matthutch

Did 2008's $677 Billion Trade Deficit Cause the Recession?

“To finance the deficit of recent years, Americans have borrowed more than $6.5 trillion from foreign sources”
Americans haven’t borrowed to fund the trade deficit. No debt was created. You can wonder, though, if we’d have as large of a trade deficit if we didn’t require such a large capital surplus to fund our budget deficit. The federal government has borrowed to fund its deficit. And with all the government is about to borrow to fund future deficits, including the stimulus, the capital surplus is about to get a whole lot bigger.
“The Chinese government alone holds about $2 trillion in U.S. and other securities, and these could be used to purchase about 20 percent of the value of publicly-traded U.S. companies.”
I don’t see why this is a concern. What would happen if they decided they wanted to diversify (ie sell what they own and buy something else)? They would significantly impair the assets they’re selling, realizing massive losses, and bid up the assets they’re buying. They would create huge gains for whoever buys the assets they sell and whoever sells the assets they buy. And now your concern is that they will now do something nefarious after they buy up our assets. If they do anything but run them profitably, they will lose on their investment. If SWF’s really wanted to hurt us, they could just shut off the oil or stop buying debt. But why don’t they? Because Americans are their customers and they realize the W in their SWF is inextricably connected with the US.
“The American appetite for inexpensive imported consumer goods and cars is also a huge factor driving up the trade deficit.”
We only buy as much as we do from non-US sources is because it’s cheaper. Why do we buy so much oil? It’s cheaper than alternatives. Not because we’re “addicted”. All consumers have an appetite for relatively inexpensive goods. They make judgments based on quality, price, convenience, and any number of other reasons. Are you arguing they should buy without regard for the value per dollar? You might be able to convince politicians that paying too much for something is a good way to stimulate the economy, but I think you’ll find it much harder to convince anyone who actually spends their own money.
“Dollars spent on imported oil and cars and consumer goods from China cannot be spent on U.S. goods and services, and every dollar that U.S. imports exceed exports negates at least one dollar of federal stimulus spending.”
This isn’t true (if you’re on board with the idea that even if the federal dollar is stimulative in the first place). First, this assumes that every dollar spent on an imported good goes straight to China or the Saudis. In fact, Wal-Mart makes a profit when you buy. They paid the trucking companies to get it there. Often, Wal-Mart bought it from someone else, who makes a profit. There are a lot of people who get a piece of that dollar. Second, again, that dollar we send over there doesn’t do them a bit of good. For them to benefit from that dollar, they need to buy dollar-denominated assets. That might be a dollar-denominated tractor or a dollar denominated treasury note or a dollar-denominated whatever.