Trade deficit question

Discussion in 'Economics' started by Daal, Nov 14, 2006.

  1. Daal


    Why when people mention the trade deficit they talk about the 'need' for foreign capital to 'finance' the trade deficit. since most of the importing is done by the private sector who uses their their own capital(or their private borrowing in the US) to finance it, I dont get it where is the 'need' for financing. I do understand that the countries we run the trade deficit tend to buy up bonds but thats budget deficit financing and not the trade
  2. if someone from the private sector borrows from US to buy imports, and the US in turn borrows from foreigners to finance that individual, then it seems to me that the foreigners are ultimately financing that which the person bought.

    If we assume that purchase resulted in a trade imbalance (he never made money exporting anything back), then ulitmately the foreigners financed the trade imbalance from that transaction. Hence, they financed the trade deficit that occured.
  3. Daal


    I still dont understand. that person will borrow from a commercial bank which if they dont have reserves will borrow from another commercial bank, if nobody got reserves the bank will borrow from the fed(only in a crisis as far as I know), how this would affect the issuing of new treasuries to be owned by foreigners?
    I do see that that person would be draining on US savings making less savings avaliable to buy treasuries but when the foreigners buy them it would still be budget financing and not trade
  4. Daal


    where I'm wrong
  5. I dont believe you can apply conventional logic to the trade deficit question. As long as the US dollar remains the reserve currency and the US consumer remains the preeminent target market for manufactured goods the trade deficit is meaningless. China is the new Japan, who was the new Taiwan, they all enjoyed rapid growth fueled by the US dollar only to find themselves in a currency trap. Meanwhile the US slogged right along buying its consumer goods from the next market ready to ride the tide. It's been a good ride that should last a while longer but it has never been "conventional" and wont be until the field is leveled. Until then just enjoy the ride cause as the man who set it all up famously responded to such questions....." In the long run we are dead!"