Debits and Credits, Not to Worry

Money doesn't just evaporate. For every debit, there must be a credit. The world is a closed system as far as the dollar is concerned. Even if we send more dollars to OPEC, those dollars come back. Currency that leaves the country must return to purchase goods and services, or make an investment.

This explains why our trade deficit with China is not a significant problem. The dollars sent across the Pacific rebound as investment or spending on goods and services, such as the recent $3- to $4-billion contract with Westinghouse Electric Co. to build nuclear-power plants in China. While many fear that China might stop investing in the U.S., or sell its current investment holdings, this is misplaced worry. If China traded its dollars for euros, then whoever stood on the other side of that transaction would hold those dollars -- facing the same choices of buying from, or investing in, America. Foreign investment reflects the strength of the U.S. as a safe and sound economy.

From an op-ed in today's WSJ by economist Brian Wesbury.

MP: International trade accounting is based on double-entry bookkeeping, and therefore there can never really be any "trade imbalance." As the article points out, "for every debit, there must be a credit." Once we account for both the current account (merchandise) and capital account (capital), the balance of payments is ZERO, and there is never a "trade imbalance." Not to worry.