The trade deficit is an unsustainable imbalance that takes away jobs and output.
Facts:
Imports are real benefits and exports are real costs. Trade deficits directly improve our standard of living. Jobs are lost because taxes are too high for a given level of government spending, not because of imports.
By now you might suspect that, once again, the mainstream has it all backwards, including the trade issue. To get on track with the trade issue, always remember this:
In economics, it’s better to receive than to give.
Therefore:
Imports are real benefits.
Exports are real costs.
In other words, going to work to produce real goods and services to export to someone else to consume does you no economic good at all, unless you get to import and consume the real goods and services others produce in return.
And also remember:
The real wealth of a nation is
all it produces and keeps for itself,
plus all it imports,
minus what it must export.
A trade deficit in fact increases our real standard of living. How can it be any other way? And the higher the trade deficit the better.
Yes, the mainstream economists, politicians, and media all have the trade issue completely backwards. Sad but true.
To further make the point, if, for example, General McArthur had proclaimed after WWII that since Japan had lost the war, they would be required to send the US 2 million cars a year and get nothing in return, the result would have been a major international uproar about US exploitation of conquered enemies. We would have been accused of fostering a repeat of the aftermath of WWI, where the allies demanded reparations from Germany that were presumably so high and exploitive they caused WWII.
Well, McArthur did not order that, yet for over 60 years, Japan has in fact been sending us about 2 million cars per year, and we have been sending them little or nothing. And, surprisingly, they think this means they are winning the ‘trade war’ and we think it means we are losing it.
Same with China- they think they are winning because they keep our stores full of their products and get nothing in return. And our leaders agree and think we are losing.
This is madness on a grand scheme! Now take a fresh look at the headlines and commentary we see and hear daily:
*The US is suffering from a trade deficit.
*The trade deficit is an unsustainable imbalance.
*The US is losing jobs to China.
*Like a drunken sailor, the US is borrowing from abroad to fund its spending habits, leaving the bill to our children, as we deplete our national savings.
I’ve heard it all. It’s all total nonsense. We are benefiting IMMENSELY from the trade deficit. The rest of the world has been sending us hundreds of billions of dollars worth of real goods and services in excess of what we send them. They get to produce and export, and we get to import and consume.
Is this an unsustainable imbalance? Certainly not for us! Why would we want to end it? As long as they want to send us goods and services without demanding any goods and services in return, why should we not be able to take them?
There is no reason, apart from a complete misunderstanding of our monetary system by our leaders that’s turned a massive real benefit into a nightmare of domestic unemployment.
Recall from the previous innocent frauds, the US can ALWAYS support domestic output and sustain domestic full employment with fiscal policy (tax cuts and/or govt. spending), even when China, or any other nation, decides to send us real goods and services that displace our industries previously doing that work.
All we have to do is keep American spending power high enough to be able to buy BOTH what foreigners want to sell us AND all the goods and services we can produce ourselves at full employment levels. Yes, jobs may be lost in one or more industries. But with the right fiscal policy there will always be sufficient domestic spending power to be able to employ those willing and able to work producing other goods and services for our private and public consumption. In fact, up until recently, unemployment remained relatively low even as our trade deficit went ever higher.
So what about all the noise about the US borrowing from abroad like drunken sailor to fund our spending habits? Also not true! We are not dependent on China to buy our securities or in any way fund our spending.
Here’s what’s really going on:
Domestic credit creation is funding foreign savings.
What does this mean? Let’s look at an example of a typical transaction. Assume you live in the US and decide to buy a car made in China.
You go to a US bank, get accepted for a loan, and spend the funds on the car.
So where do things then stand? You exchanged the borrowed funds for the car, the Chinese car company has a deposit in the bank, and the bank has a loan to you and a deposit belonging to the Chinese car company on their books. First, all parties are ‘happy.’
You would rather have the car than the funds, or you would not have bought it, so you are happy.
The Chinese car company would rather have the funds than the car, or they would not have sold it, so they are happy.
The bank wants loans and deposits, or it wouldn’t have made the loan, so it’s happy.
There is no ‘imbalance.’ Everyone is sitting fat and happy. They all got exactly what they wanted. The bank has a loan and a deposit, so they are happy and in balance. The Chinese car company has the $ US deposit they want as savings, so they are happy and in balance. And you have the car you want and a car payment you agreed to, so you are happy and in balance as well. Everyone is happy with what they have at that point in time.
And domestic credit creation-the bank loan- has funded the Chinese desire to hold a $ US deposit at the bank which we also call savings.
Where’s the ‘foreign capital?’ There isn’t any! The entire notion of the US somehow depending on foreign capital is inapplicable. Instead, it’s the foreigners who are dependent on our domestic credit creation process to fund their desire to save $ US financial assets.
It’s all a case of domestic credit funding foreign savings.
We are not dependent on foreign savings for funding anything.
Nor can we be. Again, it’s our spread sheet and if they want to save our $ they have to play in our sandbox. And what options do foreign savers have for their dollar deposits? They can do nothing, or they buy other financial assets from willing sellers, or they buy real goods and services from willing sellers. And when they do that, at market prices, again, both parties are happy. The buyers get what they want- real goods and services, other financial assets, etc. The sellers get what they want- the dollar deposit. No imbalances are possible. And there is not even the remotest possibility of US dependency on foreign capital, as there’s no foreign capital involved anywhere in this process.
