tag:blogger.com,1999:blog-5806884.post114178257015628303..comments2023-10-31T03:18:26.963-07:00Comments on Great Guys Weblog: Investment SurplusBrethttp://www.blogger.com/profile/15063508651955739056noreply@blogger.comBlogger6125tag:blogger.com,1999:blog-5806884.post-1142912096179929792006-03-20T19:34:00.000-08:002006-03-20T19:34:00.000-08:00Oroborous,Yes, China's trade deficit with the Unit...Oroborous,<BR/>Yes, China's trade deficit with the United States is pretty big. Just to keep things in perspective, though, the <A HREF="http://digital.library.unt.edu/govdocs/crs//data/2005/upl-meta-crs-7976/RS22331_2005Nov23.pdf?PHPSESSID=7d266d00be84af55700fa8bac743fb27" REL="nofollow">total accumulated holdings</A> of United States treasuries as of 9/2005 by China was $252.2 billion. While that's a fair chunk of change, and the Chinese been investing in other U.S. assets, their treasury holdings only represents about 2% of GDP. A drop in the bucket. So I completely agree with your "no big deal" sentiments.Brethttps://www.blogger.com/profile/15063508651955739056noreply@blogger.comtag:blogger.com,1999:blog-5806884.post-1142903516005935812006-03-20T17:11:00.000-08:002006-03-20T17:11:00.000-08:00hey skipper,You're right, and I should've mentione...hey skipper,<BR/><BR/>You're right, and I should've mentioned that some economists think the investment surplus is greatly overstated. I think one should take nearly all economic statistics that involve huge amounts of many different types of data and/or some subjective formulas with some skepticism. That includes trade figures, the CPI, median incomes, poverty numbers, etc. The statistics are somewhat better at noticing change than giving any absolute information.Brethttps://www.blogger.com/profile/15063508651955739056noreply@blogger.comtag:blogger.com,1999:blog-5806884.post-1142896913280267812006-03-20T15:21:00.000-08:002006-03-20T15:21:00.000-08:00America's trade deficit with China, for instance, ...America's trade deficit with China, for instance, is huge because they subsidize their goods, and then essentially offer to finance their purchase.<BR/><BR/>If, as many people think, the Chinese will soon tire of slaving away so that the American middle class can live more comfortably, then that trade deficit will <I>dramatically</I> decrease.<BR/><BR/>That particular deficit isn't a manifestation of the lack of American ability to manufacture, it's simply us taking advantage of their desire to build market share by offering deep discounts - kinda like what the U.S. auto manufacturers have been doing, and with the same results: GM shareholders and Chinese citizens alike have been bribing us to buy their products.<BR/><BR/>When they stop, we'll simply make alternate arrangements. No big deal.Oroboroushttps://www.blogger.com/profile/01710250012500728430noreply@blogger.comtag:blogger.com,1999:blog-5806884.post-1142893327737925162006-03-20T14:22:00.000-08:002006-03-20T14:22:00.000-08:00Bret:Your expertise in this area never ceases to a...Bret:<BR/><BR/>Your expertise in this area never ceases to amaze me -- thanks for taking the time to clue-in the ignoranti.<BR/><BR/>Sometime ago I read an article in the Economist that looked at trade balances from a global, rather than country perspective. Since the Earth is, UFO abductees notwithstanding, a closed system with respect to trade, the sum of trade balances should be precisely zero.<BR/><BR/>Turns out that wasn't the case, by a long shot. The delta was opposite in sign and, no doubt coincidentally, very nearly the magnitude of the prevailing US trade d..., uh, investment balance.<BR/><BR/>You'd think someone would have noticed that beforehand.<BR/><BR/>Also, my limited knowledge of the issue suggests that the investment balance adequately encompasses goods, but fails miserably when it comes to services.Hey Skipperhttps://www.blogger.com/profile/10798930502187234974noreply@blogger.comtag:blogger.com,1999:blog-5806884.post-1142868614731676812006-03-20T07:30:00.000-08:002006-03-20T07:30:00.000-08:00Duck,Regarding "Jose not obligated to invest the $...Duck,<BR/><BR/>Regarding "<I>Jose not obligated to invest the $25 at all, he could just spend it in Mexico. Wouldn't that cause a net drain of wealth from the US? </I>"<BR/><BR/>No! It would only cause a temporary drain of liquidity. There are three cases:<BR/><BR/>1. Jose (or somebody) spends the $25 on products or services in the United States. In this case, the trade deficit is lessened so it's good.<BR/><BR/>2. Jose (or somebody) invests the $25 in the United States. In this case, additional capital is invested in the United States so it's good.<BR/><BR/>3. The $25 stays outside the United States either in Jose's mattress or it becomes part of the secondary currency of Mexico. In this case the Fed injects another $25 (or some fraction thereof) into the economy via open market operations (buying treasury instruments with what I like to call "magic money"), and the liquidity is restored. Note that as the economy grows, the Fed constantly injects liquidity in order to preserve (more or less) price stability. If lots of Joses take liquidity to foreign destinations, the Fed increases the rate at which it injects liquidity. If those Jose's start to repatriate those dollars via (1) or (2) in the future, the Fed reduces the rate at which it injects liquidity.<BR/><BR/>It is true that if all the Joses suddenly decided to repatriate those dollars all at the same time, it could potentially overwhelm the Fed's ability to control the domestic money supply. Even this wouldn't necessarily be all that catastrophic though. There would be a spike in demand for American products and services, which would give our economy quite a boost while driving down the dollar. There would be some inflation until things came to an equilibrium again. This would mean that the service Jose provided for $25 would end up buying less than $25 worth of product when it's finally repatriated. Once again, not a bad deal for the United States.<BR/><BR/>Regarding "<I>...there is an issue as to whether the investments in the US are true investments or are just loans to fuel consumption.</I>".<BR/><BR/>While everything is somewhat interlinked, and indeed that's what I was writing about when I was talking about how it shifts the balance towards consumption, the two topics should be considered to be independent. In other words, once an entity (such as the government) makes a choice to borrow, it doesn't really matter how that borrowing is financed. It doesn't really matter whether Joe or Jose lends you the money. If we think we borrow too much, spend too much, and save too little, that may or may not be true, but it's a question that's mostly independent from the investment surplus issue. Again, the main point is that the trade deficit is caused by the demand for investments in the United States.Brethttps://www.blogger.com/profile/15063508651955739056noreply@blogger.comtag:blogger.com,1999:blog-5806884.post-1142801986202319182006-03-19T12:59:00.000-08:002006-03-19T12:59:00.000-08:00I have a few questions about your thesis. Jose is ...I have a few questions about your thesis. Jose is not obligated to invest the $25 in the United States. He's not obligated to invest the $25 at all, he could just spend it in Mexico. Wouldn't that cause a net drain of wealth from the US?<BR/><BR/>Also, there is an issue as to whether the investments in the US are true investments or are just loans to fuel consumption. If the money is loaned to a company that will build a plant in the US that will employ Americans, then it obviously benefits the US economy. But if it is borrowed by consumers to buy foreign goods, then it is not creating wealth building capacity in the US, but elsewhere.Duckhttps://www.blogger.com/profile/08852569465893563139noreply@blogger.com