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Trade Deficits Are Good

Steve Fast
@SteveFast
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When we buy more goods and services from a foreign country than they buy from us in a given time period, we have a trade deficit with them. That means we are sending them little pieces of green paper (or more usually, digital bits) that represent a future claim on wealth. They can't eat the green paper or the digital bits (i.e. dollars). They can't build anything with them. We are getting valuable products in exchange for a future promise. Thus we can consume more now than we would in the absence of a trade deficit.

What do the recipient countries do with the pieces of green paper or digital bits? Since the dollar is the world's reserve currency, they often use them to purchase goods and services from another country. So Taiwan might give us advanced semiconductors in exchange for digital bits and then pass the digital bits on to Saudi Arabia for oil. Then Saudi Arabia might use them to buy petroleum engineering services from the US, at which time we would be obligated to make good on the promise we made to Taiwan that those digital bits would be worth something. Because dollars flow around the globe, our trade deficit with a particular country is of no concern to us.

Our overall trade deficit is a good thing because it allows us to consume more goods and services now. Even better: because we have the world's reserve currency, many of these dollars circulate overseas and have not yet (and may never be) used to demand goods and services from us. In 2022 the St. Louis Fed estimated that $1.1 trillion in Federal Reserve banknotes were held overseas. This does NOT include the vast amounts of digital currency held overseas. So foreigners have given us goods worth $1.1 trillion in exchange for banknotes alone. And they are holding them as a store of value and a means of exchange. They have yet to ask us to give them any goods or services in exchange for those banknotes.

(I couldn't quickly find a number for the amount of US digital currency held overseas.)

Long live the trade deficit and the dollar reserve currency!

And Trump, shove your tariffs where the sun don't shine. You are screwing up the best deal America has going for it.

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Discussion (447)

  • Misthiocracy has never@Misthiocracy

    The US dollar is the world's reserve currency. Lots and lots of global trade is conducted in US dollars without US businesses ever being involved. They idea that US currency sent overseas has to come back to the US eventually is simply not accurate. How much of that currency never returns to the US is, of course, highly debatable.

  • kedavis@kedavis

    Seems to me your second paragraph essentially contradicts your first.

    They can’t eat the green paper or the digital bits (i.e. dollars). They can’t build anything with them.

    And then, in the next paragraph:

    What do the recipient countries do with the pieces of green paper or digital bits? Since the dollar is the world’s reserve currency, they often use them to purchase goods and services from another country. So Taiwan might give us advanced semiconductors in exchange for digital bits and then pass the digital bits on to Saudi Arabia for oil.

    Much of what I hear and read - including on Ricochet - implies that the countries we send our money to, must return that money to US, for something to buy from US.

    But that's not true.

    Nor do they ever finally have to buy products/merchandise from us, at all. Although when they do, that stuff might be stuff that we imported from somewhere else. So it still isn't tied to actual domestic production.

    And on the other hand, much of what they DO do, is buy debt, which we then also pay interest on, in addition to borrowing it - our own money, in effect - almost directly from ourselves.

    That is not a good path to be on.

  • Ekosj@Ekosj
    Let’s take this idea to its logical conclusion. If trade deficits are good, why not be best? Let’s just buy EVERYTHING from abroad? We get valuable stuff and we pay with some ginned-up fiat currency. It’s MMT on steroids.
  • Ekosj@Ekosj
    ReplyingtoMisthiocracy has never

    Misthiocracy has never (View Comment):

    The US dollar is the world’s reserve currency. Lots and lots of global trade is conducted in US dollars without US businesses ever being involved. They idea that US currency sent overseas has to come back to the US eventually is simply not accurate. How much of that currency never returns to the US is, of course, highly debatable.

    Actually, most US dollars never leave the US. Unless pallets of greenbacks are shipped to Iran or some such, the dollars are always in the Federal Reserve System. The account owners might be foreign, but the dollars are here.

  • Hoyacon@Hoyacon

    I am not going to pontificate on this due to lack of deep knowledge.

    But that won't stop me from asking about reciprocal tariffs. Are you saying we should be happy with trade deficits and situations where our exports are subjected to onerous tariffs and "their" exports are not?

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