I recently posted a piece on the trade deficit. I wrote in generalities there and broad estimates. I suppose I should have included a little more data.
I have a question about figure 2. The red line is the capital account, right? It is quite volatile. The black line is the trade deficit. Adding the net investment income to the trade deficit should give the current account. The net investment income is pretty stable. The current account and the capital account should be equal to each other (of opposite sign). So why is the capital account so volatile? Is it because of measurement error?
You said, "Foreigners would increasingly earn greater profits on their growing American investments. Over time, that would cause the dollar to depreciate. And, if that was happening, the trade deficit would naturally decline."
What do you make of Japan's growing current account surplus along with a trade deficit? It has been accompanied by a weakening yen and a growing trade deficit. Presumably the growing current account surplus is because Japan is earning greater investment income abroad than foreigners are earning in Japan. Shouldn't that increase the value of the yen? Instead the yen is decreasing in value and at the same time, the trade deficit is increasing.
Trump recently said something to the effect that if the tariffs eliminated several hundred billion dollars in trade then that meant the U.S. had saved that money. Similar to if I cut off my leg just below the knee I would save blood and other resources for the rest of my body.
There's a scene in Jabberwocky where a beggar has cut off his foot to encourage donations. He appears in a later scene with both feet cut off. There seem to be limits to this type of economic policy.
Savers choose investments based on both risk and return. They willingly give up return because they are seeking more safety. One reason that capital flows to the US is because the US has a history of financial and public institutions that have demonstrated that they are capable of providing safety.
3. Foreigners are older and poorer and more interested in liquid, low volatility assets compared to the younger, richer Americans (even within the US, it is well established that risk aversion is basically a function of wealth and age). Furthermore, America's comparative advantage in providing safe assets means that its main export product will be safe assets. This does not mean anyone is getting screwed, everything is priced in. Americans are just better at providing consistent returns, other countries are better at providing riskier and more profitable investments, so investors allocate money accordingly. Much like for trade of physical goods, specialization benefits both.
I don't want to sound rude, but do you know *anything* about finance? So, you have a country with rule of law, constitutional protection against arbitrary seizure, and (more importantly), a long history of *actually* respecting property rights and honoring its debt. That alone is worth a significant premium over Chinese assets if you are care about risk. But let's say our Chinese investor abstracts all these considerations away. You know what is the best way to reduce your portfolio risl? To *diversity*. If you are a Chinese guy with a job and real property in China, then most of your income and wealth is already tied to China, and you really need to put your movable assets somewhere else to get an hedge. IQ does not change anything here. Again, you insist in seeing it as a zero-sum game when we *both* are better off for having the opportunity of investing in the other country.
"As to old vs young, I think a better idea for the rest of the world would be to invest in making more babies rather then assuming that an also aging American demography is somehow going to turn around and send goods back to them when everyone is old just because they have slips of paper"
They don't need Americans to produce goods, they just need Americans to return the amount promised on those pieces of papers and then *someone* to sell them goods in exchange of USD. You know which institution is really really good at evaluating how likely this is to happen? Yes, exactly, markets. No offense anonymous user with protonmail, I'll still take market prices as more informative than your opinion on whether this is a good idea or not.
"Beyond being "hand wavy", if true we should charge people for the privilege. Which is what tariffs do! "
No, the 19% foreigners *already* pay on all the income from their US investments is what they are charged for the privilege. And it's quite an heavy charge, given that unlike American taxpayers, they don't receive anything in return, but they're happy to pay it, so fine. Tariffs are a tax *on American consumers* which also lowers competition for American firms thus lowering *American* productivity. You want to squeeze foreigners more? Raise taxes on capital income. Tariffs only squeeze Americans, beyond having terrible second-order effects
Germans want to buy Word and Excel. Microsoft opens up an office in Berlin and sells it to them. Microsoft now has profits in Euros. Americans buy things from Europe with those Euros. Who do you think is better suited to manage that office than Microsoft?
You're sort of begging the question in your reasoning here. I'm not saying anyone is stupid. You're bringing that to the conversation and then you're trying to make sense of what I wrote. It's not going to make sense to you if your conclusion requires foreigners being stupid.
Coincidentally, I’m pretty sure today’s post from Noah Smith is making much of the same point as you are. Great minds think alike!
I have a question about figure 2. The red line is the capital account, right? It is quite volatile. The black line is the trade deficit. Adding the net investment income to the trade deficit should give the current account. The net investment income is pretty stable. The current account and the capital account should be equal to each other (of opposite sign). So why is the capital account so volatile? Is it because of measurement error?
I assume that's the main problem.
You said, "Foreigners would increasingly earn greater profits on their growing American investments. Over time, that would cause the dollar to depreciate. And, if that was happening, the trade deficit would naturally decline."
What do you make of Japan's growing current account surplus along with a trade deficit? It has been accompanied by a weakening yen and a growing trade deficit. Presumably the growing current account surplus is because Japan is earning greater investment income abroad than foreigners are earning in Japan. Shouldn't that increase the value of the yen? Instead the yen is decreasing in value and at the same time, the trade deficit is increasing.
https://www.reuters.com/markets/asia/japan-runs-record-current-account-surplus-2024-foreign-investment-returns-2025-02-10/
Perhaps its the capital flows that drive the deficit and not the reverse...
Trump recently said something to the effect that if the tariffs eliminated several hundred billion dollars in trade then that meant the U.S. had saved that money. Similar to if I cut off my leg just below the knee I would save blood and other resources for the rest of my body.
There's a scene in Jabberwocky where a beggar has cut off his foot to encourage donations. He appears in a later scene with both feet cut off. There seem to be limits to this type of economic policy.
Savers choose investments based on both risk and return. They willingly give up return because they are seeking more safety. One reason that capital flows to the US is because the US has a history of financial and public institutions that have demonstrated that they are capable of providing safety.
3. Foreigners are older and poorer and more interested in liquid, low volatility assets compared to the younger, richer Americans (even within the US, it is well established that risk aversion is basically a function of wealth and age). Furthermore, America's comparative advantage in providing safe assets means that its main export product will be safe assets. This does not mean anyone is getting screwed, everything is priced in. Americans are just better at providing consistent returns, other countries are better at providing riskier and more profitable investments, so investors allocate money accordingly. Much like for trade of physical goods, specialization benefits both.
I don't want to sound rude, but do you know *anything* about finance? So, you have a country with rule of law, constitutional protection against arbitrary seizure, and (more importantly), a long history of *actually* respecting property rights and honoring its debt. That alone is worth a significant premium over Chinese assets if you are care about risk. But let's say our Chinese investor abstracts all these considerations away. You know what is the best way to reduce your portfolio risl? To *diversity*. If you are a Chinese guy with a job and real property in China, then most of your income and wealth is already tied to China, and you really need to put your movable assets somewhere else to get an hedge. IQ does not change anything here. Again, you insist in seeing it as a zero-sum game when we *both* are better off for having the opportunity of investing in the other country.
"As to old vs young, I think a better idea for the rest of the world would be to invest in making more babies rather then assuming that an also aging American demography is somehow going to turn around and send goods back to them when everyone is old just because they have slips of paper"
They don't need Americans to produce goods, they just need Americans to return the amount promised on those pieces of papers and then *someone* to sell them goods in exchange of USD. You know which institution is really really good at evaluating how likely this is to happen? Yes, exactly, markets. No offense anonymous user with protonmail, I'll still take market prices as more informative than your opinion on whether this is a good idea or not.
"Beyond being "hand wavy", if true we should charge people for the privilege. Which is what tariffs do! "
No, the 19% foreigners *already* pay on all the income from their US investments is what they are charged for the privilege. And it's quite an heavy charge, given that unlike American taxpayers, they don't receive anything in return, but they're happy to pay it, so fine. Tariffs are a tax *on American consumers* which also lowers competition for American firms thus lowering *American* productivity. You want to squeeze foreigners more? Raise taxes on capital income. Tariffs only squeeze Americans, beyond having terrible second-order effects
Germans want to buy Word and Excel. Microsoft opens up an office in Berlin and sells it to them. Microsoft now has profits in Euros. Americans buy things from Europe with those Euros. Who do you think is better suited to manage that office than Microsoft?
You're sort of begging the question in your reasoning here. I'm not saying anyone is stupid. You're bringing that to the conversation and then you're trying to make sense of what I wrote. It's not going to make sense to you if your conclusion requires foreigners being stupid.