A growing trade gap is actually the sign of a good economy. The United States economy ran a trade deficit every year from the founding of the country through WWI for example.

If you want the trade gap to go down, all you need is to have a recession. That will do it.

Note I am not saying the size of our existing trade gap is OK or healthy. I do not believe it is, but I have heard the whining and apopoleptic (sp?) predictions over this number every year of my entire life.

Economics is obviously not your strong suit, ibchillin.

"Economics is obviously not your strong suit, ibchillin. "

Amen.

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Right on, Art. Milton Friedman, Nobel Prize-winning economist, agrees with you. Dissenting opinion about trade deficits

Microeconomists do not believe that trade deficits are inherently good or bad. They do believe that trade deficits are generally harmful when countries engage in currency controls such as fixed or pegged exchange rates. They argue that fixed exchange rates do not allow the market to naturally correct any current account “problems”.

Milton Friedman believes that much of the fears of trade deficits are unfair criticisms in an attempt to push macroeconomic policies favorable to export industries. He states that these deficits are not harmful to the country as the currency always comes back to the country of origin in some form or another. He continues by informing readers that the "worst case scenario" of the currency never returning to the country of origin is actually the best possible outcome; as the country just purchased goods by exchanging pieces of cheaply made paper.

If these current account "problems" become unstable and unsustainable, Friedman notes that the market will correct any "problems" as floating currency rates will rise or fall with time to encourage or discourage imports in favor of the exports, and then possibly reverse again in favor of imports as the currency gains strength.

Friedman and other microeconomists also point out that a large trade deficit (importation of goods) signals that the currency of this country is strong and desirable. Citizens of such a country also receive the benefit of having the ability to choose between many competing consumables and lower prices than they would otherwise experience if the currency was weaker and the country was "enjoying" a trade surplus. To Milton Friedman, a trade deficit simply means that consumers get to purchase and enjoy more goods at lower prices; conversely, a trade surplus implies that a country exported goods that its own citizens did not get to consume and enjoy, while paying high prices for the goods that were consumed.

These trade deficit "problems" were explained in detail by Milton Friedman in Free to Choose, and his simple points re-examined by Dr. Reed. They can be found here: [1]

Ya think?

Amen to that.

A growing trade gap is actually the sign of a good economy. ...Note I am not saying the size of our existing trade gap is OK or healthy. I do not believe it is...

A little cutting and pasting but I think the meaning of your post is the same. So, if a growing trade gap is the sign of a good economy, why would the size of the gap matter?

I do agree that a trade gap is a positive but wonder at what point it can be a problem. I don't know, economics is not my strong point either, just curious.

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You sir, are my new hero! - Trifan 11/13/2008

Casey, you are a wise man - blueraider_mike 11/13/2008

Casey, This is an astute observation. - Slowbern 11/17/2008

"I do agree that a trade gap is a positive but wonder at what point it can be a problem."

The gap becomes a problem when we can not afford the imports. Being able to buy the imports shows we are producing money in areas other than trade.

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The trade gap per se is neither a sign of strength or weakness in an economy ...its the cause of the trade deficit.Now if im generating so much excess cash at home becuse of my wonderful inventiveness then I can use said cash to splurge on some foreign toys thus creating a deficit which is easily financeable going forward.OR I can get a Mortgage company to give me a false estimate of the value of my property, use that to borrow cash from the mortgage company, take that cash and buy some foreign toys, knowing full well that I will be able to repay it in a few years when the value of my property is up another 30 %(according to same dubious mortgage broker)......and so on and so forth.Easy when you know how....

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non illigitamus carborundum

The size of the trade deficit can really get problematic when the producing countries (i.e., Asian economies) decide, "Gee, I don't want Americans' money any more because their money isn't worth today what it was yesterday." Then, since these Asian countries stop financing our big debt and we haven't been saving any money, we're stuck having to pay for our own debt ... but with what? (oldbrit's concern from yesterday's thread). The theory is that this scenario won't likely happen (at least not overnight) because the Asian economies would have all this stuff and no one to buy it. In other words, since the Asian economies are built on producing stuff for Americans to buy, it would be problematic for them to stop selling us stuff. If they did, then both our economies would likewise falter significantly. So, it's good for both parties to keep going on this current--albeit likely unsustainable--path. This is what is commonly called the the Nash Equilibrium (from game theory) or Bretton Woods II (a now unformal agreement that looks a lot like the original formal agreement). Who knows, if might all take care of itself. Yet, a better solution would be for Congress to make George Bush's tax cuts permanent and quit spending so much and for Americans to save more.

Or stop building indoor rainforests in Indiana....

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non illigitamus carborundum

Man, quoting Milton Freedman and Free to Choose.

You must be as old as me.

"I do agree that a trade gap is a positive but wonder at what point it can be a problem."

Way above my pay grade to answer, Casey.

The gap becomes a problem when we can not afford the imports. Being able to buy the imports shows we are producing money in areas other than trade.

Or that we're borrowing the money to afford the imports.

What areas other than trade are we producing money?

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"People think it must be fun to be a super genius, but they don't realize how hard it is to put up with all the idiots in the world."

Way above my pay grade to answer, Casey.

Well, I guess you just answered why I don't know either.

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__________________________________________________

You sir, are my new hero! - Trifan 11/13/2008

Casey, you are a wise man - blueraider_mike 11/13/2008

Casey, This is an astute observation. - Slowbern 11/17/2008

"What areas other than trade are we producing money? "

Money is also created internally - econ 101.

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The trade gap per se is neither a sign of strength or weakness in an economy ...its the cause of the trade deficit.Now if im generating so much excess cash at home becuse of my wonderful inventiveness then I can use said cash to splurge on some foreign toys thus creating a deficit which is easily financeable going forward.OR I can get a Mortgage company to give me a false estimate of the value of my property, use that to borrow cash from the mortgage company, take that cash and buy some foreign toys, knowing full well that I will be able to repay it in a few years when the value of my property is up another 30 %(according to same dubious mortgage broker)......and so on and so forth.Easy when you know how.... [emphasis mine]

oldbrit, my only contention with your thoughts are: Who is to say whether the property estimate is “false” or the mortgage broker is “dubious”? You and I certainly can’t because that’s where existing buyers and sellers are creating the market prices today. If my next door neighbor’s houses are selling at $400,000, then it stands to reason that today my house is worth $400,000. Who can say whether Google is worth $360/share today? Apparently, it is not worth $470/share (Google’s recent high). My point is that—no matter how much I agree with you about “tomorrow’s prices--we just don’t know and it’s certainly not “false” or “dubious” to re-finance my house at $400,000 or to buy Google at $360/share since we have buyers and sellers at that current market price. I’m not a willing home buyer at these prices. I’m not buying Google at $360/share; even off its high of $470/share. I agree that we need to wake up and re-consider pulling money out of our homes and using the money for vacations.

Money is also created internally - econ 101.

Econ 101 is not on my academic schedule, but I do realize that money can be created internally. My question isn't what other areas can we create money, but what other areas are we creating money. And what other areas are we likely to be creating money? It's a serious question.

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"People think it must be fun to be a super genius, but they don't realize how hard it is to put up with all the idiots in the world."

One sign of an addiction is when the adverse consequences become too uncomfortable (not necessarily impossible) when they go against you and you still do the act. Currently, I think that is the case with our trade deficit. The American economy is flourishing in reliance on the trade deficit. If the trade deficit starts going against us (i.e., Asian economies become disenchanted enough with financing our debt to slow down; they don’t have to stop, which would be catastrophic for everyone), then the American economy would suffer a great blow and the markets would react significantly. Therefore, today the trade deficit is problem. We’re presently addicted to the Asian economies. That’s a problem.

My point wasnt to highlight questionable housing valuations(although it stands to reason that anyone who makes money from the volume of loan business he generates for his company would have an incentive to value assets secured against that loan at the highest rate possible).Rather my point is that a trade deficit is only a sign of strength in an economy if the cash generating that deficit is generated directly from the manufacture of a good /service that is likely to continue going forward, and not from a theoretical valuation.I absolutely concede the point that I have no idea when and even if the so called property bubble will end....but I have to suppose that with rising mortgage payments rising gas and electric bills and federally mandated increases in minimum credit card repayments that the decrease in the amount of discretionary spending power available will have at a minimum an effect on consumption .Oh by the way ....you can buy every single gold mine on earth for less than the market cap of google....

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non illigitamus carborundum

Currently, the real estate market is sustaining the economy quite nicely. Yet, that market appears—by most accounts—fizzing out (hopefully just fizzing and not popping). Corporations are currently sitting on piles of cash and that’s why you see them starting to take each other over with increasing regularity. As many people predict, corporations may re-start spending (on technology, productivity, business expansions, etc.), which would likely keep the economy going strong. If no other source, then we could be in for hard times … hard times, my friend. I think the average recession is like a 35% drop in the stock market during secular bear markets. Personally, the last scenario is the one that I think is most likely.

The 2005 US trade deficit was $725.8 billion, or about 6% of the 2005 US GDP, which was $12,479.4 billion. In other words, we are producing 17 times more at home than we are consuming from abroad.

i Hope you are right........about the supposed 'CAPEX' story...when george david , ceo of united technologies appeared on cnbc's morning show about a month ago the interviewer (the topic was the 2006 capex boom by the way)asked whether utx was raising capex in 2006.The answer was no,as the company gets more bang for the buck and better functionality with the same money each passing year.Interviewer says well surely some increases in spending on say software?"no".What about security within software?again"no".Now United Technologies is only one company....but they are a large representative company that makes REAL THINGS...elevators,escalators,fuel cell systems,helicoptersair conditioning equipment etc......and they have been around long enough to how and when to ramp up capex......just a thought again its only one company

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non illigitamus carborundum

"The 2005 US trade deficit was $725.8 billion, or about 6% of the 2005 US GDP, which was $12,479.4 billion. In other words, we are producing 17 times more at home than we are consuming from abroad. "

Not really. the trade deficit is a net figure, and gdp is a gross figure. to get a better picture you need to look at gross imports vs. gdp.

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Service, tech, energy, entertament, manufacturing, logistics industries. So on, so forth, on and on.

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