Monday, February 13, 2006

Trade Deficit: Debt or Just Data?

Who was that dumb academic who invented the phrases "trade deficit" and "current account imbalance?" He or she must have known that from a theoretical point of view, the words "deficit" and "imbalance" are really misnomers when they refer to trade and the current account. By definition, the "trade deficit" or "imbalance" is counterbalanced by a "surplus" of investment in American assets. There can be no "deficit" as there is with a household, corporate or government budget deficit.

[Thanks to for the image.]

For a good explanation of why the abstract notion of a trade deficit is not a true deficit, read this article at Tech Central Station.

On the other hand, what does worry me is that the world is now investing in the American marketplace as though it were the latest stock market fad, and they're doing so with our own dollars, i.e. those dollars we've been "printing" with abandon. That's the true imbalance, and one that deserves close study. There is no longer a gold standard requiring us to come up with the goods. Foreign holders of dollars can no longer demand that we give them our money's worth.

So are they taking us at our word? And how good is our word?

That is indeed the question, and I don't think even Alan Greenspan the Grand Pooh-bah knows for sure (and if he does, he's not tellin'.)


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