Thursday, May 10, 2012

Total U.S. Trade Sets New Record High in March

Total U.S. international trade (exports + imports) set a new monthly record of $425.3 billion in March (see chart above), as both monthly exports ($186.7 billion) and imports ($238.6 billion) reached record high levels in March, according to today's BEA report.

Other highlights include:

1. Total international trade increased in March 2012 by about 8% compared to March 2011 ($394 billion), and was 53% above the recession-related cyclical low of $277.5 billion in April 2009.  Adjusted for inflation, the increases were 5.2% vs. March 2011 and 42% vs. April 2009.

2. Compared to the previous cyclical highs in July 2008, total trade for the U.S. last month was above that previous peak by 7% in nominal terms and by 2.3% adjusted for inflation (see chart). 

3. Foreign consumers and businesses set a new monthly record by purchasing $187 billion of consumer and industrial products that were "Made in the USA" in March, which was an increase of 7.4% from purchases in March 2011 and 50% above the recession-related cyclical low in 2009. 

4. U.S. consumers and businesses purchased a new record high volume of $238.6 billion worth of consumer products, raw materials and inputs from the rest of the world, which was an increase of 8.4% from last year, and 58% more than the cyclical low in 2009.

Bottom Line: What is already getting the most media attention about today's trade report is the "bad news" that the "trade deficit" widened/rose/jumped in March.  

What won't receive much (any?) media attention is the good news that total U.S. international trade activity (Exports + Imports) set a record high in March and is now well above pre-recession levels in both nominal and real terms.  Foreign consumers and producers purchased a record volume of "Made in the USA" exports in March, and American consumers and producers purchased a record volume of "Made Outside the USA" imports, which is a positive sign of worldwide economic strength and vibrancy. 

As former Cato trade analyst Dan Griswold pointed out last year on his blog:

"Politicians and commentators love to focus on the deficit, as though it were a scorecard of who is winning in global trade, but the real measure is the total volume of trade. As economies expand, so does trade, both imports and exports. Exports help us reach new markets and expand economies of scale, while imports bless consumers with lower prices and more choices, while stoking competition, innovation, and efficiency gains among producers."

Related: See "Made on Earth: How Global Economic Integration Renders Trade Policy Obsolete," by Cato's Dan Ikenson, and also Don Boudreaux's post "Made on Earth."

51 Comments:

At 5/10/2012 9:34 AM, Blogger Jon Murphy said...

I do not understand the obsession with the trade deficit, or this idea that imports are, somehow, hurting us.

 
At 5/10/2012 9:55 AM, Blogger Junkyard_hawg1985 said...

My view is that the trade deficit data had about a $52 billion measurement error last month. Since 1960, we have had over $8 trillion in reported trade deficits, yet the U.S. return on overseas investments continue to exceed the foreign return on investments in the U.S.

 
At 5/10/2012 10:05 AM, Blogger Jet Beagle said...

Martin Crutsinger, chief economics writer, USA Today: "A rising trade deficit slows a nation's growth. It means the country is spending more on foreign-made products than it is taking in from sales of U.S.-made goods."

I wonder where this fool studied economics. Surely his economics professor told him something about the U.S. capital account surplus.

 
At 5/10/2012 10:06 AM, Blogger morganovich said...

it's pure mercantilist nonsense.

trade deficit is a meaningless notion.

if you run the regression, large "trade deficits" correlate with higher US gdp growth despite the fact that they, by definition, reduce gdp.
\
that's an incredibly strong signal about the how beneficial trade is to us growth and prosperity and pretty conclusively disproves the notion that "trade deficits" are harmful.

 
At 5/10/2012 10:23 AM, Blogger Ed R said...

Over 20% of the import bill is for oil. Is that something to cheer about??

 
At 5/10/2012 10:28 AM, Blogger Ed R said...

"A rising trade deficit slows a nation's growth."

"I wonder where this fool studied economics."

That fool is correct: Y = C + I + G +(Ex - Im). As Im increases (or Ex decreases) Y decreases.

 
At 5/10/2012 10:36 AM, Blogger Jon Murphy said...

hat fool is correct: Y = C + I + G +(Ex - Im). As Im increases (or Ex decreases) Y decreases.

GDP is but one measure of economic growth, and even then it is flawed. GDP only measures domestic production; it does not take into account the benefits imports have on standard of living. When one purchases an import, even from a domestic store, it is subtracted out of the GDP (it is not included in consumption). So, the $40 vacuum I bought that was made in China "took" $40 out of the US GDP and "put" it into the China GDP. However, what is not accounted for is the money I have saved, nor the profit for Target or Dirt Devil.

Here's another example: a German businessman buys a stake in an American company. That transaction is counted as an import. It is bringing money into an American company which will pay for American workers, but it is considered an import.

Dr. Perry is right: we should not consider trade "won" or "lost" because of the deficit. It is, realistically, a useless statistic. We should look at the volume of trade. That is a more true measure of the health of an economy. After all, if an economy exports all it's goods because no one can afford them, will we actually call that a "healthy" economy? Of course not.

 
At 5/10/2012 10:38 AM, Blogger Dan said...

Not updated yet with the new trade/unemployment numbers, but this chart shows pretty clearly that we should be more concerned when the trade deficit is falling: bit.ly/IymflZ

 
At 5/10/2012 10:42 AM, Blogger Jon Murphy said...

Thanks, Dan. That's an interesting graph, but it makes sense: as US citizens can't buy as much, imports drop and exports increase as companies turn to other markets to sell their products.

 
At 5/10/2012 10:55 AM, Blogger Jet Beagle said...

Ed R,

The equation you cited is a method for ESTIMATING the economic state of a nation. It says absolutely nothing about increasing or decreasing economic growth.

But even if you somehow believe that such a simplistic equation can substitute for economic theory, consider the equation. Did you notice the term "I" in the equation?

When foreigners gain dollars by selling goods to the U.S. (increasing "Im", they can either:

a) buy U.S. goods (increasing "Ex")

or

b) invest in U.S. capital assets (increasing the "I").

Either action will increase "Y".

All dollars get back to the U.S., Ed.

 
At 5/10/2012 11:03 AM, Blogger Benjamin said...

Good news, just wish it was even better.

 
At 5/10/2012 11:17 AM, Blogger Jon Murphy said...

One thing I am noticing, both in comments here and in the news, is folks become obsessed with one or two economic indicators.

This is just a partial list of the biggest offenders I have noticed:

-Stock Market (DJIA, NASDAQ, SP5)
-GDP (Or different components within)
-Trade Deficit
-Value of the dollar
-Industrial Production
-CPI
-Oil Prices

If you look at one or two of these things, then your opinion of the economy will be wrong. What people really need to start doing (but probably never will) is look at a wide range of economic indicators. Only then can you get a good picture of what is actually going on.

Just a rant. I'm done.

 
At 5/10/2012 11:27 AM, Blogger Buddy R Pacifico said...

morganovich states:

"if you run the regression, large "trade deficits" correlate with higher US gdp growth despite the fact that they, by definition, reduce gdp.
\
that's an incredibly strong signal..."


morganovich on 4-2-12 with this Carpe Diem comment snippet (dredge report):

"why the persistent need to try and pretend the 2000's were a great time economically? they weren't. they had low growth and much of that was debt funded."

Then high U.S. trade deficits did not correlate with growth and prosperity in the 2000s, did they?

There does seem to be a high correlation between debt(consumer and govt) and trade deficits.

 
At 5/10/2012 11:33 AM, Blogger morganovich said...

ed-

no, that fool is wrong.

if you run the correlation between gdp growth rate and trade deficits, you will see that trade deficits coincide with higher, not lower gdp growth in spite of the fact that they reduce it due to the (x-m) component.

that's precisely the opposite of the result he posits and while correlation is not causality, a negative correlation is a pretty strong sign of a lack of causality.

trade deficits coincide with higher, not lower growth, so it would appear that that trade has other effects through the rest of the economy that significantly outweigh the (x-m) component or, at the very least, are symptoms of the same prosperity.

(x-m)'s negative correlation with gdp growth demolishes the notion that trade deficits are harmful.

 
At 5/10/2012 11:42 AM, Blogger morganovich said...

buddy-

"Then high U.S. trade deficits did not correlate with growth and prosperity in the 2000s, did they?"

yes, they did. in the years with higher (and rising trade deficits) we saw more growth. in the years in which trade deficits fell, we saw less.

run the regression yourself.

it's really easy with the fred plugin for excel.

use the NETEXC96 series.

you will see that trade deficits drop during recession and rise during growth.

the us trade deficit expanded steadily from 2001-2006. it the dropped like a rock from 2006-2009.

you tell me, which was the period of better growth?

clearly, trade deficit is not the only or even the key issue in determining overall growth rates, but the fact that it expands in growth periods and shrinks very strongly in recessions is easily statistically demonstrated.

the trade deficit dropped from 750 bn in 2006 to 350bn in 2009 during the worst contracting since ww2.

it rose from 100bn to 500bn from 94-00 during one of the longest booms. it dropped during the 2001 recession.

do not mistake correlation with primary causality. there are lots of reasons that the economy has been so bad since 2000 and they are not related to trade balance.

but the fact that trade deficits and growth come together and reductions in trade deficit coincide with recessions is extremely unambiguous.

i urge you to work through this yourself. i think you will rapidly see what i mean.

 
At 5/10/2012 11:47 AM, Blogger Jet Beagle said...

Morganovich is correct. "Trade deficit" is meaningless.

What does matter is the total amount of trade. We know that total trade - imports and exports - grows during economic booms periods. We know that total trade slackens, or at least grows slower, during economic recessions.

Growing international trade is a both a symptom of growth and a driver of growth. When individuals and businesses are free to find the goods and services which best meet their needs, those individuals and businesses achieve economic efficiency. And that efficiency will drive economic growth.

 
At 5/10/2012 12:18 PM, Blogger Ed R said...

" . . . .a German businessman buys a stake in an American company. That transaction is counted as an import. It is bringing money into an American company which will pay for American workers, but it is considered an import."

The example you gave above has nothing to do with GDP. It is a simple transfer of an existing US asset to foreign ownership -- or an inflow of foreign capital (it is not an import).

GDP (Y) is a measure of current PRODUCTION of real goods and services in the domestic economy. Y = C + I + G +(Ex - Im).

Once again, an increase in Im (everything else remaining the same) transfers that much potential production out of the US economy. Whether or not one individual "saved money" at some point as a result is not relevant.

You might not like this explanation, but that is the economics of what happens.

You can buy many college and grad school textbooks on international economics and trade at Amazon. Some of the non-current editions only cost $3.00 to $10.00 (plus $3.99 to ship).

Maybe Dr. Perry can chime in about what is tought at U. Mich/Flint on trade flows and international economics.

 
At 5/10/2012 12:20 PM, Blogger morganovich said...

buddy-

sorry, let me clarify that a little bit:

in the years in which the trade deficit was higher than the year before (declining net exports) we tend to get higher growth than in years in which the trade deficit is lower than the year before.

it's direction that seems to matter more than absolute level.

i did not explain that very well.

but if you take years with widening trade deficits and compare them to years with contracting ones, the change in growth is extremely pronounced.

as it is the opposite of the mathematical effect of (x-m) one would expect on gdp, the true underlying effect must be quite large to overcome that.

 
At 5/10/2012 12:26 PM, Blogger Jon Murphy said...

Once again, an increase in Im (everything else remaining the same) transfers that much potential production out of the US economy. Whether or not one individual "saved money" at some point as a result is not relevant.

It is entirely relevant. In fact, it is the whole point of trade. Trade is designed to provide more goods/services for a lower cost than it would be to procure them in autarky. If you say that is not relevant, then I must say you do not understand the basic tenants of economics.

 
At 5/10/2012 12:31 PM, Blogger morganovich said...

"Whether or not one individual "saved money" at some point as a result is not relevant."

i think that is completely untrue. it matters a great deal if an individual saves money.

consider case 1. where you spend $100 on a domestic pair of shoes. now imagine case 2 where you spend $75 on an imported pair you like just as much.

clearly, in real terms, you get to consume more in case 2. you have an extra $25. you have more real buying power.

that is precisely what matters and precisely what is relevant.

this matters even to gdp.

what happens to those dollars that go overseas?

they come back either as X or as I. the money does not get shoved in a mattress. it goes into us bonds or us companies or some other form of capital that drives I.

it's a mistake to presume that the variables in gdp c, i, g, x, m are independent.

they aren't.

in a certain sense, we need a trade deficit to help offset our own low savings rate and provide enough capital for us businesses.

further, the benefits of trade to the non traded economy are vast.

we buy oil, make gasoline, and use it to distribute groceries to stores. that's a huge benefit in comparison to what would happen if we did not. any ill effects (and i do not believe there are any) are vastly outweighed by the positive effects of using cheaper fuel which accelerates the domestic economy in real terms.

why engage in voluntary transactions (like imports) if they do not yield positive returns? you buy what makes you better off. just because it comes from abroad does not make this any less so.

 
At 5/10/2012 12:36 PM, Blogger Jon Murphy said...

Thank you, Morganovich. You explained that much better than I could.

 
At 5/10/2012 12:39 PM, Blogger Jet Beagle said...

Ed R,

The more you write, the more you are showing you do not understand Current Accounts and Capital Accounts.

Go back to what I tried to show you earlier. Dollars return to the U.S.

When dollars go out to pay for imports to the U.S., they come back either to buy U.S. exports or to invest in U.S. assets.

If you want to believe in your simplistic equation, then look at the I in that equation. Or look at the G.

What happens in your equation when a foreign company builds a plant in the U.S.?

What happens in your equation when a foreign government buys government bonds which funds U.S. government spending?

I can tell you why that equation is so damned wrong if you want me to do so.

 
At 5/10/2012 12:51 PM, Blogger bart said...

JM: Here's another example: a German businessman buys a stake in an American company. That transaction is counted as an import. It is bringing money into an American company which will pay for American workers, but it is considered an import.

The same exact thing applies on exports.




But the *real* and MUCH more important issue than the trade deficit is the long run negative consequences covered by Triffin in the 60s.

http://en.wikipedia.org/wiki/Triffin_dilemma

 
At 5/10/2012 1:05 PM, Blogger morganovich said...

question:

i'm not sure precisely where on this thread this originated, but:

" Here's another example: a German businessman buys a stake in an American company. That transaction is counted as an import."

i do not think this is so.

i think it is counted as I (presuming new shares were issued) or not at all if he bought someone else's shares.

why would an investment count as an import?

if the us company bought goods from the german, that would be an import.

 
At 5/10/2012 1:16 PM, Blogger Buddy R Pacifico said...

Maybe most of us can agree that Free Trade is best for the U.S.

Forty-one percent of all U.S. exports go to the seventeen nations that have Free Trade agreements with the U.S.

The U.S. has a trade surplus with most of the countries it has a FTA with.

So, if you worry about trade deficits then support more Free Trade Agreements for the U.S.

 
At 5/10/2012 1:18 PM, Blogger Jon Murphy said...

i'm not sure precisely where on this thread this originated, but:

That came from me. I was thinking faster than my brain was working.

I meant to talk about buying German supplies from a business for use in an American factory. What Y typed was something else entirely :-P

Sorry for the confusion.

 
At 5/10/2012 1:26 PM, Blogger Jet Beagle said...

morganovich: "or not at all if he bought someone else's shares."

And that's one of the many reasons why the equation

Y = C + G + I + (Ex - Im)

cannot be used to predict the impact of any action.

The GDP is an equation for a measuring GDP at one instant. That's all. It says absolutely nothing about how GDP changes if the variables in that equation change in value.

Consider two ways that Y in that equation could be changed:

1. ThyssenKrupp invests $5 billion to build a steel mill in Alabama which will employ 1800 American workers;

2. the Federal government spend $5 billion to build holes in the ground in Kansas and then refill them.

According to the stupidly simple equation above, both expenditures represent $5 billion in GDP. One is found in "I", investment, and the other in "G", government spending.

Is there anyone who believes that a $5 billion hole digging and refilling would increase GDP as much as a $5 billion steel mill?

The equation is simply a MEASURING equation. It is certainly not a predictive equation.

 
At 5/10/2012 2:00 PM, Blogger Ed R said...

To slightly modify Mr. Beagle's comment:

" if . . . the Federal government spends $5 billion to build holes in the ground in Kansas (and other states) and then ..fill them." WITH ATLAS ICBMs.

It would obviously be an addition to GDP. I hope even the bloggers on this board can see that.

 
At 5/10/2012 2:10 PM, Blogger Jon Murphy said...

" if . . . the Federal government spends $5 billion to build holes in the ground in Kansas (and other states) and then ..fill them." WITH ATLAS ICBMs.

It would obviously be an addition to GDP.


Yes, but that does nothing to address Beagle's point.

If anything, it enhances it.

Let's assume the cost of everything is $5 billion (the silos, the missiles, etc). Obviously, the value of that would be worth more than spending $5 billion to dig holes and fill them. That value is not something GDP accounts for. In both cases, GDP is exactly the same (G rises by $5 billion), but in one case, the value-added is superior than the other.

Just, for the record, no one here is arguing GDP is useless. It is a good stat and certainly provides information. But to use it as the be-all and end-all of economic statistics is, quite frankly, a rookie mistake.

 
At 5/10/2012 2:29 PM, Blogger Jet Beagle said...

Jon Murphy,

Thanks for the assist.

Ed R,

You really missed my point entirely. You had used the MEASURING equations:

Y = C + G + I + (Ex - Im)

to argue that as Im increases, GDP decreases.

I have been trying to show you that the MEASURING equation says nothing about what would happen to GDP if Im increases. In fact, that MEASURING equation says nothing about how any change in C, G, I, Ex, or Im will change GDP.

You still have not understood what I'm trying to explain to you.

I'll try one more time.

 
At 5/10/2012 2:38 PM, Blogger Ed R said...

$5 Bn spent by the Fedl Govt to dig holes in Kansas adds $5 Bn to GDP. It matters not if the holes are:

1.) Filled back up
2.) For Atlas missles silos
3.) To mine gold (Keynes example)

You are entirely correct that GDP does not account for relative value. One's judgment of the 'superior value' of each purpose is a political question, not economic.

 
At 5/10/2012 2:47 PM, Blogger Jet Beagle said...

The simple MEASURING equation (or estimating model)

Y = C + G + I = (Ex - Im)

is an attempt to simplify the task of deriving the productive output of the entire U.S.

The real productive output of the U.S. - the U.S. GDP - would be a summation of all the value added by by every factory, retail store, farm, government office, etc, etc, throughout the U.S. I don't think it's really possible to gather all that data.

The BEA uses the "expenditures approach" to estimate GDP. They measure the final value of goods and services purchased by persons, businesses, government, and foreigners. that's the familiar:

Y = C + G + I + (Ex - Im)

(C + G + I), total consumption in the U.S., is not really production. Some goods and services are consumed by foreigners (exports). Some goods and services consumed in the U.S. were produced by foreigners (imports). To account for those differences, the terms Ex and Im are included in the equation.

Remember, though, that all this equation does is estimated the goods produced in the U.S. which were consumed by persons, businesses, and government - and that includes both U.S. and foreign consumers.

Using the measuring or estimating equation to predict the impact of change on GDP is completely invalid. And yet, that is what you tried to do, Ed.

 
At 5/10/2012 2:51 PM, Blogger Jet Beagle said...

Ed R: "One's judgment of the 'superior value' of each purpose is a political question, not economic."

This is hopeless. I used to believe that our nation would be better off if everyone learned a little economics. Now I'm wondering if that doesn't make things worse. You think you understand GDP and current account deficit, and you are not going to listen to anyone who actually does.

 
At 5/10/2012 2:52 PM, Blogger morganovich said...

ed-

that's not so at all.

digging holes and filling them in leaves you with zero extra value.

building a factory leaves you with new productive potential and a set of real goods that have real value.

claiming that those are different is not a political claim, it is a simple fact.

 
At 5/10/2012 2:55 PM, Blogger Jon Murphy said...

You are right that it adds to GDP regardless.

You are wrong about the value of the projects.

Option 2 & 3 add value to the economy. They provide a good (gold) or service (national defense) that people are willing to pay for.

Option 1 does no such thing. In fact, it detracts from value as resources (labor) are wasted on something that adds no value to the economy.

The goal of economic activity is to add value. Anything that does not is pretty much worthless.

Let's look at two rather extreme examples:

1) WWII. By all accounts, the Great Depression ended with the US entering WWII. GDP was growing due to the government spending. People were back at work building war machines. However, because of this, resources were greatly rationed. People had rationed meat, milk, oil, cotton, nylons, eggs, etc. Everything was devoted to the war effort. Because of that, folks were actually poorer then they were during the Great Depression (it wasn't until the war began winding down that the relative standard of living began to rise).

SO, GDP was increasing, but the standard of living was not. I don't think anyone would call that prosperity.


2) China pre-Cultural Revolution. Chairman Mao wanted to boost China's economy. He did this by ordering everyone to smelt down all metal they had and sell it to the State so it could be sold to other countries. Again, China's GDP was rising (exports) but the standard of living was dropping. Most people were starving. They had no plows to till the fields. Here we see again, GDP was rising, but I doubt anyone would call this a moment of prosperity.

As I said, these are two extreme examples. But let us not forget that the goal of an economy, whether it be command-and-control or market-oriented, is to provide people with the goods and services they desire. When an activity is not doing that, although the GDP may be increasing, it is hurting the economy. Conversely, if an activity is weighing on GDP but it is providing goods/services desired, then it is good for the economy.

This is why I said earlier we have to be weary of tracking just one statistic. It leads to false conclusions.



Let's look at one more, non-economic example:

We have a baseball player. This ballplayer has a .000 batting average. If I just gave you that statistic, you'd say "he's a terrible ballplayer! He never get's a hit!" But what if I told you every time he comes to the plate, he gets walked. His On-Base Percentage is 1.000. that would make him the best on-base player in the game.

So, looking at one stat at one moment in time doesn't tell us anything. It may even mislead us. If you want to look at economic activity, you need many statistics. And you need to be aware of the limitations of each one.

 
At 5/10/2012 5:34 PM, Blogger morganovich said...

way to go moneyball jon.

nice example.

 
At 5/10/2012 7:01 PM, Blogger PeakTrader said...

It should be noted, if Americans suddenly believe, for example, a $20,000 Toyota is much better than a $20,000 Ford, and they buy $100 billion more Toyotas produced in Japan and $100 billion fewer Fords produced in the U.S., then U.S. domestic output would fall $100 billion and Japan's domestic output would rise $100 billion, although U.S. living standards would improved.

 
At 5/10/2012 7:11 PM, Blogger PeakTrader said...

Of course, demand for yen would rise. So, the yen would appreciate, i.e. it'll take more dollars to exchange for yen and make the Toyota relatively more expensive.

 
At 5/11/2012 2:47 AM, Blogger Jet Beagle said...

peak trader: "then U.S. domestic output would fall $100 billion and Japan's domestic output would rise $100 billion"

You cannot hold all else equal. Someone in Japan does something with those U.S. dollars. The Japanese might use those dollars to:

- buy U.S. farm products;
- build a farm machinery factory in Illinois;
- provide dollars to Fedex to increase its Memphis sort capcaity;
- purchase U.S. government bonds which fund highways to move imports from Los Angeles to the rest of the nation.

The point is, all U.S. dollars come back to the U.S. And those dollars do so very rapidly.

You cannot say that U.S. auto production drops $100 billion and Japanese auto production increases $100 billion and stop there. It never stops there.

That's the error Martin Crutsinger made and that's the error Ed R made. Because both of them believed that

Y = C + G + I + (Ex - Im)

is a model for predicting effects of expenditures on GDP.

 
At 5/11/2012 2:55 AM, Blogger Jet Beagle said...

Don Boudreaux explains at Cafe Hayek when he answers the question Is Y=C+I+nX+G Meaningful?:

"All macroeconomics done using aggregates such as (Y=C+I+nX+G) — lends itself rather readily to empirical analysis. It's relatively easy to get data on aggregate demand, international-trade flows, and government spending.

Whether these data mean much, or even what they mean to the extent that they have meaning, are open questions – as are questions about the significance or meaning of any observed or measured regularities between these aggregates.

The ability to write letters on a board in the form of an equation, to give those letters names that seem to correspond to some imaginable economic things, and to assemble quantitative data on those things, is not necessarily good science."

 
At 5/11/2012 7:59 AM, Blogger Jet Beagle said...

Ed R and Peak Trader,

A paper by the Federal Reserve Bank of Cleveland, Do Imports Help or hinder Economic Growth?, explains very clearly why imports do not hurt economic growth. Here's a key passages:

"As a nation, we pay for our imports either with exports of our current output or with financial claims against our future output.
When exports rise (or fall) in line with imports, GDP remains unaffected."


So far, so good. I don't think either of you would have trouble understanding the first part. When we pay for imports with exports of exactly the same amount, the GDP measure remains unchanged.

But the Fed author goes further and explains how the GDP measure is also unchanged when we pay for imports using financial claims against future output:

"Inflows of foreign capital do not sit idle. The corporations or governments that issue the ecurities and the banks that offer the deposits use the funds to finance domestic investments, government spending, or private consumption. All of these appear as expenditures elsewhere in the GDP accounts. In all cases,
the process of paying for our imports contributes to domestic output."


Did you get that last sentence? Let's repeat it:

In all cases, the process of paying for our imports contributes to domestic output."

 
At 5/11/2012 3:24 PM, Blogger PeakTrader said...

Jet Beagle, trade deficits slow domestic growth.

If the U.S. has a $500 billion trade deficit, who do you believe produced those net exports?

Also, if a $1.5 trillion budget deficit is reduced by trade deficits, how does that increase domestic growth?

A simple example is say you purchase $10,000 of foreign goods each month and the producer purchases nothing from you each month.

The producer immediately lends you the $10,000 each month and you buy gold.

The producer's output increases by $10,000 each month and he may need to hire more workers.

Your output (of goods & services) is zero (except perhaps you pay a fee for services to buy the gold).

 
At 5/11/2012 4:21 PM, Blogger Jet Beagle said...

peak trader,

Did you even bother to read the explanation at the link I provided? It appears not.

 
At 5/11/2012 4:25 PM, Blogger Jet Beagle said...

peak trader: "Also, if a $1.5 trillion budget deficit is reduced by trade deficits, how does that increase domestic growth?"

Please explain how a trade deficit - a U.S. Current Account Deficit - can reduce a U.S. Government Budget Deficit.

 
At 5/11/2012 5:07 PM, Blogger PeakTrader said...

Jet Beagle, yes I read it, and it doesn't change the fact that trade deficits slow domestic output.

Basically, when foreigners exchange their goods for U.S. Treasury bonds, that either finances government spending, lowers taxes, or reduces the budget deficit (or increases a budget surplus), i.e. contractionary fiscal policy, which doesn't promote growth.

 
At 5/12/2012 2:28 AM, Blogger Jet Beagle said...

Peak Trader: "when foreigners exchange their goods for U.S. Treasury bonds, that either finances government spending, lowers taxes, or reduces the budget deficit (or increases a budget surplus),"

You explained nothing.

Again, please explain how selling U.S. government debt to foreigners reduces the budget deficit.

Are you sure you understand what is meant by the words "budget deficit"?

 
At 5/12/2012 4:21 PM, Blogger PeakTrader said...

Jet Beagle, I think, you misunderstood what I said, like you misunderstood the Fed article.

The federal government can do three things with more revenue:

1. Pay for more spending - Expansionary fiscal policy.
2. Cut taxes - Expansionary fiscal policy.
3. Reduce the budget deficit (or debt) - Contractionary fiscal policy.

When U.S. trade deficits increase, foreigners can buy more U.S. Treasury bonds.

 
At 5/12/2012 8:29 PM, Blogger Jet Beagle said...

peak trader: "Reduce the budget deficit (or debt) - Contractionary fiscal policy."

I don't think you understand what is meant by the words "budget deficit".

The federal government budget deficit is the amount by which federal expenditures exceed federal tax revenues and fees. The government issues bonds to make up the difference. The proceeds from those bonds equal the budget deficit. But the bonds do not "reduce the budget deficit". The bonds ARE the budget deficit.

Until you learn balance of payments accounting and learn the terminology used in government accounting, I think having a discussion with you about either is a waste of my time.

 
At 5/13/2012 6:09 AM, Blogger PeakTrader said...

Jet Beagle, selling U.S. Treasury bonds is a source of government revenue, like collecting taxes, which can reduce budget deficits or create a budget surplus.

The market determines interest rates on Treasury bonds. Trade deficits increase demand for Treasury bonds and reduce interest rates, which benefit the government.

 
At 5/14/2012 1:11 AM, Blogger Jet Beagle said...

peaj trader: "selling U.S. Treasury bonds is a source of government revenue, like collecting taxes, which can reduce budget deficits or create a budget surplus."

Peak, learn what is meant by the words "budget deficit".

 
At 5/14/2012 2:17 AM, Blogger PeakTrader said...

Jet Beagle, if it weren't for trade deficits, annual interest expense, on the national debt, would be substantially higher.

So, trade deficits reduce budget deficits.

 

Post a Comment

Links to this post:

Create a Link

<< Home