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.
U.S. depressions tend to come on the heels of federal surpluses.
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.
10 thoughts on “Our trade deficit with China rose. Why should you care?”
I dig what you are saying, Rodger, but how would you respond to arguments like Warren Buffet’s classic one here?
I would say, “Warren, the debt has increased 650-fold in the past 80 years, and none of what you outline has occurred. Why?
Very true about the national debt Rodger. But how would you respond to what he said about the trade deficit, particularly about his Thriftville vs. Squanderville analogy? I know his analogy is flawed, but I am trying to find the best way to put into words a good rebuttal to that part of it.
His entire argument is based on this line: “Sooner or later the Squanderville government, facing ever greater payments to service debt, would decide to embrace highly inflationary policies–that is, issue more Squanderbucks to dilute the value of each.”
Like most people, he believes federal deficit spending causes inflation. But, as a regular reader of this blog, you know that is not true. See: What causes inflation. No, it’s not money “printing.”
If it were true, we would be in the midst of the damndest inflation in history, right now.
Anyway, Buffett wrote the article almost 20 years ago, and since then he has changed his mind.: I’ll remind you of a Warren Buffet quote I have reprinted several times on this site: “Those who regularly preach doom because of government budget deficits (as I regularly did myself for many years) might note that our country’s national debt has increased roughly 400 fold during the last of my 77-year periods”
Very well-said, Rodger. Of course, Warren would then probably say, “but without our vital industries X, Y, and Z, we will not have a country and we would become foreign-owned”. And the answer to that is very simple: protectionism *without* tariffs like you had mentioned a while ago, via subsidies from tax breaks and newly-created federal dollars given to vital American industries X, Y, and Z to incentivize them. Problem solved.
In addition, the “What if everybody . . . ” response is not valid; “Everybody” doesn’t do anything.
Here is one example of why trade “deficits” are beneficial: Precious metal
Experts discuss the future of lithium, much desired for renewable energy needs
When the US buys lithium from China, that is part of a trade “deficit.” We send China dollars that we can create in infinite amounts by clicking a computer key, and they send us a rare metal they labored to find and extract.
Substitute the words “all goods and services” for the word “lithium” and you can see the value of trade “deficits” (which, in fact, are trade surpluses from the standpoint of goods and services.
And as soon as the above post appeared, we come to this bit of idiocy:
LikeLiked by 1 person
Wow, a lot to unpack here for a relatively new student of MS. I hope you don’t mind, but I have a few rudimentary questions.
1) How does trading with another country work? Using lithium as an example, would the USA purchase the lithium from say Bolivia and then sell it to private companies? Or would, let’s say, Tesla, buy the lithium directly from Bolivia? 1a) Would an American Multi-national Corp. producing the lithium in Bolivia be considered an exporter to the USA if they are sending that lithium back to the USA for use in manufacturing, such as Tesla cars?
2) Are we making other countries so rich in U.S. currency that they would be able to buy up too many assets in the U.S., such as farm land, which could have a detrimental effect on our economy such as price control?
3) What about the complaint that we are not producing enough here, and buying it there, causing a lack of jobs here?
1. All of the above. The U.S. could buy it and use it, or sell it. or a private company could buy it, use it, or sell it. If the US government buys it, the government creates new dollars, ad hoc, and sends them overseas. If a private U.S. company buys it, the private sector (the economy) would send dollars overseas, but (this is a key point) the U.S. government has the power to replenish the private sector as much as it wished.
The number of dollars in the U.S. private sector is at the whim and control of the U.S. government. Therefore, however the process proceeds, the U.S. economy need not lose anything. Thus, the lithium would be received at no dollar cost to the economy, despite there being a trade “deficit.”
2. That always has been a concern that never is realized. I recall one time, Japan attempted to buy major real estate in Hawaii. That didn’t work out too well for Japanese investors. At any rate, the U.S. government has total control, if it ever became a real concern. America is a gigantic economic force, and it is extremely unlikely any nation could buy enough to significantly affect prices.
As a last resort, the U.S. government simply could nationalize all the property. No one has the power to defeat the U.S. government in America. Did you ever here the phrase, “Don’t fight city hall.”?
3. Lack of jobs never is a problem. The problem only is lack of money, which the federal government has the unlimited ability to provide to those who need it. The “lack of jobs” concern is usually voiced by people who think the poor should not receive money unless they labor. But many of the rich don’t labor, and no one seems concerned.
I haven’t labored for more than 12 years and I am content to purchase what I need. The entire Saudi royalty never labors; they just hire foreigners to do the work.
Thanks Mr. Mitchell, I appreciate the wonderful education I am getting from you at no cost. You are a true Patriot!!! I am glad to see that despite your heavy heart at this time, you continue to hold out hope that somehow, someway, our government will truly operate transparently and without ambiguity the fundamental principles of a monetarily sovereign country. Your efforts have not been in vein, as I notice more and more people writing about
and talking about MS, including myself, as I try to educate as many people as I can and some even listen. There have even been a couple of people who knew what I was talking about! Obviously, this is the best time to get the word out, as our government is spending trillions in real time making it obvious that they have the ability to spend without any restrictions. It’s just common sense! Take care.