To: Abner Hosmer who wrote (10520 ) 4/24/1998 1:40:00 AM From: ahhaha Read Replies (4) | Respond to
Trading deficits don't matter because they are an abstract representation of book balancing. Nothing goes to another country without something coming here. With the Japanese we have been sending physical dollars, currency, and they have been sending physical goods like autos. When they receive the dollars they can't spend them in scale in Japan because the people won't accept them as legal tender just like here you can't buy a sandwich with a yen note. So the BOJ takes the currency and buys T-paper with it. This exchange has little consequence on anything even when the paper factoring enables us to deficit finance. But if the T-paper is declining rapidly in face value because the US is pursuing inflationary policies, the hard earned value poured into the Japanese auto when it was built, is lost. We would still be getting a yield up to depreciation out of the auto, but the Japanese would be getting a declining yield down to the inflationary discount in the T-paper. The BOJ would have to inflate the auto to compensate or the FED would have to deflate the US ability to create poor economic policies. Thus, trade deficits don't matter unless the receiver of paper loses trust in the seller. Trade deficits don't matter as long as governments conduct sober non-inflationary monetary policy. When they don't the deficits leverage the fear and multiply the lack of confidence exacerbating a random adjustment into a disaster. When deficit budget financing was in flower, obviously the lack of trust would undermine the ability of the US government to float bonds since the Japanese wouldn't buy them. It's unclear that that would be a bad thing. There has been 20 years of trust so trade deficits haven't mattered. That may be changing.
