Yippy ti yi yay…the housing crisis is no problem…the trade deficit’s no problem either.
Today’s dreary accounts (a simplified explanation of the U.S. trade deficit):
Spent – $7 billion
Received – $5 billion
Net – misery
Classical economics and common sense tell us this is no recipe for prosperity. But wait…Mr. Michael R. Sesit reports in the International Herald Tribune that there’s more to the story.
“Today that 200-year-old theory is flawed and overly simplistic,” he says.
The article explains why the trade deficit is no problem. The United States exported $1.4 trillion worth of goods and services in 2004, says Mr. Michael Sesit. It imported $1.7 trillion worth. On its face, this produced a deficit of $300 billion. But many of the products it imported were actually made by U.S.-owned companies. And if you take that into account, he tells us, the picture is much rosier…the result is much less miserable than you might have thought. In fact, instead of having a $300 billion deficit, we had a $1.2 trillion surplus!
Hosanna…and yippy ti yi yay!
So, let’s see…
Ford (NYSE:F ) makes a part overseas…using foreign workers…foreign suppliers…foreign factories…foreign currencies…maybe even foreign capital. It then sells the part to Americans, who send their money overseas to pay for it. Not to worry, says Sesit, because it is a subsidiary of an American company making the sale. Of course, almost all the money stays overseas too, where it is used to pay wages to local workers, pay local suppliers, pay taxes to local government, and generally boost up the local economy. Profits, if there are any, are almost certainly re-invested locally too – to hire more workers, pay more suppliers, etc.
Except for the dividends paid to the parent and distributed to shareholders – who may be foreigners themselves – neither the capital, the expertise, the tools, nor the wages paid, end up in the United States. And the dividends might be just one or two percent of sales…in other words, the real amounts measured by the trade deficit are probably 50 to 100 times the amounts represented by dividends that may or may not be paid at all, to people who may or may not be U.S. residents.
Alas, the numbers still tote up in the traditional way:
Expenses – $7 billion.
Revenues – $5 billion.
The United States runs a trade deficit of about $2 billion per day.
Result – Misery.
The Daily Reckoning Australia