I can remember when a year ago everyone agreed they were happy with consuming less and spending time with the family. Looks like that didn't last long, everyone is out shopping again.
First they already receive something of value, which is our money.
No one forces them to sell their stuff for our money.
Nor does selling us $1 of goods entitle them to get anything above and beyond $1 of our money. They have already been paid with sufficient value.
Now they must spend that dollar in America somewhere. So they have a choice
a) buy some other good or service from America (trade is balanced)
b) buy some American asset like a bond, share of stock, etc. Then the trade deficit goes up by $1.
The world is choosing to do b). No one is forcing them to. The moment they stop doing b) and start doing a), the trade deficit will be balanced. The moment they sell their existing dollar investments and buy US goods, the trade deficit will reverse. It is their choice, not America's choice.
The input of the U.S. in influencing this choice is merely the setting of interest rates. By setting rates, they determine the overall returns obtained from option b). Thus they can make option b) more attractive by raising rates, and less attractive by lowering rates. But our rates are basically zero already. Does it appear to you that the U.S. is running high interest rates in order to attract foreign investment? No, we don't really take the trade deficit into account when setting rates, we focus on inflation.
Now we could take steps to change the regime and strongly discourage imports. This would be the equivalent of
a) taxing foreign investment, so that there is a wedge between the interest rate obtained by foreigners and our domestic policy rate for fighting inflation. At a high enough tax, the rest of the world will collectively want to pull their money out of America, sell their dollar assets, and then buy American goods to get out from under the tax.
b) Subsidizing domestic production. The problem here is that business will tend to pocket the money. Option A is the more efficient approach.
Option A also attacks our status as the global reserve currency - it's about time we stop being the gold standard for the rest of the world. All of these deficits are the result of us being burdened with reserve currency status, which on the one hand gives us a lot of power to punish other nations, but on the other hand destroys the domestic manufacturing base.
I look forward to the time when we are no longer the world's banker but merely any other nation that needs to run balanced trade. For that to happen, we need to make our assets unappealing to foreign purchasers.
And a rate of a trillion worth of goods per year will stop flowing into USA, that is the current trade deficit, you don't think that will cause some sort of crash?
Your explanation here is like saying "This isn't a bubble, people wanted to pay this much for stocks, if stocks don't deliver people will sell and prices goes down, that is how it should be!". That totally ignores the effect of the economy when that correction happens.
There is a lot of trickery you can do with economics, but other countries will protest sooner or later and stop sending things. I think the economy should take that into account or that crash will be horrible.
A 1% tax would not cause a trillion worth of goods per year to stop flowing into the USA. Honestly, I think you are reacting too emotionally. The nice thing about a tax is it can be gradually increased to reduce foreign investment. There are actually many that have discussed taxes on foreign capital inflows, it's not some random idea I just cooked up.
>Your explanation here is like saying [crazy stuff]
No, it's nothing like that. If you have some substantive disagreement, let's here it over the doomsaying. Note, the real downside here is just somewhat higher equilibrium interest rates, which is why now is a great time to do this.
> crash will be horrible.
See above.
And no matter what finance trickery you do, fact is that USA will need to stop consuming so much. Your solution would lead to the same decrease in consumption, just with different means. And when that happens it will no longer be able to attract foreign workers as easily since American consumption is no longer privileged. And when that happens the domino effect will cause issues all over the economy.
http://www.econ.yale.edu/~ka265/teaching/UndergradFinance/Sp...
Now if there was zero foreign investment, then the U.S. deficit spending a lot (please don't use the word "printing money") would cause demand for foreign goods to rise. You are right about that!
But - does that mean that we buy more foreign goods or that the value of the dollar falls so that the money spent on foreign goods (in dollar terms) is the same as the money spent by foreigners on our goods?
You see, there is another degree of freedom, namely the exchange rate! The exchange rate is all that is needed to clear exports and imports so that there is no trade deficit, and that is true regardless of how much "money printing" happens.
So whether or not you get a (net) trade deficit is going to be determined by (net) foreign investment, which raises the dollar and prevents it from falling enough to equalize imports with exports. The residual is the trade deficit.
Viewed a different way, the demand for the dollar is the demand for american goods + the demand for american assets.
If the demand for assets is zero, then the price of dollars is whatever it needs to be so that our deflated dollar makes our goods sufficiently cheap and foreign goods sufficiently expensive so that the stimulus spending does not cause a trade deficit.
Trade deficits are always and everywhere determined by net capital inflows. That is what the Balance of Payments identity is telling you. They are not caused by deficit spending, declines in productivity, failures of our educational system, etc. It really is just capital inflows.
All the other stuff is important, as it effects the exchange rate, but it's not important for determining trade deficits.
This ignores the fact that dollar is used as a reserve currency. Since the dollar is a reserve currency people will want to keep it stable, so even though USA abuses its position as a keeper of this reserve currency by printing a lot of dollars other players still plays along and keeps sending goods to keep the value of the dollar high. But what do you think happens when they stop putting up with how USA abuses them? Well, they stop buying dollars, the dollar crashes, Americans can no longer buy Chinese goods and the American economic dominance ends overnight. Of course this would affect the rest of the world as well so they wont do it that quickly, but even if it happens slower it will still cause a massive crash.
I just don't understand why USA keeps digging their hole ever deeper, the more they dig the worse it will get, since right now they are building their economy on top of of a bubble that can be popped by China whenever China wants.
No, it's my whole damn point. Please re-read and stop it with the US "abusing" China by forcing them to run huge surpluses against us. These discussions are not helped with such emotional outbursts -- we are talking about currency markets, not your kids' tuba recital.
>Well, they stop buying dollars, the dollar crashes,
Yes, the whole point is to get them to stop buying dollars. That's the goal. And no, the dollar doesn't "crash", the dollar falls to its true value, the one in which exports = imports. That is the only possible sustainable value of the dollar.
> USA keeps digging their hole ever deeper
The only "hole" the U.S. is digging is allowing China to purchase an unlimited amount of dollars. You think China allows the U.S. to do that? It is capital inflows into the US that need to be reigned in, just as China does not allow unrestricted capital inflows into its capital markets.
What if the us pressured China and India to allow capital to flow to them instead ?
Does this make any sense ?: https://twn.my/title/mai1-cn.htm
Many countries, including the US, have run trade deficits in the past for multiple decades and it's been fine. In those cases where it's not fine it's because the economy had nothing (or not enough) foreigners wanted, e.g. Russia in the late 90s.
Yes if your economy collapses for some reason you'll have a deficit problem, but in fact past deficits don't affect that. They don't matter because the deficit was already invested in domestic assets. Since those assets change in value as your economy changes, it nets out. The foreigners already invested their money in your economy and they suffer as you suffer. However the past deficit isn't going to cause any such collapse. There would have to be some other additional factor.
That's what history tells us actually happens, anyway.
Are you just making stuff up to argue about??