.PNG)
The Innocent Fraud of the Trade Deficit: Who’s Funding Whom?
Myth: |
US consumers need to borrow $billions from foreigners. |
Fact: |
US consumers are funding $billions in foreign savings. |
While the media continuously bemoans an assumed US dependence on foreign capital, a recap of the actual transactions involved reveals the reverse.
Let’s begin with the example of US consumer buying a German car.
If the consumer pays cash for it, the consumer’s checking account in a US bank is debited and the German carmaker’s account is credited, thereby increasing foreign savings of USD financial assets. Total deposits in the US banking system remain unchanged.
If the consumer borrows to buy the car, the bank makes a loan to the consumer, which results in a loan on the asset side of the bank’s balance sheet and a new deposit on the liability side (loans create deposits). After the car is paid for the German car company has the new bank deposit. Consumer borrowing increased total bank deposits and funded foreign savings of USD.
That’s what the finance behind the trade gap is all about – foreigners desire to net save USD financial assets and sell goods and services to the US to obtain those assets.
Following the above transaction the foreign holder of USD bank deposits may instead desire to purchase US Treasury securities. At the time of purchase, the seller of the Treasury security becomes the new holder of the bank deposit, and the foreigner the new holder of the Treasury security. (If the foreigner buys securities directly from the Treasury the result is the same.)
The US government is now said to have foreign creditors, and the US is said to be a debtor nation.
While this is true as defined, a look past the rhetoric at what the US government actually owes the holder of the Treasury security is revealing. What the government promises is that at maturity the foreigner’s security account at the Fed will be debited, and his bank’s reserve account at the Fed will be credited for the balance due.
In other words, the US government’s promise is only that a non-interest bearing reserve balance will be substituted for an interest bearing Treasury security. This is not a potential source of financial stress for the government.
Warren Mosler
February, 2004
April 13th, 2009 at 2:55 pm
Warren,
If foriegners are getting interest on their deposits then the foriegn entities will be getting interest and will have a claim on some US assets…right?
So it seems like its not entirely true that the deficit is benign.
Reply
April 14th, 2009 at 7:57 pm
As they pile up $US financial assets they can certainly decide to buy real goods and services from any willing sellers at ‘market’ prices.
I’m not saying trade deficits are ‘benign,’ I’m saying that imports are real benefits, and there is no funding issue for govts. spending their own currencies. Nor are we in anyway dependent on foreigners lending to us in our own currency.
I’m also saying when you see Clinton and Obama kissing up to China because they think we need them to buy our securities they have it all wrong.
Reply
April 15th, 2009 at 1:39 pm
“If foriegners are getting interest on their deposits then the foriegn entities will be getting interest and will have a claim on some US assets…right?”…
WRONG!!!! they will get interest, which means more $. NO CLAIMS ON ANY ASSETS! .They will have an option to SPEND those $ with americans who may or may not want to sell US assets, depending on price.
The option to sell US assets is the sellers option NOT the CLAIM of some foreigner who holds $.
Reply
February 14th, 2010 at 7:25 am
That is the most absurd economic thought I have come across. Mosler needs to get his head checked.
Reply