I had a conversation recently with a senior manager in our company and I failed to articulate the concern I have with trade deficits. After failing to present my concerns in a coherent way I felt compelled to do some research in order to better represent my perspective. While doing some basic research on trade deficits I started with the assumption that there is some boundary for any given country past which they cannot (effectively) print more money without sending the economy into a tailspin. In fact the United States has blown past all of my supposed limits to this. A rough estimate of our current cumulative currency deficit is approaching 13 trillion dollars which is nearly our annual gross domestic product of ~18 trillion dollars. Faced with the equivalent of nearly a years salary worth of unsecured debt (the equivalent of credit card debt for an individual) where we apparently pay no noticeable interest I wondered why other countries don't call this debt due? Finance is complex and in a currency race to the bottom it is sometimes to the advantage of other countries to hold our currency without caching it in. After some research I discovered that for me the more compelling question was why we let ourselves as a country be so beholden. In point of fact during my research I was faced over and over again with the mainstream view also held by the senior manager that trade deficits were in general a good thing. TL;DR all of this is based on the fact that these planners never expect the currency deficits to come due!
Current trade deficits expectations are based on the expectation that other countries twill sell us goods in exchange for US dollars that are never converted back into their domestic currency. If the currency was exchanged back on the open market this would force the dollar value down and our import purchasing power would drop (correcting the deficit). In general one might see this as a good thing but I get suspicious of the whole "free lunch" scenario. In fact the only way to buy more than you produce is to print money to make up the difference. My view of the monetary supply is that it needs to grow sufficiently to enable gross domestic product. If there is more money than commerce the money supply would normally devalue. If there is less money than commerce the purchasing power of the dollar would go up. In this case the monetary supply for the US exceeds the GDP for the US by almost a full year. As an added benefit of printing this extra money the market for these supposedly desirable dollars is held down so that our internal economy can still export some of it's goods and services. All should be hunky dory right? We have more stuff than we make and we get to keep our jobs.
How do other non-US dollar countries deal with this? Net export countries are required to weaken their currency as well to maintain their net export status. As the US dollar drops other countries must drop as well or be left with unused production capacity. The ability to inject money into the economy in this fashion (Fiat) is only possible in a state controlled commerce situation like communism since the other mechanism is the currency exchange market. Market based export economies are just forced to either find someone who will hold their currency as well or export more than they import lowering the standard of living for all citizens. In fact it all starts to look like some gigantic pyramid scheme where each country is looking to find someone else to hold the bag. I suspect that countries at the lowest end of this economic Ponzi scheme suffer the most. Strangely, though I am also convinced that the lower and middle classes at the top of the pyramid also suffer.
My argument is this. When people look at the massive currency devaluation practiced by almost all first world countries today they justify holding US dollars because as the total world dollar volume grows the productivity of american society grows as well (creating a perception that eventually the effectively devalued dollar will have a restored value - keeping the reserve currency of choice status for the US). To me this is the crux of the US lower and middle class issue. If the excuse for more dollars is that the economy is increasing and if those new dollars were gowing to the new sources of growth and productivity then capitalism would be rewarding effort. However, in the US those dollars are being injected straight into the upper class. I argue that the mechanism in the US of using cheap money to inject these new dollars into our economy is rewards people in ways that doesn't grow our GDP. What is the evidence for that? Since the late 1990s the general participation rate for employment in the US has dropped. Wages for the US workers who remain employed have stagnated in the middle class and dropped for the poor. Additionally the level of training required for middle class jobs in the US has skyrocketed. The cost of this training is increasingly borne by that same US middle class. All the while the measured GDP for the US has gone up. In the United States senior management is using labor arbitrage available from the "currency race to the bottom" in the name of globalization to disenfranchise US workers and leverage a perceived productivity gain by hiring workers below a true closed market value. If managers can maintain a sufficient number of unemployed american workers then employed workers will be forced to accept lower wages. In truth there are consequences when senior managers do not follow this practice. Treating workers as if they existed in a net neutral export economy means they instantly make their companies less competitive against companies with arbitraged labor.
How does it all end? (The link illuminates the financial transfer of money from savers to borrowers) Historically, currency wars have either ended with economic crashes where economies fall apart or world war or both. By economic crashes I mean much greater in the US than either the crash of 2000/2001 or 2008. Highly productive countries are very likely to turn this economic uncertainty into warlike actions. Physical aggression allows for leaders to distract the population away from their economic sins and channel the nation into joint productivity. If you win the war it also has the value of resetting the world economies to your standard, maintaining internal production in service of the war machine, and substantially injuring the losers economic stability.
Is there some solution other than war and or financial ruin? Yes, we can all operate at our maximum ability to eschew imports (exports are ok). Individuals buying local will not correct the national trade deficit but it does do two things. First, the people that we buy from will be rewarded as if there was a closed market. Yes, that most certainly means reducing our standard of living for the same wages. However our current greedy consumerism in the United States is causing a global crisis. We live beyond our true means to the detriment of the whole world. Second, establishing a local economy will create a firewall to any external crash. When the world monetary system is in chaos, local economies can exist on barter and trust far better than far flung supply chains. Add that goods imported into the US are actually worth far more in trade neutral US dollars than we are paying today in the absence of the governments power to control currency and import transactions common today will fall apart. I suppose that the people buying land and gold as a hedge against the crash are not wrong but it will be the local economic relationships we have that will ultimately save us in the long run as it is hard to eat gold or laugh with land.
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