The Lighter Side of Current-Account Deficits

George Mason University economist Don Boudreaux with his letter to the New York Times on what Obama is talking about when he talks about current account deficits:

You open a report today with this line: "The Obama administration on Friday urged the world's biggest economies to set a numerical limit on their trade imbalances" ("U.S. Proposes Benchmark for Limiting Trade Imbalances," Oct. 22).

Because the concern here obviously is with the U.S current-account deficit – and because a U.S. current-account deficit is simply another name for a U.S. capital-account surplus (that is, a net inflow of capital into the U.S.) – we can translate the opening line of your report to make it more meaningful: "The Obama administration on Friday urged the world's biggest economies to set a numerical limit on the amounts that their citizens invest in the U.S. economy."

I await the White House's explanation for how limitations on investments in the American economy promote Americans' economic well-being.

Comments

[MikeP]

"The Obama administration on Friday urged the world's biggest economies to set a numerical limit on the amounts that their citizens invest in the U.S. economy."

Unfortunately, over a trillion dollars a year of that investing in the US economy is investments is the US government -- a very bad steward of investments, to be sure.

Actually, that is a numerical limit that Obama can do something about!

[Hazel Meade]

Does this mean that he wants to stop the Chinese from buying US treasury bonds?

[Alan Vanneman]

I think he meant it would be nice if, instead of lending us money, countries would just give it to us.

[cynical]

Ah, tribute. There's a policy with historical precedent.

[Aresen]

I can't wait to see the Congressional Hearings on "Predatory International Lending."

[Ken Shultz]

"I await the White House's explanation for how limitations on investments in the American economy promote Americans' economic well-being."

Does the term "United Auto Workers" mean anything to you?

The Obama Administration doesn't care about the economic well being of anyone they aren't directly connected to politically--and yes, if that means he's harming the economic well being of average Americans, then that's the fault of Average Americans for not joining a union like the UAW.

Obama cares about union members. Obama cares about government workers. And their economic well-being runs contrary to the economic well-being of average Americans, so we can all go screw ourselves.

Even ObamaCare can be understood as a means by which to make union and government workers more competitive by comparison. The Obama Administration's central pitch--from day one--has been about how average Americans need to dig deep and make sacrifices for the benefit of everyone generally--just like in a union.

Get into Obama's union--otherwise, no, the Obama Administration doesn't care about promoting Americans' economic well-being.

He doesn't care about that--that's the explanation.

[R C Dean]

The Obama administration on Friday urged the world's biggest economies to set a numerical limit on the amounts that their citizens invest in the U.S. economy.

Wrong. As noted already, much of that "capital account surplus" is in the Treasury market, which in no way represents an investment in the US economy.

But its even worse than that. Because of quantitative easing, much of the investment in Treasuries isn't foreign inflows, its simply the Fed stuffing newly-printed cash into the Treasury accounts.

That capital account surplus is nothing more than an accounting fiction to get the books to balance.

You'd think a GMU economist would know this.

[domoarrigato]

You are quite correct. Capital ccount surplus sounds like the foreigners lent us money with which we bought productive assets like machines, and buildings and patents instead of sheap plastic toys that are mostly already consigned to the landfill.

[pmains]

Just to clarify, this is a generalization, no? Our number one export is aerospace. You're not denying that there is foreign investment going into, say, Boeing and Lockheed Martin, are you?

And, in a sense, isn't consumer lending a form of investment (or at least "speculation")? That is, you're betting that the American economy is going to continue to be strong enough that those you are lending to can repay their debts. Or do you have another take on it?

[domoarrigato]

The capital account surplus represents real assets the same way the Social Security Trust Fund does.

[R C Dean]

Hey, domo. Good to see you back. We can always use somebody who understands the nuts and bolts of finance.

[Ken Shultz]

"Wrong. As noted already, much of that "capital account surplus" is in the Treasury market, which in no way represents an investment in the US economy."

I'm thinkin' about that from an investment standpoint, and I'm not sure that's entirely accurate.

If our currency's been getting hammered, then isn't that a direct result of foreign investment (or lack thereof)?

[R C Dean]

If our currency's been getting hammered, then isn't that a direct result of foreign investment (or lack thereof)?

Its the result of a conscious and overt policy of debasing the currency to

(1) create an asset bubble to give the appearance of a health economy, and

(2) to reduce the value of the national debt by means other than paying it off.

[Ken Shultz]

Again, I think he's doing it to try to spur exports and reduce unemployment.

Investment makes economies grow, but it also tends to displace people sometimes.

I think he's consciously discouraging investment too.

We know there's nothing government/UAW owned GM and Chrysler want more than a weak US currency, but the one thing they don't want? Is Japanese car companies investing in more American plants!

Why would they want more competition and more efficient competition at that?

I'm just using the auto industry as one example--there are others. It's about spurring exports. I bet farming interests aren't too upset about a weaker dollar either.

[Vaccine]

I'm struggling to understand how buying U.S. Treasuries "in no way represents an investment in the US economy." Care to elaborate?

[Ken Shultz]

What they're doing seems especially foolish to me considering that over the last two years, the Obama Administration has tried to...

1) Limit the amount of risk commercial banks take on.

2) Raise taxes on investment activity.

...and now?

3) Limit the appeal of investing in America by foreign investors?

I don't think the Obama Administration knows where economic growth comes from.

...or, rather, like I said above, I don't think they care about economic growth generally; they're just worried about their friends--like the UAW.

[Democratic Strategist]

Economic growth is the result of economic success which is based on luck and inheritance.

[Hazel Meade]

It's funding stimulus projects like paying people unemployment benefits.

How does paying people to stimulate consumption represent an investment?

[Ken Shultz]

It seems to me that the Obama Adminsitration wants a weaker dollar to spur exports.

A weakening dollar discourages foreign investment...

I think the argument he's making is that what America needs is more investment (which spurs economic growth) rather than spurring more exports by artificial means...

And I think that's the argument I'm making too.

[Don Boudreaux]

You're mistaken. Funds loaned by foreigners to Uncle Sam are funds not loaned by Americans to Uncle Sam - funds available to be invested elsewhere. Unless you believe that Uncle Sam's will stop or reduce his borrowing if foreigners become less willing to buy his Treasury notes, then Americans gain by having foreigners lend to Uncle Sam GIVEN Uncle Sam's decision to borrow.

[adam]

It's interesting that Obama seems determined make sure China stops loaning the US govt money. First he pushes all kinds of unsustainable fiscal policies. Then he agitates over China's currency manipulation, ignoring that China's main lever in manipulating its exchange rate is the purchase of US treasuries. Now he wants to set a limit on the trade deficit. Is he trying to make default come more quickly?

[Ken Shultz]

So, I take it that means you still haven't joined a union?!

[Hazel Meade]

Maybe he thinks that if the Chinese cut off the smack, America will have to go into rehab.

It's a cry for help.

[R C Dean]

I'm struggling to understand how buying U.S. Treasuries "in no way represents an investment in the US economy."

Money put into Treasuries is money that is not invested in private industry.

For example: If I buy Ford stock, that money in no way represents an investment in Apple.

[BOP equation]

For those who need a refresher on balance of payments, it is inherently an identity. Current Account + Capital Account + Errors and Omissions = Change in FX reserves...being that we have the reserve currency of the world, there would not be a change in FX reserves of the US, but one should expect the dollar to weaken if the BOP is negative. Capital account (financial flows - including the lending of money to the government via bond purchases, investment, among other things) does not necessarily cancel out the current account (trade balance + services balance + current transfers + some minor items). When it does not, you have BOP deficit, which causes currency weakening. This is the cause of many a major crisis, usually in emerging markets (see Argentina) where the currency is devalued to a point where the country can no longer pay back its FX-denominated debt. We don't really have debt in other currencies and we own a printing press, so default through a BOP imbalance is impossible. But any notion that there can somehow be imposed limits on current account imbalances is absurd. If you want to search for causes, how about an inflexible labor market and artificially inflated prices? I would suggest we look to the recent success of the Baltic states (Latvia, Lithuania, Estonia) at internal devaluation (letting prices and wages fall) as a method for correcting our external imbalances. Paul Krugman hated this idea (even though it worked) so it must be a good one.