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January 10, 2007

Silly Billy

Will Hutton treats us to a display of the dazzling pyrotechnics of the economist that he is(n't). Indeed, he's written a whole book about the global economy to follow up an earlier one, The State We're In (we weren't).

(China)..by lending $200bn a year to finance the US trade deficit,

How does that work then? The trade deficit is caused by companies and individuals purchasing more goods from abroad than companies and individuals who are not US residents buy from those who are. The financing of the trade deficit is therefore done by those who lend to those companies and individuals, isn't it?

Does China lend to said individuals? Err, no, that figure he uses there is China's purchase of Treasuries, which are the debt obligations of the US Government. They go to finance the Federal budget deficit. It's a quite different thing I'm afraid.

Yes, there's all sorts of other things going on as well, for example, the purchases of Treasuries are indeed counted as additions to the inflows on the capital account which then balance the books (as, by definition, they must be) but it is entirely possible that the US could be running a trade surplus yet someone could still be a net buyer of Treasuries.

Hope the rest of the book is better.

January 10, 2007 in Economics | Permalink

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Comments

'The financing of the trade deficit is therefore done by those who lend to those companies and individuals, isn't it?'

No.

Posted by: james C | Jan 10, 2007 11:39:27 AM

The concept of 'trade deficit' is best avoided. Do I create a trade deficit, between me and Asda, when I buy my shopping? Am I bovvered?

Posted by: Kit | Jan 10, 2007 12:08:56 PM

I thought the trade deficit was financed by those consumers in the deficit side nation buying the goods from the providers in the surplus side nations?

Posted by: B's Freak | Jan 10, 2007 2:27:47 PM

as it happens the Chinese are largely buyers of US agency paper, effectively lending money to US households to refinance their mortgages, thus freeing up cashflow for consumption. The fact that the stuff the US is selling (agency paper) has been going up in price while the stuff they are buying (electronic goodies and toys) has been falling in price tells you something about who has pricing power.

Posted by: MARK T | Jan 10, 2007 2:50:23 PM

'The financing of the trade deficit is therefore done by those who lend to those companies and individuals, isn't it?'

I award this 100% for economic illiteracy.

Tim adds: If you look up a bit then that is apparently what MarkT says is true.

Posted by: james C | Jan 10, 2007 3:13:33 PM

Mark T says that the Chinese are effectively lending to US households, doesn't he, which is the exact opposite of what you were saying.

Tim adds: Indeed. I'm being told I'm wrong for two entirely contradictory and exclusive reasons! Being wrong I'm used to, just wish people would make up their minds as to why,

Posted by: Matthew | Jan 10, 2007 4:34:48 PM

'How does that work then? The trade deficit is caused by companies and individuals purchasing more goods from abroad than companies and individuals who are not US residents buy from those who are. The financing of the trade deficit is therefore done by those who lend to those companies and individuals, isn't it?'

The trade defict between the US and China is possible only if the Chinese are prepared to accumulate dollars. The Chinese
central bank does this,buying dollars from their exporters, and uses the dollar holdings to buy treasury bonds. This is how the current account deficit is financed.

Needless to say, the Chinese have not lent to the companies and indivuals buying Chinese goods.

Tim adds: "The trade defict between the US and China is possible only if the Chinese are prepared to accumulate dollars."

Piffle. There could be a US trade deficit with China but an overall trade surplus for the US economy. The Chinese spend the dolars earned on good from other countries, who then buy from the US, for example (oil anyone?)

Also, the Chinese could buy US assets rather than hold dollars. I don't say that either of those are actually happening but stating that the bilateral trade deficit exists only because the Chinese are willing to hold dollars is nonsense.

Posted by: james C | Jan 10, 2007 6:08:01 PM

Congratulations, Tim, you appear to have found the only correct sentence in Hutton's lousy piece. The meaning of the sentence is that the USA would have to bear the burden of adjustment to bring its current account into balance, unless somebody was prepared to accumulate dollar-denominated claims, and nobody is (or at least, nobody is at current prices in amounts of the same magnitude as the deficit) except the Chinese government. It's perfectly sensible and ubiquitous shorthand (for a claim that I regard as very disputable, but that's not the same thing).

Posted by: dsquared | Jan 10, 2007 6:17:49 PM

Although I think the current concern with trade deficits is pointless.
I would add that Chinese investors hold about $800bn in US government bonds which has kept interest rates down. So they have made it easier for US consumers to borrow. Does that help in the "Tim is wrong or right" debate?

Posted by: Kit | Jan 10, 2007 6:30:51 PM

I do find Tim's argument confusing. Just because China could buy $200bn of Treasuries and the US run a trade surplus, doesn't mean that it can't be true that China's purchase is helping to fund the trade deficit.

After all there are about $4,000bn of Treasuries outstanding, most of them held by the US public. SO I it's possible the Chinese might be indirectly buying them off the public in return for goods, rather than from the Federal Government, but it doesn't matter if the link isn't that direct, as somewhere along the line that $200bn is needed to balance the books.

Posted by: Matthew | Jan 10, 2007 7:10:41 PM


I was not making a generalization about all bilateral trade deficits but was commenting about the present situation. Apologies if this was unclear.

If the world were different and the US had an offsetting trade surplus with the ROW, then the problem would not arise. Likewise, if there were another country with an appetite for hundreds of billions of dollar assets, then China would not need to step in.

China could also accumulate other dollar investments-instead of Treasury bonds. However, it still amounts to the same thing
which is China buying hundreds of billions of dollars worth of assets from the US, which the US uses to pay for its trade deficit.

Posted by: james C | Jan 11, 2007 1:46:59 AM

my point on pricing power was that to argue (as the consensus does) that the US spends money first and borrows second - the kindness of strangers argument - might not be correct. The causality could (and I believe is) the other way around. The RoW, particualrly Japan but also China have a desire for relatively high yielding low risk bonds (Ben Bernanke's savings glut)This capital account surplus effectively requires the US to run a current account deficit A related point (the dark matter argument) is that if I borrow money by selling expensive debt and then invest in RoW equity (FDI as well as actual equity) then the economic accounting merely sees debt>assets and a funding outflow. But a 10% compound growth in equity doubles my assets in 7 years, so it's not so dumb after all. Of course if your worldview is that the US consumer is a stupid pampered credit junkie who is destroying the world then you are going to go with the current account deficit threat angle.

Posted by: MARK T | Jan 11, 2007 8:58:47 AM

That may all be true, although I think much of the dark matter argument has been successfully refuted, but it doesn't really change the idea that China is lending money to fund US consumption (US net FDI outflows aren't that large, are they?). For lots of people it's a good deal when the bank gives them a mortgage to buy rising in price property, but it's still lending them the money.

Posted by: Matthew | Jan 11, 2007 11:17:58 AM