New article: the U.S.-China imbalance

Justin - Great piece as always. A couple of amplifications. First, the Chinese economy - if the RMB were floated - would actually already be much closer in size to the U.S. economy than is reported by using the fixed exchange rate. I think it is something like $3T to $13T but China's number would be much higher if the RMB was floated. Maybe really $5T to $6T. Second, I believe that the issue in exchange rates is quite political in nature - perhaps more than is realized - and particularly in terms of unemployment and political stability. (Note: I was Professor of Management at Beijing University in 2004). I believe that the Chinese keep the RMB low to ensure lower unemployment at home, and reduce the threat of losing political power. I believe what American's do not understand is that this is not only a financial issue but really a real threat to the Party. For example, in China, many loans are made by banks based on the number of jobs created - not P & L or assets. So the American demand to float the RMB may unseat the powers that be. That is how I view the problem. Jack

Anytime the word "deficit" is used, it causes great emotion. "Federal deficit" is one example. "Trade deficit" is another.

Some economists believe the federal deficit, being the way the federal government creates money, is necessary for economic growth. They make the point that a federal deficit = an economic surplus. [Insert violent disagreement and name-calling here.]

But what about trade deficits? Do they have any benefit? Possibly.

China creates goods/services and sends them here in exchange for dollars. The goods/services are scarce to China. Time and manpower are necessary for their creation. By contrast, dollars are not scarce to the U.S. Our government has the unlimited power and authority to produce dollars, without using any (or hardly any) resources, whatsoever. The press of a computer key sends billions or trillions of dollars from our government to anywhere. Lately, much has gone into our economy as a stimulus.

A trade deficit is an example of one country devoting great effort to create scarce materials for another country in exchange for something that requires no effort by the other country. In that sense, China is our servant.

They work, sweat and strain to ship something to our shores, while we, hardly lifting a finger, ship dollars to theirs. Who has the better deal?

Obviously, for any given individual, the situation is different. None of us has the unlimited ability to create dollars. We have to work hard for our dollars. Dollars are scarce to us.

But when we talk about trade deficits, we are talking about governments, and there the situation changes. Dollars are not scarce to the U.S. government. China could ship us every yard of cloth and every ounce of steel in their country; they could completely empty their nation of all physical resources, and still we would have plenty of dollars to send to them.

This can be more easily understood by looking at Saudi Arabia, with whom we also have a trade deficit. The Saudis could send us every drop of their oil, leaving their entire country empty, and we would continue to produce dollars. (One day soon, this may happen.) Who has the better deal?

Of course, as sovereign nations, China and Saudi Arabia are able to create as much of their money as they wish. They don't need to work so hard to send us their precious resources in exchange for our money. But that's a discussion for another posting.

Rodger Malcolm Mitchell

You know those companies are UK, US, and Euro ones, right? Mattel from China; this is the era of the so-called virtual corporation. The Capitalists' created it their greatest achievement: China! The chimera that is the Capitalist-Communist cabal.

This article would have benefited from displaying some grasp of the concept of comparative advantage, and from the realization that the trade deficit with China is only one aspect of the total trade deficit. Economists are typically interested in the total trade deficit, and are not particularly concerned with the trade deficit with any particular country.

In summary, the misnamed trade deficit benefits the U.S., as we receive scarce goods in exchange for non-scarce money.

And, since 1971 (end of the gold standard), the so-called federal deficit also has benefited the U.S. as it has added money to the economy, with no negative economic effects, and never needs to add to our grandchildren's tax burden -- more than benefited, money growth is an absolute necessity for a growing economy.

Thus, the two great economic "deficits," continually bemoaned by the media, politicians and even some economists (who should know better), aren't really deficits at all. They are benefits.

Rodger Malcolm Mitchell