Trade deficit

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    What is the process of the U.S. trading treasuries for imports? Does the government come in and say, “Uh oh we dont have enough imported goods to sustain the economy. Lets start printing money to buy them.”??? Or does the Fed start giving extra money to businesses and say, “Here’s some more money, we want you to buy more from China. And by the way, the money I’m giving you just came from the treasuries we sold to them yesterday.”

    I’m so confused on this.


    Here is how I understand it (and I’m sure Dr. Herbener will correct me):

    International trade is made of two parts: the current account and the capital account. The current account consists of goods and services, the capital account consists of capital. A current account deficit (which the US has) implies a capital account surplus.

    Treasuries are not traded directly for imports, but government deficits can contribute to the current account deficit.

    When the government has fiscal deficits, it sells treasury bonds. Many of these bonds are bought by foreigners and foreign governments. These governments pay for these treasuries with US dollars. Where do they get these dollars? They obtain them by selling goods and services to Americans (or tax those who do). Thus, instead of buying American goods or services, they buy US treasuries, which goes to funding government employees, transfer payments, wars, etc. (and some of it then might be spent on imports).

    In national accounting terms, there is total savings (TS) = private savings + public saving. In the US, there is no public saving; it is negative, which decreases TS. The demand for loanable funds (which is supplied by total savings) cannot be fully met by domestic saving. This tends to lead to higher interest rates and foreigners investing their savings in the US (of course, the Fed affects this whole scenario as well). Ceteris peribis, foreigners investing their savings in the US will increase the capital account surplus, and thus increase the current account deficit.


    Thanks for the help! Most of what you said I had a fair grasp on beforehand, but I still appreciate it.
    Maybe my question is “how does a business buy a foreign product without funds?” It wont. But then the government will want to get involved in order to keep the economy afloat. So wont the government print up a few hundred billion dollars and toss it into the private sector so that they can continue to buy foreign goods until we meet a trade balance? Once the foreign governments have dollars, they have nothing better to do but to buy U.S. treasuries.

    To me, this makes sense, but maybe I’m way off.


    Fundamentally, international trade is no different than domestic trade. The principles of economics transcend political boundaries.

    The reason two persons trade with each other is that they both benefit from obtaining something they value more highly. In other words, they recognize a difference in the value of two alternatives and act to gain from this difference. In trade all moveable goods, consumer goods, producer goods (i.e., labor and capital goods), and money move from where they have less value to where they have more value. This process continues until there are no more value differences to exploit. Trade statistics merely account for (but are not the cause of) these movements.

    If a government has a policy with respect to international trade it’s typically to help exporters and not importers. It usually does this through protectionism, i.e., high tariffs on competing foreign produced imports or artificial devaluation of the countries currency to stimulate foreign purchases of domestic exports.

    I’ve never heard of a government that inflates its money with the intention of stimulating imports, although one could conceive of such a policy. Perhaps one reason governments attempt to stimulate exports and not imports is that net exports (exports minus imports) are part of GDP, i.e., the production of final goods and services in the economy. So to make the economy appear more productive, the government could attempt to stimulate exports or restrict imports.

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