Here are a few questions about the “trade deficit.” We could begin by asking, “What is a trade deficit”?
Some say a country has a “trade deficit” when it imports more goods and services than it exports.
A trade deficit is felt to be “bad,” and a trade surplus is felt to be “good.” At least, that is the common belief as expressed by politicians and most economists.
The U.S. imports more goods and services than it exports, so this is called a “trade deficit.” But the U.S. exports more U.S. dollars than it imports.
I. If exports are “good,” why isn’t this export of dollars called a “trade surplus”?
You run a trade deficit with your butcher, your baker, and your candlestick maker. Is this a bad thing for you?
II. Should buy fewer goods and services from them, until they buy more goods and services from you?
Why or why not?
III. Your employer runs a services trade deficit with you. You export more services to your employer than he exports to you. Is this a bad thing for your employer?
IV. Should your employer buy less of your services until you buy more of his services?
What if to pay your butcher, baker, and candlestick maker you are allowed to use something you can obtain in limitless amounts — for instance spoken words.
That is, imagine your butcher tells you, “I’ll sell you all the meat you want, and you pay me by saying a few words.” Would you be concerned about running a “trade deficit” with him, i.e. paying him more words than he gives you?
You probably wouldn’t be concerned about this “trade deficit” because you will receive meat, something that is scarce to you, and in return, you will give him words, of which you have infinite.
And that is the exact description of the U.S. trade deficit.
Because the U.S. is Monetarily Sovereign, it can produce an infinite amount of dollars, at virtually no cost, and it can exchange those dollars for valuable and scarce goods and services.
V. If I give you something that is valuable and difficult to obtain, in exchange for something that costs you nothing, is that a trade deficit you would want to reduce?
Think about that as we explore excerpts from these articles:
Why aren’t Trump’s tariffs closing the trade deficit?
By Jeff Spross
President Trump, as he recently reminded us, is a “Tariff Man.” He’s slapped tariffs on America’s imports of steel and aluminum from around the globe, and on roughly half of our imports from China.
The president’s enthusiasm for tariffs is largely driven by his antipathy for America’s massive trade deficit, which Trump regularly denounces as evidence that the rest of the world is ripping us off.
But a funny thing happened on the way to Trump’s trade war: America’s trade deficit actually went up.
The purpose of tariffs is to make imports more expensive. That should discourage Americans from buying from abroad, reduce our imports, and thus bring our imports and exports into closer balance.
There is no purpose served by “bringing our imports and exports into closer balance.”
VI. If the U.S. can, as former Federal Reserve Chairman Ben Bernanke reminds us, “produce as many U.S. dollars as it wishes at essentially no cost,” why would we wish to reduce our imports?
VII. And why would we wish to make the American people pay more for those imports, thereby exacerbating inflation?
The article explains why, despite “Tariff man” Trump’s efforts, the U.S. trade deficit actually has gone up, and ends with this:
There’s simply not a lot Trump can do to reduce America’s trade deficit. In this arena, at least, he remains at the mercy of the rest of the world.
There is zero value to America in trying to reduce the amount we import relative to the amount we export. We create an unlimited supply of U.S. dollars, at no cost to us, and exchange them for valuable goods and services.
The more, the better. What’s not to like about that arrangement?
And then, there is this article:
How John Maynard Keynes’ most radical idea could save the world
By Ryan Cooper
The basic problem with international trade is that imbalances can develop: Some countries get big export surpluses, while others necessarily develop big trade deficits (since the world cannot be in surplus or deficit with itself).
And because countries typically must borrow to finance trade deficits, it’s a quick and easy recipe for a crash in those countries when their ability to take on more debt reaches its limit.
It’s not as bad for surplus countries, since they will not have a debt crisis or a collapse in the value of their currency, but they too will be hurt by the loss of export markets.
This problem has haunted nations since well before the Industrial Revolution.
Keynes comments apply to the time when virtually all nations had surrendered their Monetary Sovereignty in favor of “pegging” their currency to gold, silver, or to another currency.
Pegging eliminates a government’s unlimited ability to create its own currency, and thus diminishes its sovereignty over its own sovereign currency.
Today, Keynes comments do not apply to such Monetarily Sovereign governments as the U.S., Canada, Mexico, China, the UK, Japan, Australia, et al.
Those countries do not need to “borrow to finance trade deficits.” The U.S., for example, issues Treasury Securities, but the dollars paid for those T-securities are not used to finance trade deficits.
Instead, the dollars a deposited into privately owned T-security accounts, and held there until the securities mature, at which time the dollars are returned to the account owners.
Thus, there is no time when the U.S.’s “ability to take on more debt reaches its limit.” Nor will the U.S. ever have “a debt crisis or a collapse in the value of their currency.”
Being Monetarily Sovereign, i.e sovereign over its own currency, the U.S. has absolute control over the value of its currency (by interest rate control and/or by fiat).
The article continues:
Nations like Germany with a large export surplus often portray it as resulting from their superior virtue and technical skill.
But the fundamental reality of such a surplus is that it requires someone to buy the exports.
Without some sort of permanent mechanism to recycle that surplus back into deficit countries, the result will be eventual disaster.
It’s precisely what caused the initial economic crisis in Greece that is still ongoing.
No, the economic crisis in Greece came about because it voluntarily surrendered its Monetary Sovereignty to the European Union. Greece no longer uses the drachma, over which it was sovereign, but currently uses the euro, over which the EU is sovereign.
Unlike a Monetarily Sovereign government, monetarily non-sovereign governments must have a net money inflow in order to survive long term. To achieve this inflow, they must borrow money and or sell goods and service.
The governments of Boston, and Illinois, and France, and Greece are examples of monetarily non-sovereign governments that must have a net inflow of money to survive long term.
If the ability to borrow and export goods and services hits limits, these governments are forced to take money from their citizens, aka “austerity.”
Austerity, in turn, causes recessions, which inevitably must lead to deeper recessions, until money can be supplied by some outside source like the EU or the International Monetary Fund or the U.S. government.
For the euro nations, this reduces them to permanent beggar status.
There is no reason why a Monetarily Sovereign nation considers a trade (money) “deficit” to be any sort of threat.
The U.S. trade “deficit” merely reflects the facts that the U.S. has the unlimited ability to create dollars at no cost, and never can run short of dollars. Dollars are not scarce to it.
Exchanging these no-cost dollars for valuable goods and service benefits America.
The greater the trade “deficit,” the more valuable goods and service enter America — at no cost to the government.
America doesn’t have a trade deficit. We simply buy more than we sell, using dollars we create at no cost. Concerns over the size of the trade “deficit” are economically ignorant.
Rodger Malcolm Mitchell
Twitter: @rodgermitchell; Search #monetarysovereignty
Facebook: Rodger Malcolm Mitchell
The single most important problems in economics involve the excessive income/wealth/power Gaps between the have-mores and the have-less.
Wide Gaps negatively affect poverty, health and longevity, education, housing, law and crime, war, leadership, ownership, bigotry, supply and demand, taxation, GDP, international relations, scientific advancement, the environment, human motivation and well-being, and virtually every other issue in economics.
Implementation of The Ten Steps To Prosperity can narrow the Gaps:
Ten Steps To Prosperity:
1. Eliminate FICA
2. Federally funded medicare — parts a, b & d, plus long-term care — for everyone
3. Provide a monthly economic bonus to every man, woman and child in America (similar to social security for all)
4. Free education (including post-grad) for everyone
5. Salary for attending school
6. Eliminate federal taxes on business
7. Increase the standard income tax deduction, annually.
8. Tax the very rich (the “.1%) more, with higher progressive tax rates on all forms of income.
9. Federal ownership of all banks
10. Increase federal spending on the myriad initiatives that benefit America’s 99.9%
The Ten Steps will grow the economy, and narrow the income/wealth/power Gap between the rich and you.
ity to create money.
The U.S., Canada et al, need no net inflow of money. They have the unlimited ability to create their sovereign currency.
2 thoughts on “Questions about the trade deficit illusion. Do we even have a trade deficit?”
Great post well expressed and explained.
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“…Concerns over the size of the trade “deficit” …
Society’s inability to distinguish MS from non-MS. The world needs to replace the scarcity model with an abundance model. The whole idea of deficits and debt would eventually disappear along with distrust and fear.