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m_d_hI don't think I've ever said it like this before, that there's no such thing as a trade deficit.
There are economic statistics that tally up our imports and exports of goods and services, and the US regularly imports more goods than it exports. So if you focus on goods alone, yes, the US has a persistent "trade deficit" with respect to goods, in that we buy more goods from abroad than we sell abroad.
But if you look at the global economy broadly, there's no such thing as a trade deficit between countries, and no such thing as an aggregate trade deficit (or surplus) for a specific country.
That's because we're talking about trade. We're talking about exchanges of one thing of value for another thing of equivalent value. We're not talking about gifts, we're not talking about theft, we're not talking about taxes. We're talking about voluntary trade. Usually in today's modern economy, we trade a good or service for some currency. If you trade one good or service directly for another good or service, we call that "barter". Like if I do my massage therapist's tax return for him in return for a free massage -- that's barter. But even if I pay my massage therapist cash for a massage, that's still a trade. And you wouldn't say there's a "trade deficit" between me and my massage therapist, that would be strange. He gave me a massage of $100 value, I gave him cash of $100 value. That's a fair and voluntary trade, no deficit anywhere.
So if the US has an international trade deficit with respect to goods, it is because we are paying cash for these goods. We are trading cash for goods. We want the goods, they want the cash, everybody's happy. Again, there's no "deficit" here, it's all value for value exchanges.
Viewed properly, we don't have a trade deficit, per se. No, what we're doing in the US is exporting US Dollars in exchange for imported goods.
-----
If you look at a list of our biggest exports, the US exports airplanes, refined petroleum, cars, medical drugs & devices, soybeans, corn, nuts. But our biggest net export by far, 10x the next largest category, is the US Dollar.
Most of the US Dollars in circulation are held abroad. The US Dollar is the world's most popular currency for trade and investment. It is our biggest, best known, most valuable brand. We're able to export hundreds of billions of US Dollars each year. Altogether, over the past 20 years, we've net exported about $10 trillion in cash!
In return for that cash, people & businesses in other countries give us electronic equipment, mechanical equipment, cars, fuel, and other stuff. And for some reason they're happy to take US Dollars in return, and then put these US Dollars in their bank accounts, or they buy US-Dollar-denominated securities with them (like US Treasury Bonds, or Fannie Mae mortgage bonds).
It's a privilege like no country has ever seen! No other country in the history of the planet could export so much cash, year after year, for decades, and yet have people lining up for even more. The US didn't have this privilege either until the early 1980s. That's when ...
The US Congress decided in 1984 to stop taxing foreign portfolio investments in US securities.
-----
If you, my US-resident readers, invest in US Treasury Bonds, or other securities issued and traded within the US, you pay taxes to the US on your interest, dividends, and capital gains.
But if you're an EU resident, or a Saudi prince, or a Russian mobster, you can trade something for US Dollars, invest those US Dollars in a portfolio of US securities, and then pay zero taxes to the US.
Also, most governments around the world do not tax their residents on their investments in the US!
So those $10 trillion in US Dollars we've exported over the past 20 years have created a bonanza in tax-free investments back into the US. It's a big reason why we've had these stock and bond market bubbles -- all those foreign investors putting their US Dollar savings into US securities. It's also a big contributor to our federal budget deficits, all those foreign investments contributing ZERO to the US Treasury.
It's a wonderful privilege for the US. Our Federal Reserve creates new cash, we use that cash to buy stuff from overseas, and then foreigners lend that cash back to us at low interest rates. Win/Win!
-----
The risk, of course, is that people eventually realize this setup for the Ponzi scheme that it is. We keep printing cash, trading it for goods, and they just get ... more cash. They lend us a bunch of that cash, and we send them even more cash as interest, which they lend back to us again. Hey, it's gone well since the early 1980s, why won't it continue?
Mainly, it won't continue because over time the US will abuse this privilege, take it for granted, and think it can print endless amounts of cash with no payback. If foreigners are willing to hold $10 trillion, why not $20 trillion? Just cut taxes again, increase spending again, borrow the difference, we're fine.
For a while -- and this is what's happening right now -- there's an illusion of increasing wealth. By printing more US Dollars and issuing more US Treasury Bonds, all the people holding these dollars and bonds think they're rich. But it's all an illusion. One blogger I follow calls it the "Money Illusion". This idea that having a million or a billion dollars in the bank makes you wealthy.
It can become a self-feeding frenzy, as more people hoard US Dollars, more people want to hoard US Dollars, so they can measure up against their peers. This hoarding by the international capitalist class has intensified more over the past Pandemic year than during any other year since Congress changed the rules. It's a kind of bubble -- everybody around the world wanting to define wealth as US Dollars instead of as something else, and now the Federal Reserve dumping an additional $5 trillion of US Dollars into this market in just one year.
Another of them risks to be aware of. The US Dollar may not always be considered so valuable by everybody around the world. If there's a "run on the bank" -- if everybody wants to trade their US Dollars and US securities for something else at the same time, that's a helluva lot of cash with nowhere to go. If that happens, the Federal Reserve will be forced to increase interest rates dramatically to entice people to continue holding US Dollars. In 1984, as Congress changed the rules, the Federal Reserve had pegged overnight interest rates at 10%. They've never been that high again since. That 10% was 100x our current overnight interest rates.
We should not be surprised if interest rates climb that high again, when global investors decide to put their savings elsewhere.
There are economic statistics that tally up our imports and exports of goods and services, and the US regularly imports more goods than it exports. So if you focus on goods alone, yes, the US has a persistent "trade deficit" with respect to goods, in that we buy more goods from abroad than we sell abroad.
But if you look at the global economy broadly, there's no such thing as a trade deficit between countries, and no such thing as an aggregate trade deficit (or surplus) for a specific country.
That's because we're talking about trade. We're talking about exchanges of one thing of value for another thing of equivalent value. We're not talking about gifts, we're not talking about theft, we're not talking about taxes. We're talking about voluntary trade. Usually in today's modern economy, we trade a good or service for some currency. If you trade one good or service directly for another good or service, we call that "barter". Like if I do my massage therapist's tax return for him in return for a free massage -- that's barter. But even if I pay my massage therapist cash for a massage, that's still a trade. And you wouldn't say there's a "trade deficit" between me and my massage therapist, that would be strange. He gave me a massage of $100 value, I gave him cash of $100 value. That's a fair and voluntary trade, no deficit anywhere.
So if the US has an international trade deficit with respect to goods, it is because we are paying cash for these goods. We are trading cash for goods. We want the goods, they want the cash, everybody's happy. Again, there's no "deficit" here, it's all value for value exchanges.
Viewed properly, we don't have a trade deficit, per se. No, what we're doing in the US is exporting US Dollars in exchange for imported goods.
-----
If you look at a list of our biggest exports, the US exports airplanes, refined petroleum, cars, medical drugs & devices, soybeans, corn, nuts. But our biggest net export by far, 10x the next largest category, is the US Dollar.
Most of the US Dollars in circulation are held abroad. The US Dollar is the world's most popular currency for trade and investment. It is our biggest, best known, most valuable brand. We're able to export hundreds of billions of US Dollars each year. Altogether, over the past 20 years, we've net exported about $10 trillion in cash!
In return for that cash, people & businesses in other countries give us electronic equipment, mechanical equipment, cars, fuel, and other stuff. And for some reason they're happy to take US Dollars in return, and then put these US Dollars in their bank accounts, or they buy US-Dollar-denominated securities with them (like US Treasury Bonds, or Fannie Mae mortgage bonds).
It's a privilege like no country has ever seen! No other country in the history of the planet could export so much cash, year after year, for decades, and yet have people lining up for even more. The US didn't have this privilege either until the early 1980s. That's when ...
The US Congress decided in 1984 to stop taxing foreign portfolio investments in US securities.
-----
If you, my US-resident readers, invest in US Treasury Bonds, or other securities issued and traded within the US, you pay taxes to the US on your interest, dividends, and capital gains.
But if you're an EU resident, or a Saudi prince, or a Russian mobster, you can trade something for US Dollars, invest those US Dollars in a portfolio of US securities, and then pay zero taxes to the US.
Also, most governments around the world do not tax their residents on their investments in the US!
So those $10 trillion in US Dollars we've exported over the past 20 years have created a bonanza in tax-free investments back into the US. It's a big reason why we've had these stock and bond market bubbles -- all those foreign investors putting their US Dollar savings into US securities. It's also a big contributor to our federal budget deficits, all those foreign investments contributing ZERO to the US Treasury.
It's a wonderful privilege for the US. Our Federal Reserve creates new cash, we use that cash to buy stuff from overseas, and then foreigners lend that cash back to us at low interest rates. Win/Win!
-----
The risk, of course, is that people eventually realize this setup for the Ponzi scheme that it is. We keep printing cash, trading it for goods, and they just get ... more cash. They lend us a bunch of that cash, and we send them even more cash as interest, which they lend back to us again. Hey, it's gone well since the early 1980s, why won't it continue?
Mainly, it won't continue because over time the US will abuse this privilege, take it for granted, and think it can print endless amounts of cash with no payback. If foreigners are willing to hold $10 trillion, why not $20 trillion? Just cut taxes again, increase spending again, borrow the difference, we're fine.
For a while -- and this is what's happening right now -- there's an illusion of increasing wealth. By printing more US Dollars and issuing more US Treasury Bonds, all the people holding these dollars and bonds think they're rich. But it's all an illusion. One blogger I follow calls it the "Money Illusion". This idea that having a million or a billion dollars in the bank makes you wealthy.
It can become a self-feeding frenzy, as more people hoard US Dollars, more people want to hoard US Dollars, so they can measure up against their peers. This hoarding by the international capitalist class has intensified more over the past Pandemic year than during any other year since Congress changed the rules. It's a kind of bubble -- everybody around the world wanting to define wealth as US Dollars instead of as something else, and now the Federal Reserve dumping an additional $5 trillion of US Dollars into this market in just one year.
Another of them risks to be aware of. The US Dollar may not always be considered so valuable by everybody around the world. If there's a "run on the bank" -- if everybody wants to trade their US Dollars and US securities for something else at the same time, that's a helluva lot of cash with nowhere to go. If that happens, the Federal Reserve will be forced to increase interest rates dramatically to entice people to continue holding US Dollars. In 1984, as Congress changed the rules, the Federal Reserve had pegged overnight interest rates at 10%. They've never been that high again since. That 10% was 100x our current overnight interest rates.
We should not be surprised if interest rates climb that high again, when global investors decide to put their savings elsewhere.