February 4, 2005
by Gary North
Business Reform
The trade deficit is a combined product: low-cost foreign goods and a willingness of foreigners to invest in the United States. For as long as foreigners are willing and able to provide the money to buy goods offered for sale in their currencies, the trade deficit will continue. Of course, if American consumers said, "Let’s save," spending on foreign consumer goods would decline. But it is likely that low-cost imported capital goods would replace them. If foreigners can produce cheap consumer goods to export, it is likely that they can produce low-cost capital goods, too. Americans look for bargains, and this is even more true of capital goods buyers than consumers. Businessmen pay close attention to the bottom line.
Now, if Americans started saving at rates comparable to foreigners who invest in dollar-denominated assets, foreigners would buy fewer assets. This would have an effect on the distribution of future payments, Americans vs. foreigners. Americans would earn higher incomes than if they had refused to save. Output here would rise: more capital. American industry would grow more competitive. We could compete better with Asian manufacturers. But it would take an enormous increase in thrift by Americans to outbid foreigners for ownership of capital used in domestic firms.
Basically, the trade deficit is a product of Americans who are looking for bargains and foreigners who are looking to buy assets owned by Americans: bargains. Americans buy consumer goods. Foreigners buy producer goods and debt instruments. For this arrangement to change, it would take a transformation of thinking on both sides: by foreigners, who would decide to invest less money here, and Americans, who would decide to invest abroad or in the U.S., thereby raising the price of American capital assets. Americans would outbid foreign investors.
The likelihood of this changing dramatically on both sides is minimal. There are basic habits of mind already firmly ingrained. Americans don’t like to save. Foreigners do. So, any major reduction of the trade deficit must come from capital’s supply side, i.e., foreign investors. They keep buying dollars, which raises the price of the dollar, which enables Americans to buy imports less expensively.
In other words, the fate of the dollar is now in the hands of foreigners: private investors and central bankers. The initiative comes from foreigners, who invest here. They make foreign currencies available at today’s low but climbing prices. Americans are in full consumption mode. They are taking to heart the demand-side economics of John Maynard Keynes: "Spend ourselves rich."
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