Trade Imblance and Debt

Discussion in 'Economy' started by Wiseacre, May 11, 2011.

  1. Wiseacre
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    Wiseacre Retired USAF Chief Supporting Member

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    Say US company A imports a product from foreign company B, and pays them X dollars for it. B now has the bucks, in a bank somewhere. They either convert it to their own currency, or they invest those dollars in our economy, right? Or maybe they use those dollars in another transaction with foreign company C, whatever. I don't see a debt problem yet, the US gov't doesn't owe anybody anything at this point. If the US gov't were not running a deficit, there would be no debt, regardless of the trade imbalance. Foreign interests could invest here or buy US assets, but I see no connection between the trade imbalance and our national debt.
     
  2. Norman
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    Norman Gold Member

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    Well, first of all money can not be converted, but exchanged. If you exchange via bank, someone has to buy and sell the currencies. So in the end there are 2 choices. Invest the money or buy something with it(balance the trade). On the other hand, investing is only done because you are expecting future returns so in the really end you only want to buy something with the cash. But that is besides the point.

    Anyway, the problem is, company B invested those bucks into your debt. So the chinese company (more like central bank) owns a lot of the US govts debt.

    Of course company B could also have invested the money into Company A's equity, in which case you would not technically owe them anything I guess. But then the government could not have gotten all the debt. OFC the US government is running ponzi scheme with this like it is with everything else, lulz.

    Also one problem with china and USA is that their central bank owns so many dollars and debt. This means they could easily dump the dollars and debt, which would cause a lot of inflation and government default in USA.

    Finally, the trade imbalance has nothing to do with this. The US gov could get foreign debt even if you had trade surplus, it would just mean the country as whole still has trade surplus. But it is a cause in the sense that foreigners have all the dollars and they just decided to invest a lot of them into US govt bonds instead of businesses (which would have probably been a lot better choice for both parties).


    I had topic kind of like this a lot earlier here....
     
    Last edited: May 11, 2011
  3. Wiseacre
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    Wiseacre Retired USAF Chief Supporting Member

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    " Anyway, the problem is, company B invested those bucks into your debt. "

    Yeah, but that's a separate issue, right? They don't have to buy treasuries, and that isn't totally a bad thing anyway unless you let it get out of hand with too much debt like we have know. Point is, our trade imbalance means the rest of the world has a lot of US capital as a result of the imbalance. That is not a debt problem. It'd actually a monetary value problem isn't it, the value of the dollar should depreciate if gov'ts don't interfere with the process. True?



    " Also one problem with china and USA is that their central bank owns so many dollars and debt. This means they could easily dump the dollars and debt, which would cause a lot of inflation and government default in USA. "

    Dump their dollars? Dunno how that would work, outside of investing in US companies or buying US assets. And then dump their debt? IOW, stop buying our treasuries and when the ones they have expire we give 'em more dollars that are worth less due to inflation that they themselves caused?

    Say the Chinese did that, wouldn't they essentially be cutting their own throats? What would happen to the world economy if the US defaulted, or experienced high inflation? Dollars would be worth a whole lot less, how does that help them? Who would buy their stuff then?

    Sorry I missed your thread, probably coulda learned something.
     
  4. Norman
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    Norman Gold Member

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    Well, what is a debt problem?

    Kinda hard to define, because if you take a lot of debt to invest into factories, you are going to be prosperous and you don't have any problems. On the other hand if you take a lot of debt and blow it in consumer goods, then everything will be all dandy the year you do it, but next year... So view of this is personal, personally I believe free market will always get it the rightest.

    So it is all about priorities.

    China is selling their stuff to get dollars which buys them stuff from USA. If they find out that the dollars buy almost nothing, ofc they should dump them (buy all they can with them). So it may be better for them to not send good money after bad but just stop it. China does not export to USA just so they could get useless paper. They export to in the end import. If they think dumping all the dollars quickly buys them more imports in the long run, they should do that.
     
  5. Wiseacre
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    Wiseacre Retired USAF Chief Supporting Member

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    " Well, first of all money can not be converted, but exchanged. If you exchange via bank, someone has to buy and sell the currencies. So in the end there are 2 choices. Invest the money or buy something with it(balance the trade). On the other hand, investing is only done because you are expecting future returns so in the really end you only want to buy something with the cash. But that is besides the point.

    Anyway, the problem is, company B invested those bucks into your debt. So the chinese company (more like central bank) owns a lot of the US govts debt. "


    Here's where we go off the rails. When US company A imports something from a foreign company B, they pay for it, there ain't no debt. We got goods or services, they got our currency, there's no debt anywhere. Multiple that by a thousand transactionss, there's still no debt. For anybody.

    Now, at some point the foreign companies may elect to buy US assets, property, stock, bonds, whatever. If they buy bonds, either federal, state, local, or private, then you get a debt to repay. But that transaction is entirely independent of the trade imbalance, they could do that with their own currency. Otherwise, if they invest in our economy by buying assets or stock, there's no debt there either.

    Trade imbalances and debt at any level are separate issues, you can run a trade surplus and still have debt, and you can also have a negative trade imbalance with no debt. At various times I believe the US has had both situations.
     
  6. Norman
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    Norman Gold Member

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    I am just reading an macro economic book here, and it does view trade deficit as net debt. However it's not like this book is crafted by Chuck Norris who gave it down in silver plating from mount Mosaic.

    Anyway, debt is promise to pay. And USA has to accept dollars, which are a promise to pay "whatever they buy". So USA as whole does owe whatever the dollars happen to buy to foreigners.

    Foreigners buying US debt/equities just widens the outflow of dollars and promises to pay whatever they buy. This is of course not a bad thing for USA, unless the government gets the money and spends it inefficiently.

    So again, it can be viewed as debt, but debt is not a bad thing.
     
  7. Wiseacre
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    Wiseacre Retired USAF Chief Supporting Member

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    What book are you reading? I'd like to see the rationale the author uses. Look, if a US company buys a product from a foreign firm, then of course there is a debt for the US company. Which I assume is paid according to the stipulations of the contract. But the US Gov't at this point has no involvement, and as a taxpayer I am not on the hook for whatever some company decides to do. Maybe I'm dense, but I'm not seeing any debt until and unless the foreign company buys US Treasuries or S bonds of some kind.
     
  8. Norman
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    Norman Gold Member

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    Don't mix the federal debt and trade deficit.

    Obviously the government owes no one till it burrows. So trade deficit is not the government's obligation to provide anything.

    However any US business is obligated to take in the dollars and give in goods to the chinese. That is what the debt is about, and that is also why chinese are giving their products for the green pieces of paper in the first place.

    The book used rationale that a dollar is basically a share of US economy and thus trade deficit is debt. Or something like that. I may put the exact translation here later.

    Also this is all related to the Savings = Investment - trade deficit. Which is part of GDP equation.


    Although not in the book, if you think about it in terms of gold standard it may make more sense.
     
    Last edited: May 14, 2011
  9. expat_panama
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    expat_panama Silver Member

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    You're not seeing it hypothetically. Let's see how this works in the real world--
    [​IMG]

    --so changes of the trade balance have gone up and down regardless of the budget deficit. Sometimes together and sometimes opposite. No relationship whatsoever. Your hypothesis is now a theory backed by observation.
     
  10. waltky
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    waltky Wise ol' monkey Supporting Member

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    America's Debt Crisis...
    :eek:
    We will have another crisis...
    May 17, 2011: Robert Rodriguez, CEO of the FPA investment house, says there are plenty of risks out there and that investors have not learned the lessons of the past few years.
    See also:

    The Great Recession's lost generation
    May 17, 2011: The brutal job market brought on by the recession has been hard on everyone, but especially devastating on the youngest members of the labor force.
     
    Last edited: May 17, 2011

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