Question for Economists

[Cosimo]

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

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My understanding of the accounting of these sorts of goods is that the trade balance is only modified by the amount of the contract with the foreign supplier, not for the retail price of the shoes. Much of the retail price goes to the retailer and the US distributor; more goes to Nike for research/development/management.

[Cosimo]

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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.

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This doesn't sound too bad to me, especially given the gov't ability to print up more dollar bills and give them to itself. What's the trade deficit relative to monetary inflation?

If money represents stored wealth (although not directly with fiat currency), then wealth flows both ways, and whether our trade status is deficit or surplus seems irrelevant. If Americans are buying more foreign products than selling domestic products abroad, ... so what? Is there some end-of-the-road nightmare scenario waiting here?

[lehighguy]

Correct. Also, the trade deficiet you read in the news is only physical goods. It doesnt include services, where we run a surplus (though not nearly enough to cancel out the trade deficiet).

[lehighguy]

Eventually, Americans will own no capital. In other words. you will work for a company owned by foriegners and all profit will go back to thier country.

However, it seems our Asian friends are too busy buying these worthless treasuries instead of stocks, land, and other appreciable assets.

[FishHooks]

Foreign companies investing in the U.S. is called globalization which is a GREAT thing for our economy. We also invest tons in other countries, its a win win situation.

[Cosimo]

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Eventually, Americans will own no capital. In other words. you will work for a company owned by foriegners and all profit will go back to thier country.

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I'd like to get an idea for how far away this is. What is the trade deficit? How much is the surplus in services? What are the historical numbers, ie is the last year representative, or does it cycle with domestic and foreign recessions?

How much capital is there in the US currently? How much additional capital is produced within the US each year?

Given all of these numbers, we could project out how long it would take for no Americans to own any capital. Next would be to find out if there are counter-balancing trends that would start popping up when domestic capital ownership starts getting low, but that of course can wait.

I would guess that we're looking at hundreds of years before American capital ownership disappears, which means short-term effects have signifigantly more impact on operational (day-to-day) matters.

[lehighguy]

The trade deficiet is 5% of GDP. Not sure about how large GDP is in relation to the capital base. I'll have to look it up.

Basically, 5% of the things you buy this year were paid for by foriegners.

[FishHooks]

not necessarly, many people put too much emphasis on the trade deficit.

[lehighguy]

The trade balance is a big problem. If it isn't addressed it will be lose lose. Current trends are simply unsustainable.

However, as posited earlier in my posts, the problem is largely domestic rather then international. We need to save more money. If you don't invest you don't own anything.

Foriegn investment is great for US GDP, not so great for US GNP. Though, as a said earlier, most of the foriegn investment so far has been in non-appreciable assets so it is not so much of a problem. The Chinese will take a huge bath on those treasuries just as the Japanese did on thier investments in the 1980s.

Of course, people in the US will have to deal with higher interests rates when this all hits the fan, which could be a big problem for GDP.

[lehighguy]

Perhaps in the past this is true. But the trade deficiet has grown to a point where it is causing severe disequilibria in the global capital markets. Even gun hoe free traders will tell you that it has gotten a little rediculous the last few years.