Perhaps you can explain something that I hear over and over again, but seems to be totally incorrect. People write that "the trade deficit doesn't matter because it is offset by a capital surplus". I believe this is patently false and misleading and shows a deep misunderstanding of basic accounting concepts as well as cross border flows. Consider the following example:
I, an American, own $1 million dollars in US Treasury Bonds. I sell those bonds, and use the proceeds to buy disposable goods from a Chinese company.
Putting aside costs and so for simplicity, the Chinese company now has $1 million. They take those dollars and buy the Treasury Bonds that I previously owned.
Under your analysis, there is no issue because our Trade Deficit of $1 million is offset by a capital surplus of $1 million. Of course those two numbers "offset" in arithmetic terms but they are hardly equivalent. At the end of the day the US population has transferred $1 million of wealth to the Chinese population.
As Pat Buchanan pointed out, we have a cumulative $4 trillion deficit with China, so in effect we have transferred $4 trillion of wealth to them.
Also, the story about Trump being "clueless" about the Softbank deal is equally flawed. Softbank is going to bring NEW money into the USA from wherever they have it now. This will create jobs and perhaps exports (really irrelevant). It will NOT in any way increase the trade deficit.My response:
If I am wrong I would appreciate a detailed response to my points. You have a big following and its important that your readers are getting accurate stories. Thank you.
You are doing what Trump is doing looking at just one side of the equation at any given point.
You write: "At the end of the day the US population has transferred $1 million of wealth to the Chinese population."
But this occurred only because we received $1 million in goods which was the only way the Chinese gained the funds to buy the bonds.
You write: "Softbank is going to bring NEW money into the USA from wherever they have it now. This will create jobs and perhaps exports (really irrelevant). It will NOT in any way increase the trade deficit."
US dollars, aside from being held as physical cash, must be used in the US, either on investments or consumption goods. If Softbank acquired the funds because of earlier goods sold overseas (Or otherwise, if it was a US investment overseas it is really a US deal), it means that much was spent on trade and because the money received from that trade is used to invest in the US as opposed to purchasing goods or service it creates a trade deficit.
Note: This also is a response to the comment left by Matt@Occidentalism.org at the post, Clueless Trump Just Hails a $50 Billion Increase in the Trade Deficit. Matt@Occidentalism.org writes:
You assume that the $50 billion dollars that is to be invested within the USA would otherwise have been used to purchase $50 billion dollars of US goods and services, which is an absolutely ridiculous assumption to make. Your Trump Derangement Syndrome at work again.It is not absurd, it requires complex thinking to understand but it is an identity that by definition is correct.
Let me try to make it clear one more time via Investopedia:
A capital account shows the net change in physical or financial asset ownership for a nation and, together with the current account, constitutes a nation's balance of payments. The capital account includes foreign direct investment (FDI), portfolio and other investments, plus changes in the reserve account...
A country’s balance of trade is part of its balance of payments. For example, the balance of payments in the United States is composed of three subaccounts: the current account, the capital account and the financial account. Each has its own types of inflows and outflows.Greg Mankiw in Principles of Macroeconomics explains it this way:
An important but subtle fact of accounting states that, for an economy as a whole, net capital outflow (NCO) must always equalt net exports (NX):
This equation holds because every transaction that affects one side of the equation affects the other side by exactly the same amount, This equation is an identity--an equation that must hold becasue of the way the variables in the equation are defined and measured.Not everyone is going to understand this but it is a fact.
That said, its usefulness is another thing. And we have Murray Rothbard to point this out: