The Atlanta Fed's macroblog provides commentary and analysis on economic topics including monetary policy, macroeconomic developments, inflation, labor economics, and financial issues.

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January 04, 2006

Trade And Debt

One of my New year's resolutions is to work through some the random bits of things I have been meaning to blog on about, stored in my ever-useful copy of EverNote.  So far I am making about as much progress on that as on my promise to eat less ice cream.

Oh, well.  Baby steps.  One piece of old business comes from Don Boudreaux's campaign last month to undermine the view that current account deficits imply indebtedness.  If I might paraphrase, Don's argument -- which you can find here, here, and here -- is essentially that that trade deficits represent an act of deferred consumption -- and hence investment -- by someone in the world. This is crystal clear when the funds made available by countries with trade surpluses are used to purchase plants, properties, or significant equity claims outside of their own border -- an activity known as foreign direct investment

Here's a picture you have probably seen before:


Here's a picture you may not have seen, from Sun Bin:


Since about 1980 the United States has, for all practical purposes, run permanent trade deficits.  It has also been a magnet for direct investment.  And though some of the income from that direct investment is repatriated to other countries, I think you would be hard pressed to argue that the situation shown above represents a loss to Americans.

You can certainly quibble with the size of the U.S. current account deficit today.  Or that in present circumstances current account deficits are primarily financing consumption, not investment. Don would probably say shame on you for your parochial perspective (because those deficits surely represent saving for someone else in the world, even if globally they just swap their consumption today for our consumption tomorrow).   Either way, a blanket aversion to trade or current account deficits just does not seem justified by the record.

January 4, 2006 in Trade , Trade Deficit | Permalink


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Where you're likely to find increased Japanese private investment in the US is in the MBS market, from financial entities rendered desperate for yield by the zero-interest-rate policy.

As the MBS market goes south with the bursting of the real estate bubble, there'll be an immense scandal back in Japan, and that source of funds will dry up.

I'd be surprised if the Japanese are not also active in selling credit default insurance -- the big boys' equivalent of selling naked puts. But it's late...

Posted by: jm | January 10, 2006 at 03:42 AM

jm -- The picture from Sun Bin above is data, so it speaks for itself. It, of course, only extends through 1998 and most critics of recent US economic policy have argued that the cause of rising trade deficits in the past 4 or 5 years are not comparable to the forces that have yielded a general trend in deficits in the post-1980 period. I'm not really objecting to that claim here -- only pointing out that up to 1998 trade was indeed associated with FDI flowing into the US (big time). Them's the facts.

Posted by: Dave Altig | January 10, 2006 at 11:55 AM

But David, how can data for expansion of FDI from '80 thru '98 have much serious relevancy regarding the nature of today's trade and current account deficits, when pre-'98 they were nowhere near their present horrific scale, as your own graph at page top shows?

BTW, before I go any farther, I should state that I completely agree that free trade is a win-win proposition, strongly believe that unfettered comparative advantage will lead to optimal partitioning of production among nations -- and even agree that, at least in the short term, having foreign governments force their citizens to work for us at below-free-market wages by manipulating their currencies is overall to our benefit.

But exactly because I believe in free markets and comparative advantage, I can't see how the blatantly mercantilistic exchange rate manipulations of the Asian governments can possibly be to the world's and our advantage in the long run. And I find it simply amazing that putative foes of government interference in markets such as Don Boudreaux not only fail to rise up in outrage against such manipulations, but seem to tie themselves in knots finding ways to defend them.

As you must well know, in the five quarters of 2003 through Q1 2004, the Japanese government expended about $320 billion in direct intervention against the yen/dollar exchange rate, and authorized the expenditure of about $1 trillion more.

Consider that, Japan's GDP being about half ours, that is equivalent in scale to the US government expending $640 billion on currency intervention and authorizing $2 trillion more.

What would Boudreaux be writing if the US government did that?

What would you be writing?

How can any serious person use the words "free trade" to describe the current international trade regime?

Are not prices the fundamental means by which participants in free markets signal to each other their relative economic preferences? Is exchange rate manipulation by government buying of massive quantities of US Treasury securities anything other than blatant manipulation and falsification of those sacred pricing signals?

How can the mechanisms of comparative advantage possibly function correctly in the presence of such distortions?

Posted by: jm | January 11, 2006 at 12:47 AM

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