Thursday, June 16, 2011

U.S. Trade With Rest of World is Always Balanced

In a Tuesday Washington Times editorial "Truth about Trade Deficits and Jobs," Cato Institute trade specialist Dan Griswold makes the following important point about U.S. trade deficits:

"A trade deficit doesn't mean that the dollars flowing abroad just disappear. They quickly return to the United States. If they are not used to buy our goods and services to export, they are used to buy American assets — Treasury bills, corporate stock and bonds, real estate and bank deposits. 

In this way, America's trade deficit is always and almost exactly offset by a foreign investment surplus. The net surplus of foreign investment into the U.S. each year keeps long-term interest rates down, prevents the crowding out of private investment by government borrowing and promotes job creation through direct investment in U.S. factories and businesses.

In the broadest sense, our trade with the rest of the world is always balanced. In 2010, Americans bought $4 trillion worth of goods, services and assets from abroad, while foreigners bought $4 trillion worth of goods, services and assets from the U.S."

MP: The Bureau of Economic Analysis released detailed data today on U.S. international transactions for the first quarter 2011. The U.S. had a $182.45 billion "trade deficit" for goods in the first quarter, which was offset by multiple surpluses for other international accounts including services, income receipts and asset purchases, so that our overall trade with the rest of the world remained balanced.  (What a relief!)

While most of the media attention focuses on the "trade deficit," a more complete analysis always reveals offsetting surpluses for other international transactions that result in a "balance" of our total payments (cash outflows) and receipts (cash inflows) with the rest of the world.   Because international transactions are calculated using double-entry bookkeeping accounting, international payments HAVE TO BALANCE, and the balance of payments has to equal ZERO, just like a corporate "balance sheet" has to balance such that Total Assets - (Debt + Equity) = ZERO.

The chart above illustrates graphically the "balance" of international transactions for the first quarter showing that the $1.1 trillion of cash inflows to Americans between January and March from: a) the export of U.S. goods and services, b) income receipts (e.g. dividends and interest income) to Americans owning foreign assets, and c) the sales of U.S. assets (e.g. stocks and bonds) to foreigners, is exactly equal to the $1.1 trillion of cash outflows paid to foreigners for: a) imports of goods and services, b) income payments to foreigners owning U.S. assets, and c) the purchase of foreign assets by Americans.  

In other words, even though it's not very "newsworthy," America's international transactions were once again balanced in the first quarter, just like every quarter and every year, and the "balance of payments" was once again ZERO.  

Bottom Line: As Dan Griswold concludes, politicians, and everybody else, should just stop worrying about the "trade deficit."

53 Comments:

At 6/16/2011 10:35 AM, Blogger Rufus II said...

What is actually happening, of course, is they're selling us Trillions of Dollars worth of stuff On Credit.

They will, eventually, Foreclose.

 
At 6/16/2011 10:59 AM, Blogger Mark J. Perry said...

And then what, move the foreclosed property (e.g. real estate, etc.) over to China?

 
At 6/16/2011 11:06 AM, Blogger morganovich said...

on credit?

no.

you don;t owe them anything, neither do i. neither does wal mart.

it is not the US consumer running up a bill on chinese credit.

you give them a dollar, they give you stuff. no one owes anyone anything based on that transaction.

you are confusing that trade with what happens next.

the US governemnt runs chronic deficits and issues debt endlessly. the chinese take the dollar you pay them and use it to buy US debt. this is mostly driven by government policy to control their exchange rate.

there is nothing at all about trade causing this problem. it is caused entirely by the fiscal irresponsibility of the us government.

what you are really upset about is that we have such poor federal management that we must sell huge piles of debt.

it's the government spending on chinese credit. that has ZERO to do with trade.

 
At 6/16/2011 11:18 AM, Blogger Rufus II said...

I'm not "upset" about anything. I just made a statement of fact. The Chinese are loaning the money back to My Kids, and I, through our proxy, the government.

Okay, foreclose is a metaphor. But, owing China, and OPEC a couple of Trillion Dollars doesn't ezzakly give me the "warm and fuzzies."

The worst part, though, is kidding ourselves that a Loan (for continued consumption) is "Investment."

 
At 6/16/2011 11:29 AM, Blogger Jet Beagle said...

"The Chinese are loaning the money back to My Kids, and I, through our proxy, the government."

The federal debt held by the public - that is, excluding the debt which the government owes itself - totals about $10 trillion. China only holds 10 percent of that $10 trillion. About 53 percent is held by U.S. citizens and corporations.

 
At 6/16/2011 11:33 AM, Blogger Jet Beagle said...

"But, owing China, and OPEC a couple of Trillion Dollars doesn't ezzakly give me the "warm and fuzzies."

Why should it make any difference who owns the U.S. debt? Why would you care whether it is the Chinese government or Citigroup or some british investor which has purchased U.S. treasuries?

That the U.S. government has borrowed $10 trillion does piss me off. But I don't really care who it borrowed from. All I want is the borrowing to stop.

 
At 6/16/2011 11:34 AM, Blogger Rufus II said...

I'm going to go down to the coffee shop afterwhile, and tell the guys the good news about all those Walmart, and KFC stores in China.

I hope my ol' ticker can hold up through all the excitement.

 
At 6/16/2011 11:35 AM, Blogger Jet Beagle said...

Rufus II: "The worst part, though, is kidding ourselves that a Loan (for continued consumption) is "Investment."

From the perspective of the lender, it is indeed an investment.

 
At 6/16/2011 11:39 AM, Blogger Rufus II said...

The Phillie Fed came in at Minus 7.7 this morning.

From the plus forties in March to minus 7, today.

Richmond Fed, and, now, Phillie Fed - Negative numbers.

Now what?

Oh, that's right, we'll open some more stores in China. Borrow some money from OPEC for gasoline to drive to the unemployment office (where we pick up a check from the gov - that borrowed the money from China.)

Is that about it?

 
At 6/16/2011 11:43 AM, Blogger Jet Beagle said...

Rufus II: 'and tell the guys the good news about all those Walmart, and KFC stores in China."

I have friends who work at YUM Brands. They were hired by YUM exactly because of the KFC and Pizza Hut growth in China. For them, and for many other YUM employees in Louisville and Dallas, the growth in China ia very good news.

 
At 6/16/2011 12:57 PM, Blogger morganovich said...

rufus-

but this has nothing to do with trade.

your statement about "they are selling us trillions of dollars of stuff on credit" is completely untrue.

they are selling us stuff for dollars.

they are then taking those dollars and lending them to our government. our government is running up the debt. if it were not chinese buys, it would be someone else.

you are confusing all sorts of issues here, none of which are trade related.

what does opening a KFC in bejing have to do with the phille fed?

btw, empire was terrible as well.

all these manufacturing indexes have fallen of cliffs since march.

GDP numbers for q2 are going to have to come down.

inflation is up, growth is slowing (or negative and dropping depending upon your deflator assumptions).

it appears that those "welcome back carter" t shirts with obama's head on them are proving quite prescient.

stagflation and malaise.

you cannot drive an economy by printing money. it always blows up in your face and you wind up in the sort of mess we are now in.

the rate hikes to break this cycle (as in 1992) are going to be devastating.

 
At 6/16/2011 1:03 PM, Blogger morganovich said...

sorry, 1982, not 92

 
At 6/16/2011 1:24 PM, Blogger Rufus II said...

It all started going south somewhere between $3.25 and $3.50 gallon. It died somewhere between $3.50 and $4.00.

 
At 6/16/2011 2:04 PM, Blogger juandos said...

Phoenix Capital Research article/opinion piece posted at Zer0Hedge: I’m talking about a sovereign debt Crisis. The kind of collapse we’re now seeing in Greece… only for the single largest economy in the world as well as its reserve currency.

So what happens when this Crisis hits and a partial if not complete Government shutdown occurs? What happens when that 35% of incomes and salaries stops being paid? What happens when prisons and other Government paid services run out of money? What happens when the next major banking run reveals that there is no WAY on earth the FDIC can truly insure all the deposits in the US (other than more money printing from the Fed)? What happens when the US defaults on its debts?
...

 
At 6/16/2011 2:46 PM, Blogger Buddy R Pacifico said...

The Chinese are diversifying away from U.S. Treasurys, by way of loaning foreign currency in exchange for natural resources around the world. The trillion dollars from managed trade with the U.S. is great currency cash flow.

The China Development Bank has just finished a a Latin American shopping spree for oil, food and minerals with long term loans of foreign currency.

 
At 6/16/2011 5:05 PM, Blogger Benjamin said...

Trade is a balance if you ignore the Chinese are getting IOUs by the billions.

Future output and income will be, in effect, "taxed" by the Chinese, thus lowering our income. We will have to take increasing portions of our income to service debt.

 
At 6/16/2011 5:14 PM, Blogger Jet Beagle said...

Benjamin: "We will have to take increasing portions of our income to service debt."

We will have to do that if our government continues to borrow.

Benjamin: "Future output and income will be, in effect, "taxed" by the Chinese, thus lowering our income."

China holds only 10 percent of our publicly traded debt. But it really doesn't matter who holds the T-Bills, does it?

Future taxpayers will be paying half the interest to fellow Americans, and 10% to China, about 8% to Japan, and so on.

The problem is not who holds our government debt. The problem is that our government debt keeps growing.

 
At 6/16/2011 6:13 PM, Blogger Rufus II said...

The point is: It's not Real Investment coming back. It's loans. Whether they're from China, OPEC, Japan, or Norway doesn't matter. It's NOT "Investment."

It' Loans. And, we're using those loans to fund "Consumption," not investment.

That is how you go Bankrupt.

 
At 6/16/2011 7:14 PM, Blogger OBloodyHell said...

>> Because international transactions are calculated using double-entry bookkeeping accounting

What are you saying, that in The Real World, banking and finance organizations use GAAP, instead of Magic Number Government Accounting Practices (MNGAP)...?

 
At 6/16/2011 7:23 PM, Blogger OBloodyHell said...

>> Okay, foreclose is a metaphor. But, owing China, and OPEC a couple of Trillion Dollars doesn't ezzakly give me the "warm and fuzzies."


Perhaps you might expect the warm and fuzzies from the fact that they'll be buying OUR oil (that stuff we refuse to take out of the ground NOW from shales and tar sands) at higher prices when the bills come due?

Or that we can always make some higher demands for properly accounting for pirated IP, which would substantially balance the differences...? I have YET to see ANYONE attempt to actually calculate REAL value numbers for the amount of pirated US IP that the world uses (and no, I don't mean the kind of BS numbers the MPAA/RIAA/BSA bandy about, based on copies being "sold" to every person who uses a pirate copy as though it was a totally lost sale at US citizen/business consumer prices, but something reflecting the true balance value of it if it were a matter of them having to kick out money to use it or do without it... i.e., "the value of a thing is what that thing will bring"... not what the "owner" demands for it regardless of actual interest in paying that value.

(I have a rock here that I expect you to give me $3,000,000 for, if you don't grasp the difference. It came from my yard, so I say it's worth that. Now pay up, deadbeat).

The real problem with our financial system is a combination of MNGAP and failure to grasp that the value of IP is radically different from that of so-called "Real Property" -- that both are "property" in the same sense as ice and steam are both water. Attempting to manipulate one with the rules for manipulating the other is a recipe for scalding or frostbite.

 
At 6/16/2011 7:27 PM, Blogger OBloodyHell said...

>> it appears that those "welcome back carter" t shirts with obama's head on them are proving quite prescient.

HA!!! I predicted back when he got the NOMINATION that, if elected, he'd make us appreciate the wonders of the Carter presidency.

Not just financially, but sociopolitically.

Now, if only i can do as good on this weekend's lotto numbers...
:^D

(well, i'd have to actually be stupid enough to BUY lotto tickets to win, but it makes the point).

 
At 6/16/2011 7:30 PM, Blogger OBloodyHell said...

>> So what happens when...?

Nazi Germany is one example.

THAT is the kind of thing to give one the warm and fuzzies.

Amerikkka indeed.

 
At 6/16/2011 7:35 PM, Blogger OBloodyHell said...

>>> It' Loans. And, we're using those loans to fund "Consumption," not investment.

That is how you go Bankrupt.


Rufus, we do plenty of investment, it's just not credited properly, because of reasons mentioned above -- IP is a complete monkeywrench in the system. The last time there was a major shift in the nature of wealth (Ag economy->Industrial economy) the Great Depression was the result.

You can pretty much expect to see the same things happen again, as idiots ignore the fact that the Way Things Work is shifting far, far more than they were in that change of economy (the nature of Ag Goods and Mfr Goods isn't all THAT different, unlike Mfr Goods vs. IP).

In the sense of the apocryphal Chinese curse, "We are soon to live in interesting times"

 
At 6/16/2011 8:04 PM, Blogger Rufus II said...

That's my point, Obloody; these guys down here can't take IP addresses to the grocery store.

And, they've been a little "short" on cash since the factory moved to China.

 
At 6/16/2011 8:24 PM, Blogger Buddy R Pacifico said...

How does national accounting, that results in an "Always Balanced" trade account, explain Red Chinese loans around the world via U.S. currency?

The Red Chinese loan their U.S. dollars to countries that turn around and buy Chinese goods with the dollars. The dollars are not returning to the U.S. China secures natural resources in return for purchase of their goods -- all with U.S. dollars derived from a massive U.S. trade deficits. This is all, off the U.S. accounting books.

 
At 6/16/2011 8:31 PM, Blogger OBloodyHell said...

>> That's my point, Obloody; these guys down here can't take IP addresses to the grocery store.

And, they've been a little "short" on cash since the factory moved to China.


Amazingly they might try moving to where jobs are, if there are no jobs there. That's what happened in the 70s, it's why they called it the "Rust Belt".

It's the nature of business and has nothing to do with China, even. If anything, stuff moving to China is a reflection of the fact that the USA is becoming a mediocre business environment due to all the mindless BS paperwork required, the double taxation, and the various green regulatory crap... in short the fact that almost half the nation, one way or another, is getting a government paycheck.

The nature of the problem isn't to whine for more factories or manufacturing, it's to realize that The Thing You Used To Do need not be The Thing You Do In The Future... in fact, more and more, you should pretty much EXPECT to make a major professional shift at least once in your life, possibly twice. And that may involve uprooting yourself and moving halfway across the country, if your skills aren't widely useful enough to give you job opportunities everywhere.

 
At 6/16/2011 8:40 PM, Blogger OBloodyHell said...

>> How does national accounting, that results in an "Always Balanced" trade account, explain Red Chinese loans around the world via U.S. currency?

How does your employer's "always balanced" labor payroll account explain the bank taking the money in YOUR savings account and loaning it to Fred down the street to buy a house?

Do you not grasp how money flows AT ALL?

Are you six?

Round one: Money goes from A to B for goods and services.

Round two: B gives part of it to C, and D for goods and services. They buy property and resources with it from E.

Round three: D gives it to F for goods and services, C gives it back to *A* for goods and services, and E sits on it for later use in building a new government building planned for next year...

Do I need to explain round *4* to you, or do you begin to grasp the basic principles of money?

 
At 6/16/2011 9:07 PM, Blogger Buddy R Pacifico said...

O'Bloody..., this is the concluding remark of Prof. Perry's post:

": As Dan Griswold concludes, politicians, and everybody else, should just stop worrying about the "trade deficit."

I do not agree and the U.S. should worry greatly about the "trade deficit". It is a sham now to espouse the notion that U.S. dollars will return, in the form of purchases and investments, for much of the trade deficit.

The U.S. dollar, as the world reserve currency, does not have return very soon, if ever. Surplus trading nations can use the dollar for purchases on the world market and expect them to return as future purchases.

"Are you six?"

I always have found the put-down as an easy refuge of the ignorant or the hide-out of those running a fool's errand.

 
At 6/16/2011 9:29 PM, Blogger Rufus II said...

First, a lot of these guys couldn't move if they wanted to, their houses being 'underwater,' and all. Second, most of them missed school that day that they were teaching IP Professional/Software Engineering, and, Robotics Design and Architecture.

They're pretty much "fight the wars/go to work down at the factory types.

But, we need to find something for them to do. The country's not going to work well if we don't.

 
At 6/17/2011 2:10 AM, Blogger Ron H. said...

"The U.S. dollar, as the world reserve currency, does not have return very soon, if ever. Surplus trading nations can use the dollar for purchases on the world market and expect them to return as future purchases."

Buddy, if a US purchaser buys goods with USD, and those dollars never return, the purchaser has gotten free goods. The same is true if you buy something with a check that is never cashed.

Any amount of time those dollars are away from the US is, in effect, a free loan.

US dollars are claims on US goods and services, and must ultimately be redeemed as such, or to buy assets in the US. That may include buying US government debt, but that is a seperate issue.

Do you worry that many USD are spent by Californians to buy cars in Kentucky, and that those who acquire them don't immediately return them by buying something in California? I suspect that California has a constant trade deficit with Kentucky, and I'm not worried about it.

 
At 6/17/2011 2:13 AM, Blogger Ron H. said...

"But, we need to find something for them to do. The country's not going to work well if we don't."

Well, Rufus, the world needs ditch diggers too.

 
At 6/17/2011 7:10 AM, Blogger Hans said...

I am with Rufus II on this issue...This is the most stupid statement ever made be someone from Cato!

It is quite simple, America has become a debtor nation; unlike the past as a creditor...

Which one is more beneficial ?

 
At 6/17/2011 8:02 AM, Blogger morganovich said...

hans-

"It is quite simple, America has become a debtor nation; unlike the past as a creditor...

but that has NOTHING at all to do with trade or imagined trade imbalances.

that is purely a function of poor federal fiscal discipline.

i also think your definitions are a bit off.

the american government was a debtor before. it was just a question of who owned the debt. a dollar owed to bob down the street or to the central bank of china is still a dollar.

hell, if we were to either default or (more likely) debase our currency so badly that it's value erodes by huge amounts, the us economy would be better of if foreigners owned that depreciating asset.

we should be THRILLED that the chinese are fool/desperate enough to on our bonds at these interest rates.

absent that, our debt service costs would be higher and our cash deficit wider.

of course, their purchases in recent periods are TINY compared to what the fed is buying.

if you are looking for the time bomb, it's not in china, it's at the fed.

 
At 6/17/2011 6:34 PM, Blogger Hans said...

morganovich, it is better to be a creditor nation or a Greek Island ?

 
At 6/17/2011 6:43 PM, Blogger Ron H. said...

"morganovich, it is better to be a creditor nation or a Greek Island ?"

???

What does this mean?

 
At 6/17/2011 8:00 PM, Blogger Jet Beagle said...

"It' Loans. And, we're using those loans to fund "Consumption," not investment. "

Some of the loans to the U.S. government are being used to maintain and expand our infrastructure. I do not agree this is the best way to invest those dollars, but it is investment.

I would greatly prefer that the U.S. balance its budget. But when it does not, it makes no difference whatsoever whether it is Americans or Japanese or Chinese who lend the money.

That Japan and China and Great Britain decide to use dollars to purchase U.S. T-Bills rather than American goods is completely up to them. Why does that choice which they freely make bother you so much?

 
At 6/17/2011 8:07 PM, Blogger Jet Beagle said...

Rufus II: "First, a lot of these guys couldn't move if they wanted to, their houses being 'underwater,' and all."

A lot of people made some pretty stupid decisions - taking on huge loans instead of savings for a rainy day. So they may have to let the banks foreclose on those homes. People and banks have to be accountable for their stupid decisions.

Why did you offer this argument about stupid people who borrowed more than they could afford to borrow?

 
At 6/17/2011 8:11 PM, Blogger Jet Beagle said...

Rufus II: "Second, most of them missed school that day that they were teaching IP Professional/Software Engineering, and, Robotics Design and Architecture"

We've been through this before at Carpe Diem. There are many millions more U.S. jobs for non-degreed, non-technical service workers than there are for degreed and technical workers. If you cannot understrand that manufacturing is a very minor part of the U.S. economy, please go to the BLS website and learn about what kind of jobs exist in the U.S.

 
At 6/17/2011 8:17 PM, Blogger Jet Beagle said...

Rufus II: "But, we need to find something for them to do."

Who's this "we"? If someone is unemployed, he needs to find a job. That's his responsibility, not mine.
If he cannot find a job in Ohio, he needs to go somewhere else. If he cannot find a job making $20 an hour, he needs to offer his services for $10 an hour or $8 an hour. If he has no marketable skills whatsoever, he needs to get his butt into a community college and learn some.

 
At 6/17/2011 8:25 PM, Blogger Jet Beagle said...

Hans: "America has become a debtor nation; unlike the past as a creditor..."

What does this mean? When was America a creditor nation?

American corporations have been issuing debt for over a century. American households have been borrowing to finance housing purchases for many decades. American government at all levels has been issuing bonds for road construction, for schools, for hydroelectric dams, for sewers, and much more for all of my lifetime of 60 years. We haven't been a creditor nation.

 
At 6/18/2011 9:05 AM, Blogger VangelV said...

Bottom Line: As Dan Griswold concludes, politicians, and everybody else, should just stop worrying about the "trade deficit."

This is absurd. All we know is that both sides of the equation are the same. Period.

The balance is a mathematical fact that has no subjective component to it. What matters is what both sides of the equation are used for. In the case of the US it borrows money to spend on consumption even as capital accumulation is slowly being reduced over time. More and more of the 'investment' made by foreigners is in the treasury markets, which produce a very modest yield and are becoming less and less attractive to rational investors looking for savings that would protect their wealth and purchasing power. When those markets contract sharply both the unhedged lenders and the borrowers will lose.

 
At 6/18/2011 5:44 PM, Blogger Jet Beagle said...

VangeIV: "In the case of the US it borrows money to spend on consumption even as capital accumulation is slowly being reduced over time."

Perhaps I am misunderstanding you. But what in the balance of payments accounting indicates to you that capital accumulation in the U.S. is being reduced?

I see lots of evidence of capital development in the U.S. Corporations are still bulding plants and research facilities in this nation. Microsoft is still developing software and Intel is developing processors. Energy companies are drilling wells which will yield future returns.

Am I misunderstanding what you wrote?

 
At 6/18/2011 6:07 PM, Blogger Ron H. said...

Rufus

"That's my point, Obloody; these guys down here can't take IP addresses to the grocery store. "

Are you confusing the terms "Intellectual Property" and "Internet Protocol"?

 
At 6/18/2011 7:40 PM, Blogger VangelV said...

Perhaps I am misunderstanding you. But what in the balance of payments accounting indicates to you that capital accumulation in the U.S. is being reduced?

When the US sells treasuries to foreign lenders who received as deposits the cash obtained by the selling of goods by their domestic manufacturers to US consumers the flows balance out. The cash provided to the US Treasury goes to finance all kinds of activities that have nothing to do with capital formation. It is wasted on bombing Iraq, Libya, or Yemen, giving aid to Egypt so that it can buy American made tanks, as aid to Americans who will use the money to buy fruits or dope from Mexico.

But wealth takes capital formation. It requires the building of new factories and manufacturing capacity, new design centers, new schools, railways, ports, etc. To get a net positive the new investment has to be greater than the depreciation of established capital.

I do not believe that is happening in the US. More and more factories are moving abroad as the regulatory burden is too high. While new infrastructure is being built it is not enough to offset the decline of established road, railway lines, ports, trucking terminals, bridges, etc. And as many more of these activities are being directed by the government the effectiveness of the investment diminishes. It is pointless to build new schools that have a large amount of their budget spent on security measures and administrative offices when it would be much easier if smaller schools where teachers and principles had more power to discipline could be established. It makes very little sense to spend a great deal of money to make work sites wheelchair accessible when no sane operator of those facilities would allow people in wheelchairs in all of the areas of that facility.

I see lots of evidence of capital development in the U.S. Corporations are still bulding plants and research facilities in this nation. Microsoft is still developing software and Intel is developing processors. Energy companies are drilling wells which will yield future returns.

This is true. But to have an accumulation of capital the new investment has to be greater than the depreciation. How many new facilities has Intel built in the US lately? And how many companies are still carrying facilities that are worthless on their books because they cannot write them off under the current tax rules?

Am I misunderstanding what you wrote?

Perhaps I was not clear. I hope that some of what I wrote above helped.

 
At 6/18/2011 8:27 PM, OpenID Sprewell said...

Ron is mostly right when he says that "Any amount of time those dollars are away from the US is, in effect, a free loan. US dollars are claims on US goods and services, and must ultimately be redeemed as such, or to buy assets in the US." But let me modify that a little bit. Buddy worries that some of those dollars stay out on the international market and are used for international resource trading, not for US investment. And it's true that about half of all US currency is estimated to be held abroad. However, that's still a free loan. They gave us a bunch of stuff we want, like oil or laptops, and we had the Fed print up a half trillion in paper and give it to them. I suppose you can still complain that money wasn't invested here right away, but you can't complain about the great deal we did get. :)

 
At 6/18/2011 8:58 PM, Blogger Jet Beagle said...

VangeIV: "To get a net positive the new investment has to be greater than the depreciation of established capital.

I do not believe that is happening in the US."

Well, I believe it is. So we disagree. Do you have anything other than the balance of payments figures to support your position? It's a little difficult for you, I suppose, as you seem to automatically reject most government statistics.


I do believe households have seen a decline in accumulated wealth - but only in very recent years. IMO, that's a blip on a long term trendline.

 
At 6/18/2011 9:43 PM, Blogger VangelV said...

Well, I believe it is. So we disagree. Do you have anything other than the balance of payments figures to support your position? It's a little difficult for you, I suppose, as you seem to automatically reject most government statistics.

I tend to look at the real economy and try to find the unit production figures rather than look at the price data which ignores inflation. If you look around you see less cars, planes, railway cars, locomotives, trucks, housing units, chips, computers, TVs, etc., being made in the US today than there used to be made before. And more and more of the parts for the products assembled in the US come from other countries. Add it up and it is hard to make a claim that capital formation is healthy.

I do believe households have seen a decline in accumulated wealth - but only in very recent years. IMO, that's a blip on a long term trendline.

You mistook the Greenspan/Bernanke liquidity produced illusion of prosperity for the real thing. It isn't.

 
At 6/19/2011 5:17 AM, Blogger Jet Beagle said...

VangeIV,

I don't have time this morning to find unit production figures. But I'm not sure I'll agree that the U.S. is producing less of everything. Perhaps this is true since the downturn started three years ago.

One example which I do know is counter to your assertion is gasoline. Although the number of refineries has declined since 1980, the amount of gasoline produced is about the same. Expansion of large refineries has displaced the closing of smaller inefficient ones.

The problem with looking at production statistics is that it ignores a huge part of investment. The genomics research centers built and expanded across the U.S. would not be reflected in the production numbers you referenced. Neither would the recent investment to develop shale and gas deposits.

Another broad group of investment you would ignore is the investment in capital goods which were produced offshore. When Southwest Airlines purchases parts from abroad, that is still U.S. investment if those arts are used on aircraft which generate revenue in the U.S. I don't think it is valid to focus entirely on manufacturing investment and ignore the huge investment made by the much larger service sector.

 
At 6/19/2011 9:09 AM, Blogger VangelV said...

I don't have time this morning to find unit production figures. But I'm not sure I'll agree that the U.S. is producing less of everything. Perhaps this is true since the downturn started three years ago.

It was true before. If you look at the auto sector even when the US was near a production peak much of the content that went into the autos was foreign. American manufacturers moved jobs to Canada and Mexico as it became too costly to deal with the regulatory burden at home. Some also moved facilities away from North America.

One example which I do know is counter to your assertion is gasoline. Although the number of refineries has declined since 1980, the amount of gasoline produced is about the same. Expansion of large refineries has displaced the closing of smaller inefficient ones.

I think that you need to pay attention to the industry. There have been no new refineries built for decades. Lawsuits and regulations made that impossible so imports stepped in to make up the shortfall.

http://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=PET&s=MGFIMUS1&f=M

As you can see, it was the collapse in demand, not new refineries that caused imports to fall in the past few years. And let us note that US crude production peaked in 1970 and has been falling since.

The problem with looking at production statistics is that it ignores a huge part of investment. The genomics research centers built and expanded across the U.S. would not be reflected in the production numbers you referenced. Neither would the recent investment to develop shale and gas deposits.

This is true. Some of the investment would not be captured. But let us also note that investment in design and research facilities in the US is very helpful for investment in foreign countries which benefit from the production. While I may be happy as an investor in Apple because of the gains that accrue to me due to the investment in research and design there are hundreds of thousands of mostly foreign workers who are lifted out of poverty by making the products that American consumers purchase.

And investment is only wise if it is productive, which means that it is profitable. Much of the capital 'investment' in shale gas is not productive and the wells never turn a profit. We see the gains accrue to speculators who get to sell shares to companies looking to hide reserve declines and drillers. By the time the wells have been depleted the return to society has been negative. This does not mean that shale can't offer very good returns. It simply means that using the current technology produces a net loss and that makes shale a destroyer of capital. It also means that future production will become difficult as improved techniques will have to deal with less favourable formations.

Another broad group of investment you would ignore is the investment in capital goods which were produced offshore. When Southwest Airlines purchases parts from abroad, that is still U.S. investment if those arts are used on aircraft which generate revenue in the U.S. I don't think it is valid to focus entirely on manufacturing investment and ignore the huge investment made by the much larger service sector.

I agree with this part. But you forget that the value of the imported parts gets counted just as the sale of the final parts do when they are sold. While the accounting is not all that great much of this nets out in the figures.

 
At 6/19/2011 7:20 PM, Blogger Jet Beagle said...

VangeIV: "I think that you need to pay attention to the industry. There have been no new refineries built for decades.:

Well, I'm not sure you know as much as you think you do about the U.S. refining industry.

U. S. Operable Crude Oil Distillation Capacity (Thousand Barrels per Day)

Mar1985: 15,582
Mar1990: 15,582
Mar1995: 15,440
Mar2000: 16,505
Mar2005: 17,125
Mar2010: 17,584
Mar2011: 17,698

Refinery capacity has increased because Valero and Exxon and BP and other refiners have invested huge sums in expanding existing refineries. They have also invested huge sums in replacing worn out equipment in those refineries,

VangeIV: "As you can see, it was the collapse in demand, not new refineries that caused imports to fall in the past few years."

Gasoline imports represent less than 10 percent of U.S. gasoline consumption. If you compared EIA data on U.S. gasoline consumption with data on U.S. gasoline imports you would realize that.

 
At 6/19/2011 7:29 PM, Blogger Jet Beagle said...

VangeIV,

It is pointless to argue with you. The U.S. government is the only organization which collects data on U.S. capital investment. You will almost certainly refuse to accept their data.

Businesses large and small continue to invest trillions of dollars in revenue-producing capital. I'm not sure you and I can even agree, though, on what is capital investment and what is not. That is especially apparent when you use the value of imported parts in a debate about how much U.S. companies have invested in capital goods in the U.S.

It's really pointless to keep discussing this with you.

 
At 6/19/2011 8:49 PM, Blogger VangelV said...

Refinery capacity has increased because Valero and Exxon and BP and other refiners have invested huge sums in expanding existing refineries. They have also invested huge sums in replacing worn out equipment in those refineries,

Yes, they have spent a huge amount replacing very old equipment and expanding. But they wanted to invest in new refineries and were not permitted to, which is why the US had to import so much gasoline.

Gasoline imports represent less than 10 percent of U.S. gasoline consumption. If you compared EIA data on U.S. gasoline consumption with data on U.S. gasoline imports you would realize that.

It is still a huge amount of gasoline that the energy companies would rather produce in the US. The fact is that they are not permitted to because of regulations and lawsuits. The same is true of coal and nuclear generation facilities.

 
At 6/19/2011 9:00 PM, Blogger VangelV said...

It is pointless to argue with you. The U.S. government is the only organization which collects data on U.S. capital investment. You will almost certainly refuse to accept their data.

I certainly refuse to accept the inflation data because we know how the way it has been calculated was changed. (The same is true with the unemployment data.) If the wrong inflation number is used you get a value for real growth and real investment that is too high and does not reflect reality.

Businesses large and small continue to invest trillions of dollars in revenue-producing capital.

Yes they do. I see many commercial buildings being put up. I see many government office buildings, schools, malls, etc. But at the same time many old schools, office buildings, and strip malls have been closed down and are no longer useful. The question is about new investment versus depreciation. You believe that the new investment is enough to offset the depreciation and add new capacity but I see no objective evidence of that.

I'm not sure you and I can even agree, though, on what is capital investment and what is not. That is especially apparent when you use the value of imported parts in a debate about how much U.S. companies have invested in capital goods in the U.S.

Well, I certainly don't consider building bombers, tanks, or nuclear subs as productive capital. Hell, I don't even consider a new building in an area that has a surplus of office space for rent to be productive capital that is capable of offsetting the depreciation of the existing stock.

What I consider productive investment is the building of facilities that increase the capacity of the US to produce products and services in a competitive market without subsidies. That means that those wind farms, solar panels, ethanol plants that are not capable of producing energy without subsidies should not be considered as useful capital investment. The same is true of assembly lines that make electric vehicles that have no market without subsidies. Etc., etc., etc.

 

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