Must trade deficits be funded by imported capital?
KevinStud99 asked:
Everyone knows wealth is created and money is created. So why do so many people repeat the mantra that foreigners must fund the trade deficit (or current account deficit)? Isn’t that an obsolete zero-sum mentality? Why can’t it be funded by internally-created money based on real productive wealth-creation?
Wrong Meg. The supply of US dollars held outside the US by foreign entities has grown over time (immensely, over the long term), which necessarily means that not all dollars are repatriated, which I suspect proves my point.
Albern
Everyone knows wealth is created and money is created. So why do so many people repeat the mantra that foreigners must fund the trade deficit (or current account deficit)? Isn’t that an obsolete zero-sum mentality? Why can’t it be funded by internally-created money based on real productive wealth-creation?
Wrong Meg. The supply of US dollars held outside the US by foreign entities has grown over time (immensely, over the long term), which necessarily means that not all dollars are repatriated, which I suspect proves my point.
Albern
December 10th, 2008 at 5:00 am
Let us be clear why the US is running a trade deficit. It is not because of anything the US is doing. It is because other countries want to run a trade surplus, i.e. sell more to us than they buy from us. If they have a surplus, the US must have a deficit. This is a zero sum situation.
Other countries (most notably China) maintain a surplus by overvaluing their currency. This makes their exports to the US cheap and imports from the US expensive. The key point to remember is that these countries maintain an overvalued exchange rate by selling their own currency in exchange for dollars. Thus they accumulate dollars which they typically invest in US government securities.
The US does not cause this situation in any way. It is a conscious policy of foreign governments in countries such as China to maintain a trade surplus with the US and thus accumulate dollars. The accumulation of dollars by these countries is an automatic consequence of their decision to maintain an overvalued exchange rate.
One could ask why China wants to do this, but that would require a much longer answer.