The Folly of a Fallacy

 

Economics Without The B.S.**: 

[**  Double entendre intended.]

[This is a draft.  I’m still working on it.  You can see where I’m going with this,]

We have a leader of the largest, most productive, country in the world with also the most strongest military, and he is saying we are being picked on. It is not fair. We run a trade imbalance with Vietnam. They export more to us than we export to them. They are taking advantage of us. And it isn’t just with Vietnam. We run trade deficits with a lot of countries. So, they are all taking advantage of us. How are we paying for all of these deficits? You get the impression from listening to our leader and his supporters, which include many intelligent people, to include academics, that this imbalance in trade is a problem because somehow we have to pay for that imbalance. You may come away with the impression that our buying imports should be paid by our exports, to balance things out. But that is a fallacy. We pay for the imbalance with our productivity. We produce around $30 trillion a year. Only about 30% of that productivity is directly related to international trade; with about 20% being imports and around 10% to 12% being exports. So the imbalance between the imports and exports is paid by the 70% of our economy that is only indirectly connected to international trade. And remember, most of that trade is not conducted by one country to another. The great majority of international trade is conducted by businesses and individuals. Foreign businesses and individuals that sell to Americans earn dollars as a rule and when they acquire dollars they have to do something with those dollars – either spend the dollars or invest the dollars. They may want to convert those dollars into their own currency. That is where Central Banks come in. Central Banks in other countries accumulate dollars during that conversion. There is an exchange rate between the dollars and the foreign currency. Foreign Central Banks also accumulate dollars for their own purposes. Since they do conversions of their domestic currency, they are concerned with the value of their currency vis-à-vis the dollar. They want to control the value of their currency to control inflation in their country. This affects how well their people’s living standards are kept. In a democratically governed country that affects political stability or instability. In a country that is less democratically governed there is the same problem, but the government may use more authoritarian measures in exercising power. If the country has economic policies that emphasize exporting xxxxx then the value of their currency in relation to the value of the currency of the country they are trading with comes into play.

Now these experts will also tell you that because some of these countries have adopted an industrial policy to be an exporting country we are forced to be the consumer of their products.  And to pay for this, our government must run up budget deficits to provide the dollars that they foreigners demand. That is another fallacy.