The words “deficit” and “surplus” have emotional meanings beyond their rational meanings. “Deficit” has bad connotations, and a “surplus” generally is good.
So when you see a headline saying the federal government’s deficit exceeds $2 trillion, you immediately worry.
Similarly, when you learn China’s trade surplus with the United States has grown 7.1% (meaning our trade deficit has grown), your knee jerk reaction might be negative.
But . . .
. . . for every debit there is a credit and for every deficit, there is a surplus.
When the US federal government runs a deficit, someone must run a surplus.
Mostly, that “someone” is the U.S. economy. Federal deficits, rather than being feared, should be encouraged because federal deficits enrich the private sector.
And the private sector is another way of saying, “the economy.”
So, would you rather see the federal government, which has infinite dollars, run a deficit, or would you prefer that the economy, which has limited dollars, run a deficit?
Take your choice.
And while you’re choosing, remember that when the U.S. federal government runs a surplus (and so, the U.S. economy runs a deficit) we have recessions or depressions.
Fortunately, the federal government has tended to run deficits, which is why the U.S. economy has tended to grow.
1804-1812: U. S. Federal Debt reduced 48%. Depression began 1807.
1817-1821: U. S. Federal Debt reduced 29%. Depression began 1819.
1823-1836: U. S. Federal Debt reduced 99%. Depression began 1837.
1852-1857: U. S. Federal Debt reduced 59%. Depression began 1857.
1867-1873: U. S. Federal Debt reduced 27%. Depression began 1873.
1880-1893: U. S. Federal Debt reduced 57%. Depression began 1893.
1920-1930: U. S. Federal Debt reduced 36%. Depression began 1929.
1997-2001: U. S. Federal Debt reduced 15%. Recession began 2001.
Now, let us consider those times when the U.S. runs a trade deficit. These are different from a federal deficit or an economic deficit.
It is perfectly possible, common actually, for the U.S. economy to run a surplus while America runs a trade deficit. It is, in fact, the rule rather than the exception.
Look at this recent headline: China trade surplus with US widens 7.1% to $317 bn in 2020
In 2020, the U.S. economy ran a surplus versus the U.S. government. The federal government sent more dollars into the economy than the economy sent to the U.S. government. But the U.S. economy ran a deficit versus the Chinese economy.
More specifically, the U.S. economy and the Chinese economy buy goods and services from each other. So there is an exchange of money and of goods and services.
When the U.S. economy runs a trade deficit with the Chinese economy, we send them more money and they send us more goods and services. Thus, the term “trade deficit” focuses only on the money-exchange aspect.
If we were to focus on goods and services, we properly would say that we ran a “trade surplus.”
When evaluating the process, does the U.S. benefit more from receiving a surplus of goods and services, or would we benefit more from receiving a surplus of money?
In one view, it’s an even exchange. The money is worth exactly the same as the goods and services. But from the standpoint of benefit to the U.S., which is preferable, receiving a surplus of goods and services, or receiving a surplus of money?
The U.S. government, being Monetarily Sovereign has the infinite ability to create money. It never can run short of U.S. dollars. But the U.S. economy does not have the infinite ability to create goods and services. It can, and generally does, run short of goods and services, which it can get via money.
Ben Bernanke: “The U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost.”
Having an infinite supply of money, but a limited supply of goods and services, indicates that the U.S. always should run a money deficit with a goods and services surplus — and generally it does.
Receiving money from China is of no benefit to the U.S. economy because the U.S. government has the power to provide infinite money to the U.S. economy.
Even if the U.S. economy sold next to nothing to the Chinese economy, the U.S. economy could prosper by running a surplus with the U.S. federal government — and that is what happens during the vast majority of the time. China sells us more than we sell them, yet our economy grows because the U.S. government provides our economy with money.
Think of it from the standpoint of resources. We create all the dollars we wish, simply by pressing computer keys at virtually no cost to us. But China sends us goods and services which cost China labor and diminishing natural resources to produce.
The reality is that we receive valuable goods and services in exchange for nothing but numbers on a balance sheet.
Who has the better deal? Think of that as you read these excerpts:
China trade surplus with US widens 7.1% to $317 bn in 2020
Donald Trump made narrowing the trade gap with China a key priority when he came to office four years ago
January 14, 2021
China’s trade surplus with the United States widened last year, underlining the failure of Donald Trump to narrow the gap during his tenure, while demand soared for electronics and medical equipment during the coronavirus pandemic.
Ridiculous, isn’t it? Our government pressed a few computer keys and in return received “electronics and medical equipment during the coronavirus pandemic.” And this exchange is what Donald Trump wanted to cut??!
He actually preferred that we send China less money, and more of something substantial, in exchange for their electronics, et al.
The pick-up came on the back of a jump in exports through most of last year as China’s factories kicked back into gear from the second quarter following a strict lockdown that managed to broadly contain Covid-19 and allow economic activity to return.
Trump had made addressing the gaping trade gap with China a priority when he took office four years ago, and signed a partial agreement with Beijing to boost the country’s purchases of goods such as soybeans.
Rather than paying China with something that costs us nothing to produce (i.e. dollars), Trump and his advisors wanted to pay them with soybeans that require sweat labor, and physical resources to produce.
But Chinese customs data showed the surplus with the US climbed 7.1 percent to $316.9 billion in 2020.
The figure is a 14.9 percent jump from 2017’s surplus of $275.8 billion — which was already a sensitive political issue due to Trump’s claims that China held unfair practices and killed US jobs.
This brings us to a fundamental question:
Should America’s economic goal be to make Americans labor? Or should America’s economic goal be to provide Americans with the fruits of labor?
Put simply, would you prefer to work more and receive less, or would you prefer to work less and receive more?
The prior option describes America’s working poor. The latter option describes the very rich. On a national level, it describes the royals of Saudi Arabia, who sit back and spend petro-dollars, which they use to purchase all the goods and services they want.
Given your choice of two lifestyles, which do you find preferable.
(Or perhaps more realistically, would you like to labor a bit less and to receive a lot more? That’s known as “running a trade deficit.”)
You already do run a trade deficit with your local grocer and drug store. You give them money, and they give you goods and services. The problem is, that unlike the Monetarily Sovereign U.S. government, you are monetarily non-sovereign.
You cannot create infinite money at the touch of a computer key. Because the U.S. public, and most of the politicians do not understand the implications of Monetary Sovereignty, they make decisions inimical to the true welfare of America.
US-China relations have deteriorated to their worst in decades under the Trump administration, largely because of the trade war that saw Washington hit Chinese imports with huge tariffs — drawing retaliation and tit-for-tat moves.
In an interview with The Wall Street Journalthis week, US Trade Representative Robert Lighthizer defended the Trump administration’s tactics of imposing tariffs on hundreds of billions of dollars in Chinese goods.
So greatly did the Trump administration misunderstand Monetary Sovereign, that it levied taxes on the American economy (aka “import duties) hoping to force China to pay money we don’t need in exchange for our soybeans, etc.
There is a penalty for ignorance, and we pay it every day.
One final note: Some might object that if everyone produced nothing and imported everything, the world would be impoverished, which is true. But we aren’t suggesting that extreme.
We merely say that for a Monetarily Sovereign nation, having the unlimited ability to create its own sovereign currency, imports are more beneficial than exports, and trade “deficits” are an economic advantage.
In essence, trade deficits provide free goods and services.
In summary: Would you prefer to work more and receive less, or to work less and receive more? As a nation, we have that choice, but first, we need to understand Monetary Sovereignty.
Rodger Malcolm Mitchell
Monetary Sovereignty Twitter: @rodgermitchell Search #monetarysovereignty Facebook: Rodger Malcolm Mitchell …………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………..
THE SOLE PURPOSE OF GOVERNMENT IS TO IMPROVE AND PROTECT THE LIVES OF THE PEOPLE.
The most important problems in economics involve:
- Monetary Sovereignty describes money creation and destruction.
- Gap Psychology describes the common desire to distance oneself from those “below” in any socio-economic ranking, and to come nearer those “above.” The socio-economic distance is referred to as “The Gap.”
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 Monetary Sovereignty and The Ten Steps To Prosperity can grow the economy and narrow the Gaps:
Ten Steps To Prosperity:
- Eliminate FICA
- Federally funded Medicare — parts A, B & D, plus long-term care — for everyone
- Social Security for all or a reverse income tax
- Free education (including post-grad) for everyone
- Salary for attending school
- Eliminate federal taxes on business
- Increase the standard income tax deduction, annually.
- Tax the very rich (the “.1%”) more, with higher progressive tax rates on all forms of income.
- Federal ownership of all banks
- 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 the rest.