.

tap-snap-or-nap• 1 year ago

The non-national global reserve suggested by Keynes was to be called Bancor, however Harry Dexter White's plan was pursued instead.

skybrian3• 1 year ago

Rather than thinking of it as demand for dollars, you could think of it as demand for US investments in general. The US is one of the better places in the world to invest. Why foreigners want to buy US tech stocks (for example) shouldn’t be a mystery.

deadfoxygrandpa2• 1 year ago

but it is a demand for dollars. if germany buys oil from saudi arabia and they have to use USD to buy the oil, that right there is a demand for us dollars and not us investments in general

seanmcdirmid4• 1 year ago

This is also why China isn’t too keen on using the RMB yet in the same way, it is still not freely convertible. The question comes if the USA is insistent on giving up its top spot in the world economy, what currency will fill the void?

deaddodo3• 1 year ago

They can then use these earned dollars to transact with other countries, as the US itself insists they do.

I feel like people who post this have no idea of the "eurodollar"[1] or the fact that it was London (and the EU, at the time, in general) that benefited from popularizing the USD as a reserve currency versus pegging one to their previously decentralized currencies or risking their own currency control.

The US doesn't need to insist on anything. As you yourself stated in the paragraph previous to this, it's a natural side effect of being a large economy that everyone wants/needs to trade with. For the most part, the eurodollar has been a pain in the side of the US as it removes some control over their own currency. In some cases this has helped, as it's tempered certain recessive/depressive effects during downtimes (especially with Europe), but it's also caused inflationary issues that are outside the hands of the Fed. The US (like pretty much any nation minting their own currency) would prefer to have that control over some ephemeral benefits that very few can ever seem to articulate or meaningfully quantify.

1 - https://en.wikipedia.org/wiki/Eurodollar

kiitos2• 1 year ago

the expense of hollowing out domestic industry
Post WW2, US leadership [deliberately] traded the domestic manufacturing industry [capability] for national security, by making the US dollar the default international trade currency. [This] gave America benefits, but increased the value of the dollar astronomically, which made it impossible to manufacture anything locally ... the logic at the time was that Americans would up-skill en-masse, away from the menial manufacturing jobs [of history] -- but everyone is too much of a dumbass to stay in school [which is required for all of this to work] ... Let's Go Brandon!!

https://www.youtube.com/shorts/SCUy3DrUZmw

sgjohnson3• 1 year ago

all USD transactions go through US institutions regardless of where those transacting partners are located

This is not true. See: Eurodollar - https://en.m.wikipedia.org/wiki/Eurodollar

RivieraKid2• 1 year ago

Why does having a reserve currency status guarantee a trade deficit? For that to be true, (1) foreign-held dollar reserves would have to grow at a sufficient rate and (2) Americans would need to get increasingly indebted, which is a voluntary decision. The fact that foreign goods are cheap doesn't force Americans to get in debt in order to buy them.

trod12345• 1 year ago

This is not really accurate.

National currency as the defacto reserve currency does not necessarily guarantee a trade deficit. It just happens that way in history quite often, but it is unsustainable throughout the currency lifecycle.

The solution is a non-national global reserve ... Keynes argument.

Keynes was wrong about a great many things which weren't really recognized until after the 1970s. His depiction of Say's law (and the disproving caricature of it which meant nothing), as well as the related actual failures of monetary policy in low interest rate environments, where his theories indicate contradictory outcomes.

I'd like to know why you think this would be a solution. It is not an obvious stance, and in fact the suggestion has been discounted in the past as impossible/intractable for a large number of reasons. First and foremost any system would be fundamentally unstable, and the risk of economic contagion unmitigated, there are cultural, sovereign, and other influences at the intersection of fiscal and monetary policy.

Most of the issues under that proposal are caused by the lack of economic calculation being possible, and growing chaos, and its a problem where the indicators lag behind the wave, so it comes without warning, or possibility to react.

wkat42424• 1 year ago

The solution is a non-national global reserve, calculated on a basket of national currencies. This was Keynes argument at Bretton Woods, but the US would not have it then, and does not want it now.

The US is getting that now whether they want it or not. The financial confidence in them has been destroyed by the insane off-the-cuff trade tariff jumps and I don't think it will ever recover. The trust in the dollar is gone, it's just not so obvious yet because financial systems don't get changed in a day. It's a slow ship to turn but it's also slow to turn back. Europe is now working on replacing the Visa/MasterCard duopoly which currently backs all our payment cards. It'll take a while but when it's there it will never come back.

Even consumer confidence (and affinity) is now gone and I see a lot of people proudly avoiding American products and services. Tariffs or not, this will only increase the deficit. You can't force people to buy your stuff, not if you so strongly advocate a free market.

Even when there's hopefully a sane president again, the US has shown it's always possible there'll be another Trump out of the blue that screws things over again just from one day to the next. Financial markets can't handle that huge risk. The world is going to move on from trusting the US.

nba456_• 1 year ago

Because most major countries devalue their currency vs the US Dollar, making imports more expensive. Like tariffs.

metalman2• 1 year ago

the United Stares biggest import ton for ton was (maybe still), oxygen, it looks to be impossible to search for, as of course the only returns are for profit making companys, not anything so trivial as the atmosphere, which realy just makes the point that the whole concept of money and economy exists in a special bubble, where control of the naritive is what realy counts

monero-xmr• 1 year ago

Countries want American assets - stocks, bonds, property (or abstract ownership in such property).

Countries acquire such assets with dollars. They need to get dollars. The acquire dollars by selling things Americans want, typically physical goods as Americans are very good at making the non-physical kind.

Unfortunately this incentivizes the never-ending march towards de-industrialization in the USA, as countries earn dollars by making things. They get more efficient every year, and more skilled, making more things, to acquire dollars.

That is, I would argue, the single biggest issue animating politics today. It is the argument against globalization, one that has not been solved, and the turmoil in politics across the West with gyrating governments is because voters continue to desire change, and solutions, which no party has yet solved.

Arguing that voters are "stupid" is itself stupid. Voters vote the way they vote. It is on elites and politicians to solve the problem of deindustrialization while maintaining the parts of globalization that are beneficial. If you want to wring your hands and blame the voters, that's fine, but in a democracy you should try to win votes and not call people stupid.

CyanLite2• 1 year ago

Because the USA has more money than other countries. People outside the US can't afford to buy our products, but we can afford to buy theirs. This is ideal for many people in the US who want cheap $200 flat screen TVs in every room of their house.

This isn't good for unskilled labor in rural parts of America, often in swing states. Manufacturing had always been a place for high school grads to have a decent career. Those days are over with, but politically they decide the election.

kylebenzle2• 1 year ago

Perfect answer but it's also important WHY the USA, "has more money than other countries."

It is because we are the only country that prints money at will and forces the rest of the world to use it at gunpoint.

The entire basis of our way of life is essentially printing worthless pieces of paper and digital assets and then literally giving the rest of the world the ultimatum we will kill you if you don't buy and use our currency.

aaronbaugher2• 1 year ago

True. It's weird how many of the people who used to know this and protest against it forgot it when the US started using that same power to force their culture onto other countries along with the currency.

As an American, I want my country to get out of this obviously unsustainable position of debt-based hegemon. The tricky part is doing so while staying strong enough that the rest of the world doesn't (quite reasonably) decide to come take a piece out of us to get back at us for the decades of bullying.

yodsanklai• 1 year ago

Unemployment is low in the US though? what type of jobs do high school grads do? and would working in a (let say) doll factory be a better job for them?

downut• 1 year ago

They move to where the jobs are. And the small town where they got their schooling hollows out.

vel0city2• 1 year ago

As a high school grad with nothing but a diploma I got jobs working retail, doing data entry/discovery for a law firm, working the graveyard shift as a receptionist for a 24-hour facility. Are those better than doing factory work? I don't know. The discovery one was pretty cushy, but still rather monotonous.

xeromal2• 1 year ago

A lot of people work dead end jobs at walmart or trucking (which is another industry that has taken a big shit like manufacturing)

Manufacturing and trucking jobs and the like paid 20-40% above what you could make at Walmart and other big corporations.

I grew up in a rural town and people decry losing jobs to places like walmart. That said, I still think the bread and butter of american business are all the small businesses that are still kind of trucking.

Small construction companies, small engine repair, home repair, mechanics, etc.

tiahura• 1 year ago

The decimation of the price of unskilled labor via free trade was one of the all time Panglossian failures to consider second and third order effects.

sorcerer-mar21• 1 year ago

Manufacturing was “crumbling” in the US decades prior to anything that people today refer to as "free trade."

herbst6• 1 year ago

Swiss checking in. No idea what you even talking about. Do you think we don't have 200$ flat screens?

roenxi5• 1 year ago

The saving gap perspective tells a contrary story. Investment spending would have been lower if not for the United States being able to borrow from the rest of the world. One can argue that this funding raised the economy’s productive capacity from what it would have been otherwise.

This sounds backwards, I suspect he's being a bit sloppy when he says that. To sustain the trade deficit it was necessary to enormously increase China's productive capacity so that they could build the goods that get shipped to the US. If the US wasn't running a trade deficit the number in the statistics might have been lower, but it is quite likely that the amount of productive capital actually built in the US would have increased and they might have the same amount of real stuff at the end of the day. They could have built a similar amount of production in the US, for example, instead of importing. The accounting identity for that might be a lower number but that doesn't immediately tell us anything about what the real outcome would have looked like.

It is like the situation where nominally China's economy is nominally smaller than the US's, even though as far as the economists can tell China produces more actual stuff. Accounting identities are so basic that they abstract out a lot of important detail vis a vis what an outcome looks like on the ground. Accounting identities always hold, so any situation that can theoretically occur will have a valid accounting identity. It doesn't make sense to rank outcomes by how high investment spending is, it is important to know what real changes would occur. Which identities can't tell us because they are general.

Obviously he is technically correct that he can argue that, but it is insinuating a relationship. This stuff is the bane of central planners, it is nearly impossible to tell in the abstract whether a change in accounting identities was good or bad for productive capacity.

JackYoustra12• 1 year ago

They could have built a similar amount of production in the US, for example, instead of importing.

They could not. If they could've, why wouldn't they? Companies, all else equal, have an enormous preference to colocate supply with HQ or with demand, and both are in the US.

They could not because labor was so much more expensive that if you can use cheap capital but it takes 5x the labor you should make that trade and the world will be so much richer because the labor would otherwise be completely unused. The only way around this is to liberalize migration.

This is preferable! Liberalizing migration would also let us escape the terrible cost disease we've been experiencing, but instead we liberalized goods only and now people are confused about why goods are so cheap but human-intensive services (restaurants, education, healthcare, etc) are so expensive.

m00dy• 1 year ago

To maintain a global reserve currency, US must typically run a trade deficit to supply the world with enough of its currency for international trade and finance

c-linkage2• 1 year ago

I've always disliked economics because it never seems to make much sense. The first equation in the article -- the basis on which the entire premise rests -- just feels wrong.

Spending is either on the consumption of goods and services or investment spending on equipment, structures, and intellectual property products. Income is allocated to either consumption or to saving by households, businesses, and government. In a closed economy, spending equals income—that is, the sum of consumption and saving equals the sum of consumption and investment spending.
Spending (Consumption + Investment Spending) = Income (Consumption + Saving)
Because consumption drops out on both sides of the equation, investment spending equals domestic saving in the economy. This makes sense: the funds available to invest in productive projects have to come from domestic savers.

It _doesn't_ make sense. How is consumption on the income side of the equation? And even if that somehow did make sense, who is to say the consumption on the income side is the same as the consumption on the spending side such that they balance out?

Saving is deferred spending, meaning money is set aside temporarily. One might think of this like a "cash queue" where the velocity of money slows down for a while. Is the assumption that all saving takes place in banks where banks can lend it out? If I stuff cash in a mattress (saving), how can that cash be used for investing?

A more realistic version might look like this:

                (fast)
  Income --+--------------+-> Spending --+--> Consumption
     ^     |              |              |
     |     +--> Saving >--+              |
     |          (slow)                   |
     |                                   v
     +---------------------- Investment and Production

This model involves time, but apparently economists only like models that incorporate addition and subtraction.

EDIT: If I'm asking questions, saying I don't understand, and offering a counter-model, doesn't that count as adding to the discussion? If I'm operating under some misunderstanding, there are certainly others who have the same misunderstanding but didn't speak up.

neximo64• 1 year ago

So what's negative savings in this model? Money you get temporarily and use to increase income?

roenxi5• 1 year ago

Klitgaard is talking about accounting, ie, instantaneous currency exchanges where, by definition, the gain on one side of the exchange has to equal the outlay on the other. Your model doesn't look like an accounting model; I suspect you want to talk about something different from what he is talking about - and that you want to talk bout policy implications rather than truisms (which is a good instinct; just not what economists care about when they sit down to talk accounting identities).

griffzhowl• 1 year ago

How is consumption on the income side of the equation?

Isn't it just that one person's spending on consumption is another person's income from that consumption?

jihadjihad2• 1 year ago

It _doesn't_ make sense. How is consumption on the income side of the equation? And even if that somehow did make sense, who is to say the consumption on the income side is the same as the consumption on the spending side such that they balance out?

The model they are using is a simplified macroeconomic model. In their model, they are simply saying that when you account for Income--the total amount of money earned across the entire economy--it can only fall into two mutually exclusive buckets. Either the income is related to Consumption (purchasing goods and services), or Saving (as you mention, deferred spending--money in banks, or surpluses in the budget for states etc.--anything that is not in the consumption bucket).

who is to say the consumption on the income side is the same as the consumption on the spending side such that they balance out?

By definition, it has to be. The way national income accounting works is that you can look at things from the perspective of expenditures or income. Since GDP is total output and total income, the total amount of consumption is the same, which is why it drops out in the equation from their model.

c-linkage2• 1 year ago

So in this simplified model, consumption is like a mobius strip in that while the mobius strip only has one side, income can only come from the consumption from spending.

The fact that they included it on both sides of the equation seems pointless, then, and only serves to confuse.

izacus• 1 year ago

I've always disliked economics because it never seems to make much sense. The first equation in the article -- the basis on which the entire premise rests -- just feels wrong.

That's because you're reading an econ 101 equation, similarly how basic physics blogs use spherical cows in equations to simplify them. Most of internet (and even media) discourse about economcs never grows out of this level - it's like having people debate physics of nuclear reactors while their knowledge is stuck on Newtonian level.

Or, as some academic once put it - first year in economics college you learn econ101... and the rest of the years you're taught all the ways that model doesn't apply to real life.

mastax• 1 year ago

In the real world approximately zero saving occurs by stuffing cash in the mattress, so “all saving is investment” is a correct simplification.

hgomersall2• 1 year ago

Economics is the formalisation of confusing stocks for flows.

SoftTalker• 1 year ago

It isn't called "the dismal science" for nothing.

powerapple• 1 year ago

Other people's consumption is your income, not production, producing does not generate income by itself.

standardUser• 1 year ago

I wish someone would explain to Trump that decades of low tariffs and trade deficits is what has (had) cemented the US at the center of global trade, with all of the many benefits that comes with. Getting the rest of the world on board with the US-centric economic order has been THE American project of the last 80 years, it's been astoundingly successful, and Trump appears intent on ending it.

padjo• 1 year ago

It’s been quite amusing to hear him describe the system America set up for its own benefit as being ripped off by the rest of the world. What a victim complex.

dboreham2• 1 year ago

There's no explaining to Trump. He's a willful moron. Dunning Kruger personified.

alexandre_m• 1 year ago

Trump tariffs are a leverage to make better international trade deals.

They were always meant to be temporary.

ljosifov2• 1 year ago

Because there are 1) willing exporters of US dollars USD (the US federal government USG ultimately, and US citizens in the final analysis); and 2) willing users of USD - us non-US-ian people around the world.

When I sell stuff to someone in the UK, then pounds are fine as means of exchange. When I sell the same someone around the world, then the transaction not being domestic, the cash part that is 1/2 of it (or 1/4 if you want to look at it in a way of transaction = quartet of {stuff,cash,buyer,seller}) and it can be in any currency of any country. It helps if it is the country of the buyer or the seller, but in general it is neither.

I prefer US Dollar to Zongoan Vonga, b/c:

1) USG typically does not devalue their USD much, I don't have to rush to exchange the USD for something else. Or if you want - most others devalue theirs more.

2) USG has not deleted and re-issued their USD even once so far afaik. Other countries do it more often.

3) Everyone else uses USD already. It's easier if it's one currency sufficing for all trade.

4) Often I don't produce oil, and oil is easiest to pay by with USD. Not impossible with others, just more difficult.

5) US banks allow me to hold USD in accounts outside of US. They don't ban me to take the USD in- or out- of US.

6) With USD in hand I can buy lots of stuff US produces, plus I can buy US assets - property, financial assets etc. US does not discriminate against me johnny-the-foreigner much, they are mostly relaxed in that respect. Other countries have all manner of rules that amount to: they'll basically steal their currency off you, or make it worthless to you by making you unable to claim the goods & services that are nominally sold in that currency.

Before people pipe in how US is terrible in this and that - above is all *relative* to all other options all other currencies available. This is from to top of my head, I'm sure I made some error and there is more.

Carioca• 1 year ago

USG has not deleted and re-issued their USD even once so far afaik. Other countries do it more often.

Interesting side note: they did it once, just after the ratification of the US Constitution. The Revolutionary War was funded in some sense by devaluing the Continental Currency of the time, denominated in "Dollars". You could argue that the "US Dollar" only came to being with the coinage act of 1792, but as a Brazilian I'd say "Potay-to, Potah-to"

JCattheATM2• 1 year ago

non-US-ian

FYI better not to use silly terms like 'US-ian' as they are confusing and cause problems while solving none. Just stick to the standard 'American', context makes it clear what you mean :)

ljosifov2• 1 year ago

Haha :-) - fine, hope no offence taken. :-) (none was intended) It came with the flow, flow was - US-... -Government, -Citizens, -Dollar, and then when it came to "people of the world that are not US citizens" (but are users of US dollars) programatically is seems to my compute mind, it came as "non-US-ians" fits that set of people well, and plus tallies with the "US-this-and-that" of the wordings prior. I'm originally from the Balkans, and so cognisant and got some experience with "verbal mines" and nuances in all manner of names and naming-s. I intuit what you are saying. :-) thanks

massysett• 1 year ago

“deficits are also due to a persistent shortfall in domestic saving that requires funds from abroad to finance domestic investment spending.”

But why isn’t it: deficits are due to a persistent surplus in funds from abroad to finance domestic investment, perhaps because the economy produces high returns and welcomes foreign investment?

dec0dedab0de2• 1 year ago

I always thought the plan was we give them pieces of paper for their stuff. Then if we ever needed to we could say those pieces of paper(or bits in a computer) are no longer worth anything unless you're a citizen. But I had a bunch of gift certificates for ChiChis when they went out of business, and I have been jaded to this sort of thing ever since.

alexb_• 1 year ago

Why on earth would we ever do that? That's a nonsensical proposal that would immediately make an immense amount of people poor (while also being hostile to so-called foreigners for no reason)

dec0dedab0de2• 1 year ago

Well I purposely wrote it in a hand-wavy immature way because I don't really understand it. But I did say "if we ever needed to." So whatever the equivalent of declaring bankruptcy is for a country.

Though I would like to amend my nonsense from "a citizen" to "actually in the country" I am imagining cutting off foreign governments and oligarchs, not humans that are actually living here.

Basically, if there was a bad war or something, and we needed to cut ties with most of the world. It's better to be left with the goods than the cash. Because cash has no intrinsic value.

erulabs2• 1 year ago

You're going a bit far with "no longer worth anything" but indeed, if the entire world holds a particular nation-state's currency, and uses it to exchange goods and pay down debts, then it gives that nation-state tremendous power.

Printing dollars is often considered a tax on dollar-holders: I print dollars, your dollars become less valuable as my new dollars are circulated into the market. Effectively, this means the global reserve currency's nation-state can impose a tax on the world, instead of just on its citizens.

tiffanyh2• 1 year ago

Can someone clear up if "services" are included.

I read quite often claims that state if services were included, the US would be in a trade surplus.

But in my own rudimentary research, it appears services are in fact included.

Can someone confirm.

jihadjihad2• 1 year ago

They are included. The US typically runs a trade deficit in goods and a surplus in services, but it can change [0].

0: https://tradingeconomics.com/united-states/balance-of-trade/...

corimaith8• 1 year ago

The Trade Balance definition is murky depending on who you ask, it's better to use the Current Account Balance that includes trade balance amongst other things as an indicator of net flows. The Current Account does explicitly include goods & services, and the US is running a hefty deficit today.

mtoner23• 1 year ago

Yes it includes services and we still run a deficit. Trump's definition though does exclude services which leads to the confusion. In services on its own we run a surplus but it doesn't make up for the larger goods deficit

FuriouslyAdrift• 1 year ago

"Always" being since 1977... prior to that we ran a surplus most years.

mpweiher• 1 year ago

Because it can.

phkahler2• 1 year ago

From TFA: Spending (Consumption + Investment Spending) = Income (Consumption + Saving) so they conclude Savings = Investment Spending

How does savings become investment spending? Is that through borrowing? Who says borrowing is used for investment? Sure, it's not a great idea to borrow to spend but even corporations sometimes (do stupid things like) borrow to pay dividends which is not investment.

wbl• 1 year ago

Every liability is an asset on another ledger.

hrwvjigegby• 1 year ago

I also did not understand this. It seems that “consumption” has different meanings on either side of the equals sign.

marcosdumay3• 1 year ago

To explain the sibling that came in accounting jargon, money by its very nature only exists by lending. You can't have your number on your savings account if it wasn't lent to somebody first.

owenversteeg2• 1 year ago

So, first of all, that’s an economics formula: they tend to be extreme simplifications to demonstrate a relationship between variables. Of course, that means they’re often wrong or useless. Sort of like if all physics formulas were “cow diameter=(food-waste)/2” or “car velocity=gas pedal depth-brake pedal depth.” Sometimes economists jokingly call it the “dismal science”; what they don’t mention is that the term came from a paper arguing that slavery was superior to abolition - an argument made with many of the same reasoning errors, oversimplifications and lack of perspective that clouds modern economics. Our modern sciences are not quite as evolved as we would like to believe.

- - -

Now, to your question: this is an oversimplification, but most money that’s not in a mattress somewhere is being lent out (invested.) If I have $500 in a bank account, my bank will turn around and lend my $500 to Bob’s Construction Corp or to Mary for a car loan or whatever. In practice things are a lot more complex, but the portion of money that’s sitting still in a mattress or a vault is fairly small. This means that if I get a dividend, money is moved from one bank account to the next, and the amount of investment doesn’t change.

elzbardico3• 1 year ago

Why would you not if you don't incur in external debt doing so?

The real wealth is not dollars or pounds or whatever, the real wealth is goods and services.

Having access to goods and service is what gives you a better living standard, the money is just a way to exchange them and to store value.

The US has the privilege of having high international demand for its currency, as it is the default global reserve currency. Of course, it incurs some costs, like having to have the most powerful military in the world, being implicitly responsible for making sure navigation waters are free and unimpeded for commerce, and having to try to keep the powder keg from where most of the energy that runs the world comes from, the middle east, from exploding.

In exchange, if you want more oil? more steel? more children toys? more paint? more chips? You can just use your dollars to buy it, and thus making sure your citizens have access to an unimaginable amount of stuff and services.

You can make the world work for you in exchange for dollars. And the world can buy your advanced tech and services with those dollars, and can use those dollars to also buy things they need from other countries without a lot of the complication of multiple exchange rates and/or barter schemes.

And the best part? Your government can run a lot of programs and not care much about raising taxes, because all those sellers after they use part of the dollars for buying stuff from you and between themselves, will usually have some extra dollars that they are going to save for a rainy day. And what is the best way to keep those dollars safe? Well, buying american treasury bonds!

Yeah, you can exaggerate a little bit and end up deindustrializing yourself too much, or go too hard on the consumption frenzy thing and end up with too much trash, environmental issues and household debt. But those are problems that come from the abuse, from the over enthusiastic use of this privilege. And I hope they can be solved (don't ask my how).

The system actually works for anyone involved. Nobody is really interested on this de-dolarization stuff as long as America also doesn't abuse its power too much.

International commerce is a complex machine, and everybody depends on it, everyone know that changing the current system too much would disrupt international commerce for years. Yeah, in the long run, everything would converge to some new equilibrium, but nobody fucking knows what that equilibrium would be, if it would be stable, and crucially, how much time it would take for it to be achieved. As Keynes taught: In the long run we will be all dead.

No country wants their dollar reserves to become dust, especially not china, they sweated a lot to accumulate all those nice treasury bonds.

danans2• 1 year ago

The real wealth is not dollars or pounds or whatever, the real wealth is goods and services.

You missed one that is arguably more important: ownership of assets that provide security, shelter, and productivity.

hgomersall2• 1 year ago

Control trumps access trumps ownership. If the asset is on US soil under US regulations it's controlled by the outputs of the US political system. Any failure of those assets to actually benefit the local population is a failure of the US political system.

elzbardico3• 1 year ago

In a simplified sense, all assets start their lives as goods, either tradable goods, goods that are used to build more goods, future goods, or things that represent ownership or an interest in any of them.

Land is a bit more complicated. But even land value is conditional in what you can use it for.

obblekk2• 1 year ago

Having access to goods and service is what gives you a better living standard

I think the good faith critique is access to imports can be taken away by the other country if they want. eg. rare earth metals. So being too heavily reliant on imports without the capacity to produce domestically is less long run access

elzbardico3• 1 year ago

Yes. Too much of a good thing, or a good thing at the wrong place or instant of time, ends up not being a good thing.

I would recommend against having sex in a subway station at rush hour, or drinking French Cognac during a job interview, although both are good things.

We can and should discuss how much trade deficit, and the nature of it, but in essence, it is still a good thing if you don't owe to other countries money in a currency you don't control to have this deficit.

neilwilson5• 1 year ago

Only if you have a single supplier.

For imports to be useful you need multiple suppliers all of whom have to have capacity to expand if one of the supplier lets you down.

Same as in business.

Industrial policy should decide domestic vs external production on that basis.

As the world moves to trade blocs the case for trade between trade blocs falls - precisely because the risk of getting left high and dry increases

JackYoustra12• 1 year ago

I mean China has cut off rare earths from time to time, and from time to time we don't see crippling shortages but a rather quick supply response.

If you're concerned about short / medium term timeframes, I've yet to see a broad analysis that showed stockpiling (can even do it privately!) being insufficient.

FilosofumRex• 1 year ago

Why would you not if you don't incur in external debt doing so?

you described economic Neoliberalism since 1968, in a nutshell. However, its most important consequence - impoverishment of the low-income and very low-income native population and its inevitable supplementation by emigrants, is destabilizing the very nations who championed it.

Secondarily, militarism (NATO, Israel, Taiwan, Korea, etc.) needed to maintain the pecking order is under great strain and requires considerable counterproductive expenditures (Palestine, Iraq, Libya, Lebanon, Ukraine, Afghanistan, Serbia, etc.) just as the native populations age rapidly.

Thirdly, de-dollarization has its own dynamics and is driven by politically motivated economic sanctions enforced by high seas naval interdictions, Russian asset seizures, Chinese exclusionary trade rules, & global criminal gangs like the Kushner's crime family extortion of Qatar in 2017. Rise of BRICs+(25 countries waitlisted), Alt-SWIFT payment systems (BRICS Pay, CIPS) are supplementing USD, the very foundation of the Neoliberal economics.

losvedir• 1 year ago

Why would you not if you don't incur in external debt doing so?

Don't you, though? If you're in a trade deficit with another country that means they end up holding a bunch of your currency. That's basically a debt, right? They have the ability to get goods from you whenever they want, without having to give you any in return (just giving the currency back).

jongjong• 1 year ago

My take is that the US likes to export US dollars... Then wealthy foreigners don't know what to do with them, so they pour them into the NASDAQ and NYSE and fill the pockets of US executives. The US can also leverage its powerful military to coerce artificial demand for USD within foreign nations to prevent it from being redeemed for US labor. Like how the US coerced Australia into a ridiculously expensive AUKUS deal; really, it's just a scheme to prop up USD and has nothing to do with submarines.

The US has long been playing a game where they give other nations currency that it prints out of nothing on the pretext that this currency can be redeemed for something of real value, but then goes to great lengths to ensure that those foreign nations never actually redeem the currency. This is the 1971 gold crisis in a nutshell. Now the trade deficit in fiat money is just a continuation of this scheme... Backed by even less value. That's why it feels like western economies are being hollowed out. The US economy has been hollowed out and taking its allies down with it.

It's kind of ridiculous how much backlash Trump was getting for trying to do something that is both sensible and necessary. To restore the real economy.

jajko2• 1 year ago

Its not what we is trying to do (at least in official carefully formulated and team-vetted PR statements), but how he is doing it. None of his official big claims were ever realized - wall in Mexico anybody? End of Ukraine war in 24h instead of continuous asslicking of puttin'?

Wanting to improve something and then doing active steps towards damage and destruction because he is a) brainwashed in 80s in Moscow aka russian agent Krasnov; b) arrogant corrupt fool doing insider shorts all the time and taking bribes officially left and right; c) as mentioned above Dunning-Kruger effect example par excellence in the wild.

jleyank• 1 year ago

Because US-ians want to buy cheap sh*t in Walmart. On the whole, they seem to prefer cheap to durable/costs more. So USD flow to places with cheaper goods and then flow back as investments.

sunaookami• 1 year ago

More expensive hasn't meant "more durable/reliable" for years now.

herbst6• 1 year ago

Not for everything, but in Europe we still value this kind of culture and there are still many examples where it's true.

We spend a lot more on food for example, and half of the US produce is basically illegal here because of the low quality.

obblekk2• 1 year ago

This is incredibly well written.

The oil example is very compelling for import substitution. And the covid example is interesting in showing the savings rate only went up as an offset of gov spending.

I'd love to see a follow up on (a) is it important for the US to increase domestic savings and (b) what are the best policies to do so, and why are they the best?

I imagine blanket tariffs might actually increase the savings rate because they increase the cost of importing all goods when the domestic alternatives are either inferior or more expensive. But I'm curious if they are the best way to achieve the savings goal.

tastyfreeze6• 1 year ago

The only policy that will increase savings rate is a stable or depreciating currency. People are incentivized to use an inflationary currency so they can maintain value.

analog316• 1 year ago

But they can spend it on stocks, with the hope of maintaining or increasing value. Thats savings, right?

JackYoustra12• 1 year ago

(a) There's an argument that people should save more for retirement, but I haven't heard anything more than that about why domestic savings as a whole has to increase. If anything, this is quite a good place to naturally run a deficit! Good rule of law and investment opportunities, as well as future earnings from migrants.

(b) Targeting the fiscal deficit usually works well, especially because it's particularly yawning right now. Forced savings (sing-style CPF) work ok too though, although only Singaporeans wouldn't consider that a tax.

eagleislandsong4• 1 year ago

only Singaporeans wouldn't consider that a tax

Both forced savings and taxes are legally mandated by the government, but that does not mean that forced savings are taxes. Implementation details matter.

Your money in your own CPF account accumulates interest (at decent/attractive interest rates that generally exceed inflation rates), and is then paid out tax-free to you after retirement.

Additionally CPF funds are managed separately from the government's consolidated revenue. They are administered by the CPF Board and are not used for government expenses in its yearly budget.

neilwilson5• 1 year ago

It’s amazing how everybody misses the wood for the trees.

Where else is China et al going to sell all the stuff they can produce via their physical overinvestment that was driven by the “export led growth” mantra?

There is no untapped source of demand anywhere in the world. There isn’t the income. All they could do is produce less and cause their economies of scale to go into reverse.

So instead they sell stuff for accounting entries, which are then used on the asset side of their currency area balance sheet to justify issuing more of their own currency and maintain the circulation.

They could, of course, just buy the time currently used for producing excess exports and maintain the circulation in any case. But that would cause lots of people who are hard of accounting to get very upset.

So instead they continue with financial mercantilism, allowing everybody there to pretend that they are productively engaged, not metaphorically digging holes and filling them back in again.

And that would continue, thanks to those nations supplying the accounting entries and receiving all that nice output, but for somebody getting elected on the US side who actually believes the “lack of saving” line and decided to do something about it. To the loss of the US people.

Quite why he think that saying the US isn’t paying enough for Canadian lumber or Chinese cars is good for anybody is beyond me.

Another win for the Emperors New Clothes.

hedora• 1 year ago

There’s plenty of demand for manufactured goods. They can just sell to other markets. US foreign policy is causing demand spikes everywhere.

For instance, I read 300M people are projected to starve to death this year. I’m sure China will happily send some of them any excess food, especially since it’s not going to sell it into US any more.

I think you mean there are not enough US dollars in those markets. There are at least two easy solutions: (1) Intentionally tank the dollar to increase the relative purchasing power of other countries (which they have probably been doing - someone is, but the “who” is a bit opaque). (2) Stop dealing in US currency entirely and switch the world economy to a new reserve currency. I suspect that the Euro and/or Yuan will win that war, though some argument could be made for crypto.

I agree Trump may as well be running around naked at this point. It wouldn’t affect most people’s opinion of his competence or professionalism (domestically or overseas).

Anyway: To answer the question that is the article title: Because the US is (was) rich, and has (had) a high but sustainable standard of living.

neilwilson5• 1 year ago

Don’t confuse desire with demand. Economic demand is desire coupled with the ability to pay.

Nothing to do with dollars. The system is limited by world income.

China is not going to send anything to people who can’t pay. Otherwise they’d continue shipping to the US for absolutely nothing in return rather than the vague promise they are currently taking

And if they can pay then supply will already have expanded to service them.

corimaith8• 1 year ago

There’s plenty of demand for manufactured goods.

This is not true. The US is by far the largest consumer of final household goods at 18 trillion, the EU at 10 trillion, China at 6.7 trillion, Japan at 2 trillion, UK at 2 trillion, India at 2 trillion, the rest of insignificant. You would more of less need to combine every other significant market to match the loss in exports to the US market.

And that won't happen, because of these markets are export driven economies, hence their economies are not structurally designed to suddenly take on mass deficits without mass unemployment coming at hand. Nobody wants to take on the world's surpluses as a deficit country save for the USA, which people in this thread seem quite ardent in convincing Americans to do so, even if they won't support similar policies in their own countries.

AtlasBarfed2• 1 year ago

"There is no untapped source of demand anywhere in the world."

I understand what you mean, as in the current structure of governments/economies, there isn't a magic wellspring of demand.

Centralization of wealth starves demand, whether it is in authoritarian governments or an oligarchy/kleptocracy. The US certainly has been doing that for the last 50 years. I think there is a lot of demand and growth that is suppressed by the, uh, overindulgence of the "elite".

The elite care about the gap between them and the plebs. The rich love slaves, and that is their ultimate goal.

JackYoustra12• 1 year ago

There isn’t the income

There's always the real income, the probably is usually just the price rigidity! Most rich economies have no problem with this (the US and the EU can just adjust interest rates, which are comfortably above zero, to accommodate trade balances). Ironically, China is the biggest culprit here: their interest rates are way, way too high given their inflation and unemployment. This is unfortunate, it'd cause a lot less political disturbance if they lowered it, but as a practical economic matter, not a concern to the US / EU. Drop trade barriers, lower interest rates, and everyone will be richer and have a job.

neilwilson5• 1 year ago

There can’t be or China et al wouldn’t be selling their stuff for mere promises.

People don’t swap bananas for apples. They sell them for money, and money is retained for its own benefit. Failing to treat money as its own exchange product is the problem.

The world is not run by interest rates. It’s run by monetary flow, retained in its own right for insurance, status and mercantile purposes.

Gustomaximus• 1 year ago

There is no untapped source of demand anywhere in the world.

What about global growth and development? There are ~billion living in poverty + general low income for even more.

If India and other high population poor countries achieve what China did over the last ~50 years, while China continue to export while transitioning towards a consumption/service economy, there is another engine for global growth. I'm sceptical this will happen, but the potential source of demand is sitting there.

xk_id5• 1 year ago

Is it not true that China has enough domestic demand to not rely on exports? That was supposed to be the whole point of dual circulation https://en.m.wikipedia.org/wiki/Dual_circulation

neilwilson5• 1 year ago

If it was true why are the Chinese selling goods for foreign promises rather than collecting their own?

Why would they take the exchange risk?

tiffanyh2• 1 year ago

Nationalism

I'm surprised to not see nationalism talked about. The topic of trade deficit seems to be less about economic reasons and more about a political movement towards nationalism.

This can be seen in Europe right now, as well as India and Brazil - where those respective governments have taken actions that strongly favor local/in-country based companies over foreign.

And it appears the current US administration is taking a similar approach.

neom• 1 year ago

Well: we are about to enter the resurgence of the cold war to the n'th degree, so it makes sense to focus in-country during the ramp up.

chris_va• 1 year ago

The author seems to gloss over the economy not being a zero sum game.

As an example, since this is HN: the US creates a ton of startups. Any country that creates new businesses is going to see foreign investment, which on paper leads to a trade deficit. Essentially, the US exports businesses to the rest of the world, but that is not tallied in a 19th century model for the trade balance of goods. However, it's arguably a better export that commoditized goods, from a margin standpoint.

Overall these graphs change dramatically based on where the exact geographic boundaries are set and how one defines goods/services/investment. Clearly the US hasn't run out of cash and needed to massively print dollars to cover foreign debt, which would happen very quickly if the system were actually imbalanced.

bumby17• 1 year ago

However, it's arguably a better export that commoditized goods, from a margin standpoint.

Importantly, this is the same dynamic that causes economies to move away from manufacturing towards service-oriented economies. Capitalism is going to chase higher margins, but there should be guardrails that mitigate the negative externalities of such behavior. Else we are left with an eroded middle class, lack of supply chain resilience, disproportionate costs for sectors that can’t chase geo-arbitrage, weakened national security manufacturing capacity, etc.

palmotea3• 1 year ago

No. The US will win the next world war by replying on its advanced capabilities in restaurant work and business consulting.

pirate787• 1 year ago

The US is manufacturing more than ever and is the second largest manufacturer in the world after China. The US middle class has actually "eroded" upwards -- our wealthiest population cohort has tripled in the last thirty years.

hypeatei• 1 year ago

weakened national security manufacturing capacity,

What products specifically would be a national security concern? The CHIPS act was passed to revitalize semiconductor manufacturing because we rely heavily on Taiwan. From my understanding, we already have a lot of domestic manufacturers for various parts, who are too expensive for the average American but are the main suppliers to the DoD.

brad0• 1 year ago

There was another reply here earlier that was saying it isn't a trade deficit. I wanted to steelman the parent post:

Foreign investment into USA companies reduces the USA trade deficit but it isn't tracked in traditional methods.

I've heard that foreign investment in real estate generally isn't counted as each country owns properties equally between the two, so it nets out. I wonder if investments into companies is the same?

chessgecko3• 1 year ago

It is tracked! there are a few different numbers.

by the BEA: https://fred.stlouisfed.org/graph/?g=gX0f

by the treasury: https://ticdata.treasury.gov/resource-center/data-chart-cent...

It's a little hard to figure out how important it is, but there are "good" numbers.

JumpCrisscross4• 1 year ago

Foreign investment into USA companies reduces the USA trade deficit

Other way. Foreign investment doesn’t touch the trade account but the capital account. When the company the foreign investor invested in buys stuff, that alters the trade balance depending on what they buy from whom.

testing22321• 1 year ago

Clearly the US hasn't run out of cash and needed to massively print dollars to cover foreign debt

Foreign debt is skyrocketing, with interest payments alone already becoming unworkable. Five or ten more years of this spells disaster, it’s totally unsustainable.

Either something very drastic has to change, or that money printer will have to go into overdrive.

analognoise2• 1 year ago

We could just massively tax the rich?

treis2• 1 year ago

Exporting business ownership when seen on a national level is just another form of debt. You're trading future production for stuff now.

The fundamental problem is that the balance of goods flows into the US today. If debts and profits are going to be paid out eventually that will have to reverse. But it's going to be politically impossible for the US to ever send out 5-10% of its GDP in goods. That's the fundamental problem.

Anon1096• 1 year ago

You've fallen into the exact zero sum thinking trap that the parent comment mentioned. If investment causes the overall pie to be bigger, then both sides win with no tradeoff.

If debts and profits are going to be paid out eventually that will have to reverse.

No it absolutely won't. The US exports financialization and technology services which don't show up on a trade deficit chart but do materially make the US and the world richer.

ikiris2• 1 year ago

If I buy an apple from an orchard with money, I haven’t indebted myself an apple man. I got a real product for effectively an iou that everyone pretends has value and that orchard can trade to someone else for fertilizer. You have the entire concept backwards.

mempko• 1 year ago

It's not a zero sum game over the long term, but at any moment it certainly is. At any moment there is a certain amount of money and generally it gets redistributed to the wealthy. So it's mostly zero sum. Yes the pie grows over time but the distribution gets worse over time. We call this inequality and it's growing.

hinkley• 1 year ago

Other countries federal reserves like to diversify into other currencies to help guard against hyperinflation. And the dollar is stable as currencies go, so people are happy enough to buy T bills but now there are a bunch of say Kronors the US government doesn’t know what to do with, so let’s buy some oil, fish, and steel to get it back where it’s going without fucking with the exchange rate.

csomar2• 1 year ago

Capital investment are potential future negative outflows. They do not replace exports (goods and services). That is unless these investments are a scam (ahem), investors are probably expecting a yield in the future and to retrieve their investment. Movement of capital will be good if it was balanced, but it is not: https://en.wikipedia.org/wiki/Net_international_investment_p...

The US runs a NIIP of negative $27 Trillion. This is a consequence of the trade deficit as the deficit is being financed mainly with this money.

chessgecko3• 1 year ago

Actually since the qe to fix 2008 foreign investors/governments cut down on bond buying. Treasury has foreign bond holdings up about 2T since 2014 and current account deficits sum to around 7T.

Nowadays we're mostly selling companies and real estate. (though there was a nice jump in bond buying a few years when rates went up)

marcosdumay3• 1 year ago

The author is talking about nominal-value market aggregates that always add up to 0, by construction, without alternative.

The article is literally explaining why the US runs a deficit, and economic growth isn't really a part of that explanation.

ggm2• 1 year ago

The author seems to gloss over the economy not being a zero sum game.

The current incumbent of the WH seems to think two things:

1) all games are zero sum games

2) he has authority to sack or functionally wreck any institution he likes without legal recourse.

I would expect in the light of 2) it's possible people write as if 1) is being respected.

aeternum3• 1 year ago

This is a common soundbite and an unfair simplification. Non zero sum games often still have winners and losers. Also a positive sum trade deal for both sides does not mean it is the best trade deal.

bparsons• 1 year ago

Imagine the contrary. You send out enormous amounts of goods and services, and in exchange, you get less from the rest of the world. You get to pay more for everything, but certain industries get to export more volumes of goods.

Is this better?

mannyv• 1 year ago

One reason is that certain goods like IP are excluded from trade figures.

I believe that most services are also excluded, but they may have changed that.

Transfer pricing screws up the numbers as well.

Joel_Mckay• 1 year ago

The premise is false, and the billions of dollars spent by manufactures every year training foreign-market competitors had increased exponentially since the 1990s.

There is no fix for the world moving into its own derivative technologies, and simply abandoning increasingly hostile origin markets.

It is a complex situation, and throwing taxes/money at the issue is naive =3

gorfian_robot• 1 year ago

this episode of EconTalk offers a lots more nuance than the posted article

https://www.econtalk.org/the-economics-of-tariffs-and-trade-...

some_random• 1 year ago

Answer: because "trade deficit" is a 19th century concept that is no longer a complete view into how the modern international financial system works

legitster2• 1 year ago

I think this model is useful on a theoretical level, but I think the fundamental relationship being made is backwards. Domestic savings being weak is an outcome, not an input.

Trading partners want to sell us goods for no more than our money. If we have nothing they want to buy, then the result will be a surplus of US currency out there. Parking it in US assets drives the cost of debt way down for the US, and the low rates disincentivize domestic savings.

JackYoustra12• 1 year ago

You put forth a bit of a broken model, if there's a surplus of currency abroad we should see our currency depreciate, but instead it's quite strong and has been for a very long time, even as we run persistent, large deficits.

legitster2• 1 year ago

That's exactly true if it was really a surplus. But as it seems foreigner markets are pretty happy with the quantity of dollars out there

qkhhly• 1 year ago

There is no trade deficit if you consider the dollar is the goods that US exports to other countries.

RGamma• 1 year ago

In the news: Everything is out of whack and we're waiting for the next blowup. Who will hold the bags this time?

Suppafly2• 1 year ago

I saw a comment here or reddit that basically said that trade deficits aren't real anyway since we're essentially exporting dollars and importing goods. It changed how I thought about these trade deficits a bit. I wasn't overly concerned in the first place, since it seems like a right-wing boogeyman than an actual problem, and also being a country and mostly imports high end finished goods seems like winning at capitalism.

silisili• 1 year ago

I mean, you can say the same thing about every purchase you make. The potential problem is that you don't have infinity dollars, so if you aren't getting them back, you have to make more.

Suppafly2• 1 year ago

The potential problem is that you don't have infinity dollars, so if you aren't getting them back, you have to make more.

That's basically the basis of how our banking system works though.

psunavy03• 1 year ago

Why is this even a question? I run one hell of a personal trade deficit with Costco and Safeway, because they have groceries and supplies I need to buy, and I have money to give them. Countries are no different.

The whole point of free trade is a win-win game. Someone has stuff/services you need, and you're willing to pay for them. In the end, everyone is happier than before.

burnt-resistor• 1 year ago

Trade deficit are sales envy. Value is exchanged. There is nothing wrong except the empire's unlimited greed to have it all.

JackYoustra12• 1 year ago

it's not greed! It's just being dumb. If the empire wanted it all they'd try and enforce this state of affairs and have an infinite trade deficit in exchange for nothing (/ dollar exporting).

Beijinger• 1 year ago

Dark matter in the American trade balance

https://www.gmexconsulting.com/cms/de/dunkle-materie-in-der-...

Translation: https://www-gmexconsulting-com.translate.goog/cms/de/dunkle-...

cryptonector6• 1 year ago

Using national accounting, one can show deficits are also due to a persistent shortfall in domestic saving that requires funds from abroad to finance domestic investment spending.

But which is the cause, and which is the effect?

JackYoustra12• 1 year ago

The cause is persistent shortfall in domestic saving and the effect is using abroad dollars to finance spending.

The cause starts from both micro agents secularly deciding to spend more than save and from the government making law large deficits (a large source of not saving).

coolguy4• 1 year ago

Because there is a fiscal deficit which requires borrowing, which means that new money is created. If the new money were spent only in the USA it would cause prices to go up a lot, so the money goes overseas so that the price increases are more moderate (arbitrage). Why is there a fiscal deficit? Because politicians want to win elections. If the fiscal deficit were ended then mathematically there could not be a trade deficit.

dustingetz• 1 year ago

if this is zero sum-ish then who is the counterparty that’s getting screwed and how?

cryptonector6• 1 year ago

Economies are not zero-sum games. World trade _is_ a zero-sum game (all exports and all imports worldwide must net out to zero).

thewileyone• 1 year ago

Services aren't added in the equation. With services, like Netflix, Office365, etc, the US runs a trade surplus.

vpribish• 1 year ago

it's the New York Fed. they are not making that mistake.

herbst6• 1 year ago

There are several comments in here claiming that is something that trump said but doesn't hold up in real numbers

hoppyhoppy2• 1 year ago

https://news.ycombinator.com/item?id=44041750

cookiengineer• 1 year ago

I think what the US administration hasn't realized yet is that the world isn't interested as much in oil anymore.

Previous wars were fought to combat the dropping prices of oil, and to remove influence of the Middle East (e.g. Qatar politics, UAE, Iraq, Iran etc).

Trump is stuck with an industry that hasn't realized what's going on: The new currency is not oil, not tech and electronics, it's energy.

China realized its dependency on oil a long time ago. Take a look at their geopolitical shift in regards to South China Sea expansions to take back control of the trade routes going through the straits in the West and through Taiwan. In parallel, China tries to remove its dependency on oil and coal altogether as much as possible and invests into solar power like no other nation.

Then you look at the Middle East, which is now the replacement for Russia in terms of gas and oil delivery. Russia lost its geopolitical influence on a lot of nations who are now customers of nations in the Middle East, which also removes influence and control of the US, which hurts it too.

Then you have oil trades from Russia to the remaining nations. The ruble doesn't go down further because Russia _forces_ nations to trade its oil and gas in Rubles. They do it for exactly that reason. Why do you think Russia invaded from the East, when from the North and West would have been much easier? What do you think is there? Exactly, the oil fields for which the deal went to Western companies literally two weeks before Operation Z / the invasion.

Geopolitics is meanwhile all about energy. And that's what the US totally slept in and is now paying the bill. But what do you expect being the only nation producing cars exclusively for their own market because nobody else can pay the price to drive a V8 without a catalysator anymore?

The US is a nation stuck in the past, and the pointless hostilities towards surrounding nations won't even help fixing the problem. It would have been a much smarter choice to find reasons for going to war with Qatar or UAE. Just from the perspective of what a "smart bully" would have done. Alternatively investing all budgets into wind and solar energy to make up the losses would have been more future proof, too, and literally the strategy that all other peaceful nations are going for.

Guess the Republicans at the wheel are too busy to throw piles of shit into the crowd, huh? Fear sells easier, after all, I guess.

yanhangyhy2• 1 year ago

wow, China’s internal-external internet separation policy really makes it difficult for people outside the country to truly understand what’s going on inside.

erulabs2• 1 year ago

Finally, achieving the goal of a smaller trade deficit will likely be painful

While true, this is economics in a bottle. A world war would also "likely be painful", and one would require factories on-shore and a devalued currency to improve ones odds. In a perfectly peaceful and massive and stable vacuum-world, being the global reserve currency and running a trade deficit and "raising the economy’s productive capacity" is much better than the alternative. Things aren't so simple.

What do you import, and from whom? Are your now unemployed working-class political benign or politically violent? Is your productive capacity capable of producing ships and missiles? Sure ad revenue is great, but can it intercept ICBMs?

If all goods are widgets and we're discussing economics without politics, this is completely spot-on. Alas...

eightman• 1 year ago

Because America is rich and they like to buy things.

acyou• 1 year ago

I assume that the New York Fed would like Americans to be more patriotic, save more, and buy less cheap imported crap, that's why they wrote this article in this way. But it skates past a few key issues.

1. Consumption doesn't zero out, because domestic consumption in the USA is mostly spent in China, not in the USA. That is what contributes to the trade deficit, not lack of saving.

2. Asset price inflation contributes hugely to the money supply. Where is this in this equation? It's not saving, it's not investment, it's not consumption, it's mind boggling amount of money created from nothing. That asset price inflation is the true source of wealth creation and money supply growth, not bond sales, quantitative easing, or whatever.

3. Domestic saving is in no way equivalent to productive investment in the US economy. Are people keeping money in their mattress considered accounting discrepancies? Companies hoard cash like dragons. What investment in USA? Have you seen much new equipment or new factories? What investment means here is pumping up USA asset prices, it stretches the definition of the word investment to the absolute limit. Domestic saving just ends up as unused savings in an account somewhere, we don't have a good mechanism to put it to actual productive use.

4. The true role of the Federal Reserve is to stabilize and increase asset prices. Money can be easily created by stimulating asset price growth.

5. Funds from abroad don't finance business investment in USA. Investment is a very nice way to put it. They are foreign funds snapping up American real estate and other hard assets. Investment somewhat implies it will lead to economic benefits. Foreign ownership of American assets, companies and real estate is what "investment" means. It doesn't mean growth, it means shrinkage, I think the foreign owned assets tend to lose their value.

empath75• 1 year ago

Domestic saving is in no way equivalent to productive investment in the US economy. Are people keeping money in their mattress considered accounting discrepancies? Companies hoard cash like dragons. What investment in USA? Have you seen much new equipment or new factories? What investment means here is pumping up USA asset prices, it stretches the definition of the word investment to the absolute limit. Domestic saving just ends up as unused savings in an account somewhere, we don't have a good mechanism to put it to actual productive use.

This is completely nonsensical. Banks (eliding a lot of important details about money and loan creation) use money in those accounts to make loans, and a large percentage of those loans are used for investing in businesses and real estate. "Pumping up USA asset prices", I assume means "buying stocks", which also leads to investment by the companies who sold those stocks. Companies that "hoard cash" don't literally have piles of dollar bills somewhere. Apple, for example has billions of dollars of "cash on hand", but a large percentage of that is actually in bonds and other liquid assets that are investments, and not actually just a useless hoard. They keep pure "cash equivalents" on hand mostly for operations purposes.

Funds from abroad don't finance business investment in USA. They are foreign funds snapping up American real estate and other hard assets.

This is literally what investing is. Where do you think that money goes? To the people who built those buildings and other assets. Do you think they just light the money on fire? No, they build more buildings and other assets to sell to foreign investors. And they are still productive assets in the US, with different ownership.

bgnn2• 1 year ago

This is completely nonsensical. Banks (eliding a lot of important details about money and loan creation) use money in those accounts to make loans,

No, banks do have to have a set minimum ratio of the credit to deposited money and that ratio is always higher than one. Private banks create money buy giving loans leveraging the savings at hand with the assumption of there won't be a bank rush. If a bank rush occurs no bank on earth will be solvent.

bgnn2• 1 year ago

The second point is very important. Money is created as debt and asset price inflation is one major mechanism to achieve this. There are other mechanisms too, like market value inflation. Companies with a huge hype, say Open AI, can raise money as debt and that will be just created by private banks out of thin air.

Aziell• 1 year ago

Trade deficit sounds bad, but it’s not always a problem. Other countries sell us stuff, then use the dollars to buy U.S. assets. It’s like we get goods, they get a savings account.

immibis4• 1 year ago

This. A trade deficit is a goods and services surplus. People are sending you shit for free. What's not to like about that? Well, it's unsustainable, so you should have a backup plan, but while it lasts it's pretty good. It's the singular reason the USA is the richest country, and the new regime wants to stop it.

In return you have to give them money, but you can just print that. It costs nothing to get.

You can also just confiscate it. If Trump was really worried about other countries having too many dollars, he could set their balances to zero with the stroke of a pen. They wouldn't trade with him any more after that, of course, and might even launch nukes. But hey, Nixon confiscated the world's gold and got away with it.

nr378• 1 year ago

People are sending you shit for free.

They aren't sending you stuff for free, they're sending you stuff in exchange for the right to receive future cashflows back from you (i.e. they're sending you stuff in exchange for taking ownership of your financial assets). This isn't necessarily a bad trade for you, but it's far from free.

opentokix• 1 year ago

Because USA makes garbage

topspin• 1 year ago

The US has large trade deficits because US leadership uses the lucrative US market as a diplomatic reward. By "leadership" I mean the governing interests of the US, not merely its political class.

The history of this is long, going back to the 19th century, but it became a major diplomatic tool after WW2. As the US sought to secure allies after WW2, it used the incredible wealth of its population as a carrot to gain and ensure compliance of foreign nations. Japan is an obvious example: the recovery and prosperity of Japan was the direct result of deliberately utilizing the US domestic market to create demand for Japanese products. The result is well understood today: Japan thrived as it claimed enormous shares of US electronic, automotive, machine tool, and other sectors of the US economy, and the US secured a strategic ally in the Western pacific, where it has hosted vast military resources for going on 75 years now.

This practice has continued unabated ever since, with Trump being effectively the only significant impediment to have ever emerged. In the 1990s the rationale for MFN status for China was "human rights." China was expected to comport with some notion of human rights and, in turn, China would join the long list of MFN status nations. Again, trade with the US as a diplomatic reward for some US prerogative.

All of this is incentivized by the fact that, aside from approval from the US Senate, the US president has the exclusive prerogative to negotiate trade deals with little to no limits on the terms. The president can do this without passing any bills in Congress, allocating any budgets, winning any court battles, etc. Just negotiate a trade deal, get it approved by the Senate, and shazam: you've changed the world. This is further incentivized by "fast track" authority for the executive, which has been US law since 1975.

Finally, this is all lubricated by the ability to ship vast quantities of cargo from distant locales at low cost. This part really spun up in the 1960's with the US driven standardization of containerization. With this affordance in hand, it became feasible to leverage low cost foreign resources on a large scale, and US captains of industry now had a solution to relieve themselves of high costs in the US: labor costs, regulatory costs, taxes, etc.

With industry and government fully aligned based on independent interests, the trend became the dominant factor of global economics: the world literally runs on US trade deficits.

This has been a one way street for coming up on a hundred years now. It isn't terribly surprising that the pendulum is, if not yet swinging back, at least slowing its present direction. I suspect this part might be hard to understand for those that frequent a site like HN, but the bottomless well of US wealth is basically gone now: much of the population of the US lives a sort of high tech subsistence lifestyle, and it's not difficult to imagine the day when their access to credit will effectively stop. That will happen in parallel with the collapse of government finance in the US, which basically creates a new benchmark for the concept of "clown world" with every passing day.

So there is a hard expiration date coming for all of this.

ashoeafoot2• 1 year ago

Empires have perverse incentives to be extractive and monopoly building.. and its war and conflict and resulting elite exchange/ land redistribution that rearranges the lottery once more.

usrbinbash2• 1 year ago

Why does the U.S. always run a trade deficit?

For the same reason why I run a trade deficit with my barber and my grocery store.

metalman2• 1 year ago

amazing how successfull the "deficit" narative is for the country that somehow gets the largest share of the worlds real comodities and goods shipped to it's shores in exchange for some "currency" pulled strait from the iether! and as someone said, If I owe a thousand dollars, it's my problem, but if I owe 5 million, it's the bank's problem, so I think it is a good idea for me to run a bit of a personal "deficit", you know just to do my part, and be a good citizen, hard as it is to take all that stuff, someone has to do it, but realy it's not fair, no not fair to get all the stuff and hand out IOU's for some stuff that I just have to mark up a bit, no not fair, all the time and trouble marking my stuff up, in fact I think I need to be compensated for marking my stuff up

seanhunter4• 1 year ago

The whole idea of balanced trade makes no sense at all.

Take New Zealand as an example. Last year the major import from NZ to the US was wine.

The major export from US to NZ was military hardware.

Now. Why should the dollar quantity of wine you buy from someone equal the dollar quantity of military hardware you sell them?

There really is no reason at all that the bilateral trade between countries should be balanced and therefore it's not reasonable to think that the aggregate trade with all countries should be balanced or that it would be more desirable if that were the case.

benjaminwootton• 1 year ago

Isn’t the bigger problem that the US has a population of 340 million, New Zealand has a population of 5 million?

seanhunter4• 1 year ago

But that's no excuse. Those goddam kiwis have to buy more fighter jets or we stop buying their wine.

You're right of course.

_1tem2• 1 year ago

You misunderstood: balanced trade is about the sum across all countries, not necessarily between any two countries. There can be a trade imbalance between NZ and the US without an overall trade deficit in either country. The point is, that NZ might sell wine and buy fighter jets, but they have to sell enough wine to the rest of the world to pay for the fighter jets, then their trade is balanced. There’s no problem if they have an imbalance of trade with the US as long as it’s balanced overall.

seanhunter4• 1 year ago

I didn't misunderstand at all. There is no reason to expect bilateral trade to be balanced and thus there is no reason to expect the aggregate of a large number of bilateral trade relationships to be balanced.

"Nothing, however, can be more absurd than this whole doctrine of the balance of trade, upon which, not only these restraints, but almost all the other regulations of commerce are founded. " Adam Smith, "Wealth of Nations"

DarkNova6• 1 year ago

The US runs a trade deficit because it runs a service export surplus.

If you only ever mention one of those, you are either just following a narrative or actively deceive others.

jgalt212• 1 year ago

A trade deficit is a boon for the investor class. The foreign bid makes US assets trade at prices above the level they would if the US ran a trade surplus.

nazgulnarsil• 1 year ago

If you buy things that are productive you come out ahead on a trade deficit. If you buy things that are consumptive you are pawning future productive capacity of the country. Every country does both, obviously, what matters is the overall balance. The US has notably (as in quantified by economists, civil engineers, people who study urban planning etc.) failed to invest in productive infra for quite a while now.

Why does the U.S. always run a trade deficit?

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