
My Personal Trade Deficit - __
http://www.slate.com/id/2040/
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mikesabat
Whoa! I got to the end of this article and was surprised to see that the offer
is an econ professor. I've never written a comment this long, but just had to
this time. Comparing an international trade deficit to buying books at a
Barnes & Noble in a different town? I understand the schema, but it is nowhere
near complete or accurate in its intention.

Buying books vs. running a trade deficit with Mexico. sure on a micro level
the author can run a deficit with the city of Pittstown and still be OK, just
as the US could run a deficit with Mexico and still be Ok. I'm assuming that
the author is running a surplus in the city where he earns his living. That is
the reason the deficit in Pittstown is manageable. The US is running a large
deficit overall and therefore the situation is much less manageable.

This is a better analogy. The author has a job which makes $50k a year, yet he
spends $75k a year = earnings < spending.

How does he spend more than he earns? With credit card debt of course. The US
issues and sells bonds as debt.

The author argues that a deficit is better than a surplus because credit will
eventually be cut, but someone can save forever not living to their full
utility (economics term for enjoyment). If these scenarios play out, here are
the outcomes.

The person running a deficit is in debt without the earning power to get out.
In this situation they have to cut their spending significantly and hope they
can afford to feed themselves. Remember they cannot borrow any more and
eventually their assets may be repossessed.

The person running a surplus can maintain his current standard of living
forever. Depending on the size of his savings, he may be able to quit his job
and live off the interest of the savings. He has no debt, only savings, and
can most likely increase his utility/standard of living without any further
effort or consequences.

Both scenarios are equally good?

~~~
mhartl
_This is a better analogy. The author has a job which makes $50k a year, yet
he spends $75k a year = earnings < spending._

That's not a good analogy for a trade deficit. _One_ way of increasing the
trade deficit is to borrow money and spend it. If you mortgage your house to
buy books, that certainly increases the "trade deficit" with Barnes & Noble.
But someone with, say, a $500K/yr. job could easily afford to spend $75K a
year on books, and would run a massive "trade deficit" with B&N without going
into debt.

It's a potential problem if US individuals or the US government go into
massive debt, of course, but whether they use that debt to buy foreign or
domestic goods is immaterial. If some of that debt happens to finance the
purchase of foreign goods, it drives up the trade deficit, but the problem is
the debt, not the deficit.

This looks like a linguistic problem as much as anything---people get so hung
up on the word "deficit". Given its pervasiveness, though, I suspect that
causation actually goes the other way: mercantilism is so intuitively
appealing that the imprecise terminology seems almost inevitable.

------
weel
This is an entirely sensible piece. I'm not sure if it is relevant to hacking
or to startups, but it is entirely sensible.

If A sells to B sells to C sells to A, then they have just created three trade
deficits. This is why "the trade deficit with China" is an utterly meaningless
concept. Maybe China sells things to the US, which sells things to Mexico,
which sells things to China, or any other transitive combination, and voila, a
trade deficit.

The only trade deficit that is somewhat meaningful is the trade deficit of a
country with the rest of the world, all of it. Now even that trade deficit
needs to be taken with a grain of salt. If the US has a trade deficit with the
rest of the world, you have to wonder for a minute why on earth the citizens
of all those other countries would be so happy to send goods America-bound and
not to receive equal value in return. Whence their charity? How come the free
lunch?

When a good economist smells a free lunch, s/he smells murky accounting. And
indeed, there's murky accounting in the trade deficit. Oftentimes, services
are not included. Even if they are, then investment isn't. It just so happens
that the US is a good place to invest, relative to other countries, because it
has a very well developed economic and financial system that can take
advantage of capital well and bring high returns in capital-intensive
industries. China, on the other hand, lacks the institutions required to make
capital-intensive industries quite as lucrative, but it has cheap labor. Thus
both countries specialize, but the Chinese investments flowing into the US
bought with the money that Americans paid the Chinese to buy their goods--
those investments simply do not count.

Hey! A deficit!

Is it a big deal?

Mwah... no.

~~~
dreish
Generally the U.S. has run perennial trade deficits with the rest of the world
because people around the world have been essentially collecting dollars
instead of spending them. They were for a long time considered the main "hard
currency" other than volatile and politically-sensitive gold.

In other words, we would send dollars to country X and receive goods in
return. Instead of sending back those dollars to us and receiving goods from
us, they would stuff them under a mattress, or in their government reserve
vaults, because their own local currency was not considered as trustworthy.

In recent years, foreign governments have begun viewing the euro as a strong,
stable currency, and have been diversifying their reserves by getting rid of
dollars and stocking up on euros. Two of the recent effects of that phenomenon
have been a declining dollar (as with anything, its price goes down when there
is a sudden flood of sellers), and high U.S. asset prices (because now the
dollars are coming out of the mattresses and vaults, and being used to buy
stocks and property).

~~~
Xichekolas
_Instead of sending back those dollars to us and receiving goods from us, they
would stuff them under a mattress_

Usually they take the cash and invest it in US Government Bonds or private
stocks and bonds. This high demand for bonds means our government can offer
them at really low rates, and there are still takers. (China has something
like $300 billion of US Bonds.) This is an added bonus for us. In this way,
our currency's primary status is kind of self-perpetuating. Our currency is
backed in faith in the solvency of the US Government, and our Government can
borrow money really really cheaply to deal with any crisis it needs to,
keeping it solvent where other governments would fail.

(For anyone out there that is scared what will happen if the rest of the world
started dumping it's dollar-back assets, remember that less than half of the
'National Debt' is owed to foreigners, and many of these countries use dollars
to stabilize their own currencies, so this would amount to financial suicide
for them.)

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gregwebs
Actually, you should care what your neighbors are doing. Your taxes will
(eventually) increase when the economy is unhealthy.

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mynameishere
What is the trade deficit between a cow and the rancher?

