The FT Alphaville’s Izabella Kaminska presents a Citicorp chart depicting the evolution of trade imbalances. In truth, it shows the U.S. continues to absorb a disproportionate share of the world’s risk-averse saving.
Trade deficits occur when countries with a surplus of savings, like China and Germany, buy financial assets, chiefly U.S. government-guaranteed debt, to balance trade flows rather than goods that employ Americans. When at-risk capital, namely equity, constrains growth, risk-averse savings sit unused even at near-zero interest rates. Idle savings slow employment growth, and wages.
Despite Silicon Valley teaming with investment activity, Larry Summers claims savings sit unused because America lacks investment opportunities. I claim our innovation-driven economy lacks low-risk investment opportunities suitable for risk-averse savings, and that the economy lacks the equity needed to absorb the risk of putting risk-averse savings to work.
Trade is valuable to all Americans. But when equity constrains growth, perennial trade deficits funded by a never-ending glut of offshore risk-averse savings slows middle- and working-class employment and wage growth. America derives little value from unbalanced trade under these circumstances.