As the dollar’s fall continued last week, the hand wringing about the trade deficit began anew. Morgan Stanley’s Stephen Roach wrote of the “the global enablers” that allow us to maintain the trade imbalance, while USA Today’s editorial page warned its readers that the U.S. economy’s health “is becoming more and more dependent on the kindness of strangers.”
Arguments have taken on a circular quality for trade-deficit worriers like Roach and USA Today’s editorialists. Neither argues that the U.S. trade deficit is not a function of massive capital inflows from around the world, yet both opine that the trade deficits caused by the inflows are somehow a signal of economic weakness in the U.S. Their basic assumptions contradict each other, while others they make are simply wrong.
For starters, Roach wrote in a recent New York Times op-ed that the dollar’s weakness is a “logical outgrowth” of “America’s gaping current account deficit.” The only problem with his assertion is that the U.S. has run a trade deficit for much of its existence. It did this while maintaining a stable dollar backed by gold for nearly all of its first 200 years.
To the extent that investment flows follow currency stability or strength, the more realistic assumption would be that the trade gap would widen as the dollar strengthened, or as its value became more certain. Unsurprisingly, the trade deficit has skyrocketed over the last 20 years; a period in which the dollar’s value was rising much of the time.
In a November 30 editorial, “Dollar slides, alarms ring,” USA Today’s editorialists noted that “foreign investors now own an estimated 48% of U.S. Treasury bills,” and that they could become “majority owners of federal debt in coming years.” In another example of the schizophrenia that characterizes trade-deficit worriers, the very same editorial said dollar weakness could be a signal of the “world’s increasing impatience with the United States’ habit of living beyond its means.”
Which is it? Indeed, if the world is increasingly impatient with the U.S., it has a funny way of showing it. Logic suggests that if investors were impatient, they would be dumping U.S. debt. Yet the same editorial said the opposite is occurring. In addition, U.S. Treasuries pay a dollar-denominated coupon: Is it remotely realistic to assume that foreign owners of an increasingly large share of U.S. debt would want to see the value of their payments (and bond holdings) reduced?
But the “kindness of strangers” and “global enabler” charges are quite possibly the silliest of them all. To believe the first is to believe that compassion, as opposed to expected returns, drives investment flows. If kindness explains investment flows, why do lenders to Brazil charge such high rates? Why are African countries shut out of the debt market altogether?
As for Roach’s “global enabler” theory, his use of the word “enabler” is a loaded one that suggests weakness. In order to take it seriously, one would have to believe that foreign investors are trying to weaken the very country and people whose debt they are investing in. Do weak people and countries that are addicted to debt really get loans at some of the lowest interest rates in the world? If the U.S. were really being enabled, wouldn’t the rates on U.S. Treasuries be much higher?
That they’re not shows the glaring flaw in the arguments made by trade-deficit worriers. Since it’s an empirical fact that our trade deficits are driven by massive inflows of foreign capital, it must from there be deduced that money doesn’t flow here because the world loves us (the Left says they hate us), but because the worldwide investment community still sees U.S. economic policies that embrace low taxation and low regulation as ones that will yield the best returns.
In short, we can reduce the trade deficit, but only if we pursue the kinds of high-tax, tariff, and regulatory policies that would impoverish us. Because of that, Americans should beware of those offering solutions to our supposed balance-of-trade problem. The cure is much worse than the unambiguously positive symptom.
–John Tamny is a writer in Washington, D.C. He can be contacted at email@example.com.