From time to time in these endeavors, I've weighed in on the question of the USofA foreign trade deficit. From the quant point of view, narrowly, the question boils down to: is having US dollars floating out on the planet a good thing (that can only happen if the US runs a deficit), and if so, is there a limit to how much is too much of a good thing?

My argument has steadfastly been that from the beginning, Bretton-Woods, when the buck became, nearly, de jure New Gold to now, when it has become de facto New Gold with the repudiation of the Bretton-Woods agreements; the USofA must run a trade deficit with RoW if global growth is to be sustained. If we don't, then global deflation and depression result. But, but, but... The lunatic rightwing goldbugs bleat that the global economy should be run only on specie anyway, so reverting to the 19th century model is a good thing. It was just the sporadic gold supply that caused deflation and depression over that century. Even the substitution of silver was opposed by the goldbugs.

But, of course, they neglect to mention that 19th century America, and everywhere pretty much, was a miserable mess of deflation, depression, and privation for all but the era's 1%. Mark Twain wrote "The Gilded Age" for a reason. And praise wasn't it. And for perspective, its publication date, 1873, was nearer the beginning of the period rather than the end. In other words, Twain was as much seer as chronicler.

A bit of innterTubes searching, whilst waiting for one of my few Redneck Pleasures to begin (Daytona), I came across this recent article. Another bandwagon, another rider.


In the foreign exchange market, the dollar rules. More than 85% of forex trading involves the U.S. dollar. Furthermore, 39% of the world's debt is issued in dollars. As a result, foreign banks require a lot of dollars to conduct business. For example, during the 2008 financial crisis, non-U.S. banks had $27 trillion in international liabilities denominated in foreign currencies.

Of that, $18 trillion was in dollars. That's why the U.S. Federal Reserve boosted its dollar swap line -- to keep the world's banks from running out of dollars. (Source: "Is the Role of the Dollar Changing?" The Federal Reserve Bank of New York, January 2010.)
[check the original for the links]

Concern that China and Russia don't want to be tied to the US Buck:


Prior to the crisis, in March 2009, China and Russia suggested the world adopt a single global currency. The goal would be to create a reserve currency "that is disconnected from individual nations and is able to remain stable in the long run, thus removing the inherent deficiencies caused by using credit-based national currencies." In other words, China is concerned the trillions it holds in dollars will be worth less if dollar inflation sets in.

That, of course misses the point. Bannon, Trump, the Chinese, and the Russians all assume that one can create a global (not under the control of a country) fiat currency which grows in total nominal value to just match global economic expansion (avoids both ruinous inflation and deflation), is not tied to physical specie which is limited to what might be dug out of the ground at any given time (of course, since it's fiat), and will nevertheless benefit them preferentially as opposed to their economic/political enemies. A multi-nationalist might suggest the UN, of course. Not going to happen.

Without a US foreign trade deficit, global trade collapses. That's the basis of American Exceptionalism in today's world.

Views: 89

Comment by koshersalaami on February 26, 2017 at 12:32pm

I could use a layman's explanation of this. 

Comment by Ron Powell on February 26, 2017 at 1:40pm

Kosh, this may help a bit. Try this:

Comment by Robert Young on February 26, 2017 at 1:47pm

-- I could use a layman's explanation of this.

the no-details explanation amounts to:  the US buck is now Gold for other countries, the amount of Gold available to the global economy has to increase as that global economy grows (or it falls into deflationary global depression, that's not Good Eats), so in order for the Gold (aka, US bucks) supply to increase is for the US to leave more US bucks out in other countries and that requires we run a trade deficit (deficits mean other countries hold more US bucks than the owe us).

better?

Comment by Ron Powell on February 26, 2017 at 1:54pm

 

Last time I put this juxtaposition up, nobody got it...

Can anyone see what I see in this?

Comment by Robert Young on February 26, 2017 at 3:08pm

some time ago, The Wife posed the question to me.  my answer:  Kim Jong-Don and Putin agree that the USofA gets to run the Western Hemisphere as its Mercantilist domain (the wiki:  mercantilism for the details), while Putin gets his side of the Atlantic and as far East as he can manage.

do I get an A?

Comment by nerd cred on February 26, 2017 at 4:13pm

That's what I thought but it seemed to simple. 8-/

Comment by Ron Powell on February 26, 2017 at 7:32pm

Robert Young, you get an A+ for a well annotated  correct answer.

Nerd Cred, sometimes we tend to complicate that which is simple and simplify that which is complicated to the point of the paralysis commonly known as "writer's block"'.

Comment by Ron Powell on February 26, 2017 at 7:35pm

@RY; Would you be kind enough to post your comment here:

http://oursalon.ning.com/profiles/blogs/juxtaposition-just-a-thought

Thanks

Comment by koshersalaami on February 26, 2017 at 8:59pm

Robert,

yes, thanks. If we ran a surplus everyone else would be out of "gold" or close to it. If that happened, we'd have to lower prices to sell stuff. That would mean everyone else would have to lower prices to compete. Everyone would make less and less. 

So do the Chinese sort of handle a similar problem to this by investing in their customers like the US so we can keep buying?

Comment by Robert Young on February 27, 2017 at 6:23am

mostly, the Chinese have manipulated their currency to meet their needs. 

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