U.S. Trade With Rest Of World Is Always Balanced

by: Mark J. Perry

The Bureau of Economic Analysis released detailed data today on U.S. international transactions (pdf) for the second quarter of 2011.

For the first six months of the year, the U.S. had total cash outflows of $1.9 trillion that represent: a) $1.575 trillion in spending by American consumers and companies on imported goods and services, and income payments (dividends and interest) by U.S. companies and governments to foreigners who own U.S. assets (stocks, bonds, bank deposits), and b) a $335 billion cash (or capital) outflow from Americans buying foreign assets (stocks bonds, bank deposits, direct investments in foreign firms), see chart above.

(Click chart to expand)

Over the same period, there was a total cash inflow to the U.S. of $1.9 trillion from: a) $1.4 trillion for U.S. exports and income payments that were made to Americans who own foreign assets, and b) a $510 billion cash (or capital) inflow from foreigners buying U.S. assets.

For America’s "current account" (the first category outlined above for goods, services and income payments) there was a $175 billion "current account deficit" for the first half of the year. For investment/capital flows, the U.S. had a $175 billion "capital account surplus" (or “capital inflow” or “investment surplus”), which exactly offset the $175 billion current account deficit. In other words, our overall trade with the rest of the world remained in balance for the first half of the year, after accounting for all cash inflows (+$1.9 trillion) and cash outflows -$1.9 trillion), and there really is no overall "trade deficit."

While most of the media attention focuses on America's "trade deficit" for goods and services, a more complete analysis always reveals offsetting surpluses for other international transactions that result in a "balance" of our total payments (cash outflows) and receipts (cash inflows) with the rest of the world. Because international transactions are calculated using double-entry bookkeeping accounting, international accounts HAVE TO BALANCE on net, and the Balance of Payments has to equal ZERO, just like a corporate "balance sheet" has to balance such that Total Assets (TA) = Debt (D) + Equity (E); and TA - (D + E) = ZERO.

Bottom Line: Even though it's not "newsworthy" and won't be covered by the media, America's international transactions were once again balanced from January-June this year, just like every quarter and every year, and the "balance of payments" was once again ZERO. (What a relief!)