Question for Economists

[nicky g]

Am working on something which requires more knowledge of economics than I currently have and was wondering if anyone could briefly answer the following: is a negative trade deficit a problem for a country that is running a positive balance of payments? (The situation I'm looking at involves poor countries that have negative trade balances, but receive large remittances from expatriate workers overseas leading to a positive BoP). Is it the BoP that really matters?

[lehighguy]

Balance of Payments must always equal zero. Different parts of the BoP may be positive or negative, but they must all add up to zero. That is why it is called a "balance".

Example:
If the US has a $300Bln trade deficiet it must acquire that $300Bln from the sale of assets to foriengers (usually treasuries to Asian central banks).

It is a common believe that our trade deficiet it the result of price differentials in labor and other factors of production. However, this raises the question as to why other industrialized countries with higher labor costs (Japan, Europe) have little problem maintaining flat or positive trade balances. To understand why we have to start with the asset flows rather then the trade balance.

The US has a laughably low savings rate. In order for it continue investing in new technologies and industries it must acquire capital from abroad. Since it is running a surplus in capital flows, it must run a deficiet in the trade balance in order for BoP to balance. So really it is our inability to save that leads to trade deficiets. Main culprits in this are:
1) Spend happy deficiet happy congress and president.
2) Low real interest rates.
3) Loose credit policy.
4) Taxation of investment income.
5) American culture of consumer spending.

Correcting those things would go much farther to correcting the US trade deficiet then anything else.

P.S. The trade deficiet is based on physical goods only. It doesn't include services, in which the US runs a surplus. There is another figure that includes services, but I don't remember what it was.

[adios]

[ QUOTE ]
The US has a laughably low savings rate. In order for it continue investing in new technologies and industries it must acquire capital from abroad. Since it is running a surplus in capital flows, it must run a deficiet in the trade balance in order for BoP to balance. So really it is our inability to save that leads to trade deficiets. Main culprits in this are:
1) Spend happy deficiet happy congress and president.
2) Low real interest rates.
3) Loose credit policy.
4) Taxation of investment income.
5) American culture of consumer spending.


[/ QUOTE ]

I think it would be safe to say that folks in the Bush administration and probably Greenie would add another one:

6) Lack of consummer spending in many parts of the world including Europe and the Mid East due to stagnant economic growth which is in part due to overly restrictive monetary policies and high taxes.

I would add number seven which is really part of 5

7) Fossil fuel consumption which is a major component of the trade deficit in the U.S.


I don't necessarily agree with your five reasons but I don't want to hijack the thread either.

To get back on topic, my guess is that Nicky's scenario involves workers from third world countries working in 1st world countries and sending money home to their countries in the form of taxes and various stipends. I'm not an economist but I think it's a problem because it implies alot of weakness in local the third world economy if you will. Employment opportunities in the third world country are lacking and the third world county is a "slave" to economic growth in the first world countries where their workers are employed. It would be preferable to grow the economy of the third world country such that more employment opportunities would be created.

[lehighguy]

Those two are good additions.

[FishHooks]

Also from what I understand countries such as japan buy a lot of US dollars/US capital in an attempt to keep our inflation down, If inflation goes up it becomes harder for them to sell goods to the U.S. because now we would have to pay much more for their products because the value of our money would be be down.

Regards to your comment on investing, we do have an extremly low investing, its like 1% or something, but when I was watching Greenspan on TV one day he says its not a problem because in what we actually invest in, its very advanced from what it used to be and we invest very smartly as a country, adn he doesn't see it as a problem. If not for this housing bubble eveyone is scared of, intrest rates would be lower and this economy would be booming.

I do agree with most of what you said though.

[Cosimo]

More generally: is a negative trade balance a bad thing, and if so, why?

[adios]

[ QUOTE ]
Also from what I understand countries such as japan buy a lot of US dollars/US capital in an attempt to keep our inflation down, If inflation goes up it becomes harder for them to sell goods to the U.S. because now we would have to pay much more for their products because the value of our money would be be down.

[/ QUOTE ]

China and Japan buy the US $ to inhibit their currencies from appreciating against the US $. China had it's exchange rate pegged to the value of the US $ until last week. Now the Yuan is pegged to a basket of currencies including the US $ and they allowed the Yuan to appreciate somewhat against the US $. What happens is that these two countries buy US $ and "sanitize" their purchases by buying US Treasury bonds with the $ purchased. Some believe that this is the source of what Greenspan has referred to as the "conundrum" which is basically a very flat yield curve. The Fed has been raising their target rates for awhile now and currently the Fed Funds rate is at 3.25%. The two year treasury bonds are trading at 4% while the ten year is trading at 4.25%. The Fed controls interest rates from 0-2 years and the bond market (often referred to as the bond vigilantes) controls rates from 2 years on out. Most people believe (including me) that the Fed will keep wratchiting up short term rates to at least 4% as the Fed has been stating for quite awhile that inflation risks are the biggest risks more or less. The conundrum is why long term rates like the 10 year treasury only has a yield only 25 basis points higher than the 2 year. Wow I didn't really mean to make this post that long. Just trying to say that when we say interest rates are low we have to say which interest rates and who determines them. Not much Greenie can do about rates from 2 years on out as they're a function of market forces. Many believe that the "sanitization" of the Japaneese and Chineese in trying to hold down the appreciation of their currencies is responsible for the longer term interest rates being so low. I went out on a limb today in the stock market forum and predicted that the bond market is fixing to be slaughtered more or less and I don't like to use my crystal ball too much.

[adios]

[ QUOTE ]
More generally: is a negative trade balance a bad thing, and if so, why?

[/ QUOTE ]

In theory it's a bad thing because wealth is flowing out of the country, more is being consummed than produced. Some will say that the savings rate in the U.S. is not as bad as it might seem since many own assets that have appreciated alot most notably real estate and that the equity that they've built up isn't reflected in the savings rate.

[FishHooks]

Does the countries trade deficit only take into accout things the govt buys and sells or is it everything total that all businesses in the U.S import and exmport?

If it is the latter: Campanies like Nike who outsource and make their products out of the country and then when they bring them back to their company in the U.S. to sell does that in any way affect these trading numbers, or is that just the company bringing their product to the U.S. since they really aren't paying for it?

[adios]

I believe it's simply net export minus net imports.

[ QUOTE ]
Campanies like Nike who outsource and make their products out of the country and then when they bring them back to their company in the U.S. to sell does that in any way affect these trading numbers,

[/ QUOTE ]

Yes, I believe that the Nike shoes made abroad and sold in the U.S. are counted as imports.