An alternative to popular faith
For years, there has been increasing concern about our growing trade deficit, especially with China. But do trade deficits really benefit us?
China creates the goods/services we want and sends them here in exchange for dollars. The goods/services are scarce to China. Time, manpower and physical resources are necessary for their creation. By contrast, dollars are not scarce to the U.S. Our government has the unlimited power and authority to produce dollars, without using any resources, whatsoever. The press of a computer key sends billions of dollars from our government to anywhere. Lately, many have gone into our economy as a stimulus.
A trade deficit is an example of one country devoting great effort to creating scarce materials for another country in exchange for something that requires no effort by the other country. In that sense, China is our servant. They work, sweat and strain and use their valuable resources to create and ship to us the things we want, while we, hardly lifting a finger, ship dollars to them. Who has the better deal?
Obviously, for any given individual, the situation is different. None of us has the unlimited ability to create dollars. We have to work hard for our dollars. Dollars are scarce to each of us. But when we talk about trade deficits, we are talking about governments, and there the situation changes. Dollars are not scarce to the U.S. government.
To satisfy our desires, China could ship us every yard of cloth and every ounce of steel in their country; they could burn all their coal and oil; they could employ every man, woman and child in dismal sweatshops; they could empty their nation of all physical resources, and still we would have plenty of dollars to send to them, simply by touching a computer key.
This may be more easily understood by looking at Saudi Arabia, with whom we also have a trade deficit. One day, the Saudis will have sent us every drop of their oil, leaving their country a hollow, empty sand dune, while we blithely will go on producing dollars. Who has the better deal?
Of course, as monetarily sovereign nations, China and Saudi Arabia are able to create as much of their own money as they wish. They don’t need to work so hard to send us their precious resources in exchange for our money. But that’s a discussion for another posting.
Rodger Malcolm Mitchell
http://www.rodgermitchell.com
#Monetary Sovereignty - Mitchell 
Your assumption requires that people will continue to accept dollars. If there is no demand for the USD but it is still produced massively it will surely hyperinflate prices.
LikeLike
Prestamos, you are correct. With no demand and increased supply, money would become valueless. So the key question is: What provides demand for the U.S. dollar?
Demand is based on risk and reward. Risk is the inflation we just mentioned, so what is the reward?
Reward is utility and interest. Utility is the requirement that you pay your taxes –federal, state and local–using U.S. dollars. That alone absolutely guarantees there always will be demand for the dollar. Utility also is the fact that all the other tax-paying people will accept dollars in payment of debt.
Interest is the other part of reward — what you get for owning money. So when rates are high, your demand for money (savings and money-market accounts, etc.) increases. When rates are low, your demand for money decreases and your demand for non-money (stocks, real estate, etc.) increases.
This is why the Fed raises interest rates to fight inflation.
If you truly want to learn, in only 1/2 hour, how this economy works, go to: http://www.moslereconomics.com/2009/12/10/7-deadly-innocent-frauds/ and read “The 7 deadly innocent frauds”
Or you can read my book (top of the left-hand column of this page).
Rodger Malcolm Mitchell
LikeLike
Your comments above about the utility of the dollar apply only to US taxpayers. Am trying to understand your argument here. Already we hear warnings from the Chinese, the Gulf states and others that they want to replace the dollar as the reserve currency. In essence our trading partners are realizing you’re correct about the “China trade deficit myth” and they are tiring of the con.
LikeLike
Mr. Brown,
The question of which currency is the “reserve currency,” is more a political question than an economic question. It’s similar to the question of which language international pilots should speak.
I, for one, do not care whether the dollar continues as the world’s reserve currency, although I suspect most nations would be reluctant to adopt the Euro or the RMB. What difference would it make to you and me if the dollar no longer were dominant?
Rodger Malcolm Mitchell
LikeLike
Curious to how you see the topic of “treasury auction failure”. To be more specific, it was recently publicized that China reduced its holdings by over 32 billion dollars. What is your view of both the cause and effect of this should it continue? Thanks.
LikeLike
I personally don’t care what China does with the T-securities it holds.
Any headline that reads “treasury auction failure” gives me great news. If enough people and countries refuse to buy T-securities, perhaps we can end the obsolete practice of creating them out of thin air, then selling them to obtain money we earlier created out of thin air.
After 1971, T-security auctions became unnecessary.
Anyway, how is China going to reduce its holdings? Answer: It will allow some T-securities to expire and not renew them. We will create and send them dollars to cover the expired securities. This will reduce the world’s supply of dollars, which we easily will re-supply by deficit spending.
Trust me. China is the least of our problems. They are a non-issue. What’s the real problem? Debt hawks in Congress and the media.
Rodger Malcolm Mitchell
LikeLike
As it currently stands, in order to “re-supply” as youput it, is it safe to assume that higher interest rates will be required to entice the Chinese and others to buy our T-bills. (I understand you favor creating out of thin air, but ignoring that for the moment)…..
LikeLike
PS- If foreign buyers going forward are unwilling to roll over their T-bills (which pay interest) why would they want to continue to accept US dollars (which don’t) as payment for goods and services?
LikeLike
What’s their alternative?
Rodger Malcolm Mitchell
LikeLike
In answer to your “resupply” question, if we insist on continuing the obsolete practice of creating and selling T-securities, and if China and all other nations decide not to buy them at current interest levels, we would have to raise interest rates.
Rodger Malcolm Mitchell
LikeLike
Rodger, that analysis is right to the point. China never got a fair value in exchange nor have the Saudi Arabians. And, may I add, it is not China really undervaluing their currency, it is the US debasing its own that causes those paper surpluses. If China really had the power to “undervalue” their currency, all that would on balance happen is that they equally have unjustifiedly higher import costs which largely offsets any such “gain”. After all, their exports contain imports! What’s worse, it distorts the internal price structures of an economy so that it is not working at its optimum point. The harm is mainly to the Chinese, the gain all to the US.
LikeLike
Hi Rodger, have taken the liberty to reference your above post in my “US Figures Stronger than Feared” (towards the end where it says “(Nothing against trade – but you must be able to offer something in return, in other words, need to produce yourself so that you have something to exchange; however, the US pays China with worthless treasury bills …”.
LikeLike
Thanks, Crisismaven,
Not exactly “worthless.” More like “limitless.” Something like air. It’s not worthless. In fact it’s quite valuable.
Dollars (and T-bills) are limitless to us, but quite valuable to the Chinese, while Chinese goods and services are scarce. So we get something scarce in exchange for something limitless. It’s a great deal for us.
By the way, the push for exports is a relic of the gold standard, where all money was scarce. Today, exports are necessary for nations on a “standard” (i.e, euro standard), and for all cities, counties and states. Not for the U.S.
Rodger Malcolm Mitchell
LikeLike