1. Is a large trade deficit always harmful or, vice versa, is a trade surplus always good?
2. Is it harmful that China lends most of its Dollars to Americans and what role did China play in the housing bubble?
3. In what way is the US Government intertwined with the trade deficit?
Thanks for answering!
Tobbog: 1. Is a large trade deficit always harmful or, vice versa, is a trade surplus always good?
No, that's a mercantilistic fallacy.
Tobbog: 2. Is it harmful that China lends most of its Dollars to Americans and what role did China play in the housing bubble?
No, it's not harmful, as far as I know. It doesn't matter who lends Americans money, or who the Chinese lend to. As for the housing bubble, one could argue they had an indirect role because they kept buying up our debt.
Tobbog: 3. In what way is the US Government intertwined with the trade deficit?
I don't think there's any direct relation, other than our government setting minimum wage laws, taxing the hell out of us, etc. making it not as profitable to manufacture in America.
Periodically the tree of liberty must be watered with the blood of tyrants and patriots.
Thomas Jefferson
1. Both are always harmful where they are meant as goals in themselves. 2. It is a very good thing (for the US), but it encourages the government (of the US) to act like a spoilt child, which is what happened.3. Year on year it finances a huge portiont of its budget through borrowing, mainly from abroad. This means there is stream of money constantly floating into America independent of payments for American exports. This money is eventually, after it trickles down (paychecks for government and Lockeed-Martin employees, welfare, cheap consumer loans...), exchanged for foreign goods accounting for the imbalance in trade and balancing out the US foreign debt.
Same thing except for 2 above. My response is that China lending to the US is always: Good for people in the US and bad for people in China. The lending of money (Chinese buying of US debt or needlessly holding currency) only helps keep Chineses goods artifically priced low compared to competing US goods. This is good for the econonmy of the US as the US gets to trade blips on screens or pieces of paper for stuff. This is bad for China as there are only two things that can happen with repaying the debt and they are both bad for China: 1. US Defaults, increasingly high possibility. 2. Much more likely: The US pays the debts off nominally so the Chineses lent money at current value to be paid later with principal and interest not worth the original value.
Wanderer: I don't think there's any direct relation, other than our government setting minimum wage laws, taxing the hell out of us, etc. making it not as profitable to manufacture in America.
Thank you very much for your answers, so far. They all confirm my thoughts that I had about this topic beforehand. There are two further questions remaining:
4. Is it possible that the FED's monetary expansion triggered the trade deficit, since the rate of monetary growth was larger than GDP growth and inflation combined, and the US economy wasn't large enough to absorb all the new money? Do you think that there are any connections between monetary expansion and trade deficits?
5. Why didn't the rock-bottom interest rates created by Greenspan's FED make other countries borrow money from the US, thereby making America net creditor instead of net debtor?
Wanderer: Tobbog: 3. In what way is the US Government intertwined with the trade deficit? I don't think there's any direct relation, other than our government setting minimum wage laws, taxing the hell out of us, etc. making it not as profitable to manufacture in America.
US government deficit spending. The Chinese buy government bonds with US dollars. Bonds are not included in trade statistics. If it wasn't for the government bonds, Chinese would be under more pressure to not peg their currency to the dollar and let the market alter the exchange rate so that a trade balance would occur.
4. There is a connection between monetary expansion and trade deficits. But it is not a cause -> consequence relation. It is an intermediary step between debt and trade deficit. In the immediate sense it the printing press how the budget is maintained, but it is the debt that props up the printing press. Normally money creation is nothing but an express road to destroy your currency. Zimbabwe was not able to import any more goods while it was inflating than otherwise.
What you need is a mechanism to divorce money creation from its consequence. This is where the root enabler of the trade deficits - America`s ability to sell its debt - comes into play. Should you create 100 new dollars and foreigners buy 60 dollars worth of US securities then they have transferred 60 dollars to you which you can now spend on their goods. But the remaining 40 dollars will be transfered into inflation and you can not spend inflation.5. A fascinating question. Never thought about it. But I think what would not have made the US into a net creditor. It would have just forced Greenspan to reverse his low interest policy.Greenspan does not have any money to lend. What America does is lends Asian and European money to third countries, taking a cut (and the political influence) for itself. You lend your kidd some money at 5%, he turns around and starts lending it out at 2%. What do you do? Take him up on his offer and bankrupt the SOB?
There is no such thing as a government bond. A bond is a loan backed by assets. Nobody ever seized government assets when it didn't pay up.
Tobbog:4. Is it possible that the FED's monetary expansion triggered the trade deficit, since the rate of monetary growth was larger than GDP growth and inflation combined, and the US economy wasn't large enough to absorb all the new money? Do you think that there are any connections between monetary expansion and trade deficits?
Inflating the money supply helps your trade balance. It makes your products cheaper on the international market. This is why they inflate the money supply (along side creating illusory wealth and booms). Money is always 'absorbed,' it permeates amongst the economy and remains in circulation.
Tobbog:5. Why didn't the rock-bottom interest rates created by Greenspan's FED make other countries borrow money from the US, thereby making America net creditor instead of net debtor?
Because America's debt is seen as 100% secure; thus, billionaires, from all over the world, buy our debt. The interest rate right now, though, is so low that the USD is used as a carry trade.
"If we wish to preserve a free society, it is essential that we recognize that the desirability of a particular object is not sufficient justification for the use of coercion."
To Marko and DD5, thanks
1. Large trade deficit are always harmful because the government feels obliged to borrow money to prevent deflation. That money must be payed back through taxes which stifles the economy. The trade deficit or oil deficit is what kicked us off the gold standard in the 70's which was the only tool to restrict inflation from both the public and private sector. That was the very tool that was also removed in the 30's to inflate a way out of a depression. As a country inflates its currency there will always be a contraction and a correction as all debts are re payed.
2. Yes. One of the major issues of the government bailouts were due to two things. a. foreign stock holders in our country. b. pension fund holdings.
3. Bad free trade agreements support unjust trade policies which prevents all countries from growing evenly.
"Do Current Account Deficits Matter?"
http://mises.org/journals/scholar/Meuller.pdf
Yes there are direct inflows of cash from foreigners that is supposed to "balance" the deficit but you must think and realize that all cash inflows have cash outflows with profit. Cash inflows have a return investment greater than was put in.