Chis, Davos, Others. I'm Stuck on a Critical Concept. Can you Help?

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Morpheus's picture
Morpheus
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Chis, Davos, Others. I'm Stuck on a Critical Concept. Can you Help?

Guys. I'm not an economist. I'm actually a neophyte but I study micro and macro econ every day for hours. So, I like to think that "I'm getting up to speed".

First. I'd like to thank Chris and Davos for their fantastic blogging. Guys, I read it everyday. 

Now. Here's where I am stuck. 

I understand how federal budget deficits are funded and balanced on the ledgers. What I am in a fog about are national trade imbalances. 

If we import x dollars of goods but export x-y dollars worth of goods, then our net trade balance is -y dollars. Which, and call me crazy, LOL, I'm pretty sure is a debt. 

Question: Who holds the debt obligations for this imbalance? I mean, the imbalance is a hodgepodge of consumer goods, machinery, raw materials ect. 

What entities in the economy "officially" hold the bag for the excess imports considering that these goods are dispersed at all levels of the market?

Can you provide a clarifying example please? Ohh and Chris. If I may suggest, I am not the only one that is foggy on this concept. Perhaps you might accept a suggestion to add it to your course if you find it germaine? 

 

Thanks. 

Pete

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Morpheus
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Re: Chis, Davos, Others. I'm Stuck on a Critical Concept. ...

Just a clarification. Anyone with knowledge on this subject I'd appreciate some help.

There are some sharp folks here all around. So I would really appreciate it if as many of you weighed in as possible. I just can't seem to grasp this abstraction. There is no Dept of Imports that holds the gross national import debt. What I would like to know and understand is the mechanism by which we as a nation can still import goods in excess of what we export. If you think of per say, the US as a merchant, and China as a merchant, and they trade something with each other, then one owes the other wealth in exchange for the imbalance. 

OK. Now on the micro level. 

Who? And by what mechanism? 

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Stan Robertson
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Re: Chis, Davos, Others. I'm Stuck on a Critical Concept. ...

MGhandi:

The trade imbalance is not held by just one country or company. Some foreign businesses may simply hold excess dollars for a time and use them later to buy American goods of all kinds, tangible, financial, etc. Others will exchange dollars for their own currencies leaving their governments or banks holding the dollars. Again, these may be used to buy everything from military hardware to financial securities from us. When only paper assets are bought they are effectively loaning us the excess money they got  from their trade imbalance with us. In this way China, Japan, Saudi Arabia and others become lenders financing our imports.

It seldom ends well when others hold too many dollars. Those with long memories may remember the Iranian oil embargo that doubled the price of oil from $15 per barrel to $30 per barrel overnight in 1979. This dramatically increased our trade imbalance with the OPEC nations. The oil exporters were awash in dollars and chose our large banks as the place to stash them. Our big banks, flooded with petrodollars, needed places to invest the money, so what better place than the depleted oil producing states of Oklahoma, Texas and Louisiana. Money ran in rivers through these states while the upper midwest states became the rust belt, impoverished by the cost of fuel for their factories. The demise of a little shopping center bank (Penn Square Bank 1982) that generated hundreds of millions of dollars in shaky oil and gas loans for the big banks was the beginning of the end of a credit bubble that crashed completely with the oil price crash of late 1985. Most of the banks and S&Ls of the southwest oil states failed in the aftermath. (Does this story of shaky brokered loans sounds familiar?)

For what it is worth, OPEC has never functioned well as a cartel except in times of shortage, such as the one caused by Iran. It is not functioning well now else oil prices would not be so low, but that could change abruptly if we really are on the declining production side of peak oil.

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Re: Chis, Davos, Others. I'm Stuck on a Critical Concept. ...

Stan. So you are saying that part of the GDP is held offshore by manufacturers, vendors, and suppliers?

 

Farmer Brown's picture
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Re: Chis, Davos, Others. I'm Stuck on a Critical Concept. ...

Pete,

I think your question brings to light some of the fundamental problems with our system. 

If a country runs a perpetual trade imbalance as we have, how then is new money created to continue funding the imbalance?  The answer, as the CC shows, is that the government continues to create money, and our banking cartel, through fractional reserve banking, expands that creation at least 10X.  

Who is the Dept. of Trade Debt, you ask?  I think the answer is WE ARE.  That's what a large portion of our national debt is - trade debt.  Why are we able to get away with this?  I think the answer is because foreign holders of our dollars continue to allow us to do so.  They have continued, at least so far, to re-invest their surplus dollars in our Treasury Bills.  Since we became the global reserve currency out of the Bretton Woods agreement in the aftermath of WWII, we have enjoyed this luxury.  However, the gravy train can only run for so long, and as the CC suggests, the end may be very near if we do not abruptly change course.

I don't know if this helps, but that's my take on it.  I'm no economist either.

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Re: Chis, Davos, Others. I'm Stuck on a Critical Concept. ...

Hi MGhandi,

I want to second Patrick Browns answer.  Dollars are the reserve currency of the world, if that wasn't  the case it would be a lot harder for the USA to have a big trade imbalance, but not impossible as other countries do have them.  See this very informative list of countries by trade balance (negative ones are at the bottom with the US in final place).

http://en.wikipedia.org/wiki/List_of_countries_by_current_account_balance

According to this list, 63 countries are in surplus, while 101 countries are in deficit.  That is pretty amazing.  Debt is the way to finance these trade imbalances.  Which means in general terms the countries in surplus have to be the ones funding the ones in deficit, although fractional reserve banking might mitigate that somewhat.  If you are a medium sized country with a currency that is in demand (Euros for instance) you could generate internal debt that matched your deficit without suffering inflation if the country selling goods keeps the Euros as part of their reserves.  This can't go on forever obviously, especailly as the loans need to be paid back with interest so that money needs to get back to the original country to pay the debt.  But it seems to have gone on longer than I would imagine possilbe!

 

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DrKrbyLuv
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Re: Chis, Davos, Others. I'm Stuck on a Critical Concept. ...

I do not believe that any economic system may perpetually and chronically run a trade deficit year after year. We have been able to push things further since we hold the world's reserve currency and have been freely and openly exploiting this privilege for over 40 years. There are limits to just how much exploitation other countries are willing to endure and we are seeing that now. 

Our reserve currency status requires other nations to hold some US dollars in order to conduct international trade. If for example, Spain wants to buy oil from the Saudis, they must do so with US dollars. Why would China, or anyone else, be willing to accept such an arrangement in light of the fact that our dollar has been a fiat currency since the early 70s?

As long as other large countries are able to exploit the system more than us, they are likely to go along with our exploitation. China for example, recognizes the problem with the exponential growth of interest as explained by Chris Martenson. So, in order to offset the build-up of insoluble debt, they export more than they import. This provides their economy with debt-less money that may be used to service their internal interest debt. Any country that exports more than it imports may benefit in this manner.   

My interpretation is that there are tacit agreements that allow us to continue as the worlds reserve currency. Japan and China for example, quietly demand that the US continue it's trade deficit which they refer to as "free trade." This is a great example of why private banks should not control our nations monetary system - it is a conflict of interest. While banks may prosper from such exploitation the people do not.

The people in China would be far better off if their central bank saw the people as potential consumers rather than a cheap workforce. Wages and benefits would rise. In the US, the people are suffering since we are not able to sustain our exponential growth of interest debt. The trade deficit makes matters worse for the US since both the interest and the principal are taken from our circulation.

Of course all of this is insane and compelling evidence for any thinking person to eliminate the Federal Reserve - fire them and investigate them for fraud and take back our monetary system.

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