Economics, part 1

By Hal Canary, 2008-10-03 21:03:31 (link)
#economics

(I'm reading a book on recent economics. It's in the current affairs section of the store and is written by the son of a famous economist.)

The conventional wisdom is that: "We can get away with running trade deficits because foreigners are willing to hold onto dollars."

But the reality is (maybe): "Foreigners insist on holding onto dollars (and US investments), causing a trade deficit."

They have some dollars in their hand and what do they do with them? Do they buy American goods and services? Nope. They invest them in the US government (T-bills) and in US business (stocks and bonds). This causes a trade deficit, and that's not a bad thing. What are we going to do, force them to buy American? It's not that American goods are shoddy or something, it's that the US dollar and US investments are so shiny. If the dollar wasn't shiny and if American goods and services weren't any good, then foreigners would buy commodities from us at market value and make the deficit go away.

Furthermore, [US Trade Deficit] = [US government budget deficit] + [US business deficit] + [US household deficit]. When the budget was balanced in the late 90s, it forced the private sector to run big deficits and we saw negative household savings for the first time ever. (maybe?)

I'm not sure I can wrap my head around this yet.

UPDATE: I missed a variable. The correct equation is:

TradeDeficit = BudgetDeficit + Investment – NetSavings

And since Net Savings is negative these days,

TradeDeficit = PublicBudgetDeficit + PrivateBudgetDeficit + Investment

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