Are US trade deficits driven by other countries' excess savings?
Core argument: US trade deficits are influenced in part by push factors, as economies with structural savings surpluses, such as Germany, seek to export excess capital to avoid domestic recessions.
The US trade deficits are influenced by push factors such as surplus savings from other countries, which drive capital into the US. Economies with structural savings surpluses, like Germany, often seek to export excess capital to avoid domestic recessions. This capital inflow is facilitated by maintaining depreciated exchange rates, creating trade surpluses and foreign exchange inflows. Central banks may purchase foreign assets to sustain these surpluses, even at the risk of capital losses. Such actions are often misunderstood as currency manipulation but are crucial for countries with savings gluts to maintain growth. Additionally, precautionary reserve purchases and financial outflows from stable economies further contribute to these imbalances. Understanding these dynamics is essential, as misinterpreting them can lead to deflationary policies globally.
Ed Comment:100%. Especially the line: Demanding that a country stop “manipulating” its currency is equivalent to asking that country to stop buying central-bank reserves. It's too bad I don't get credit for being at the vanguard of this and that risk-averse capital is not constrained. Except for me, economists still don't understand risk. It's like the duality of particles and waves and the juxtaposition of quantum mechanics. They get particles/savings/capital but they just can't bend their minds around waves/risk. Saving have two dimensions not one. And it's a 3 factor economy not 2. So it's 6 factors in total 1) low-skilled labor, 2) properly trained talent, 3) risk-averse savings, 4) willingness and 5) capacity to bear risk, and 6) exposure to the technological frontier, where low-skilled labor and risk-averse capital are unconstrained. Successful risk-taking builds institutions that are capable of mining the frontier. Exposure of properly trained talent to the frontier gives us more valuable ideas. Good ideas increase our willingness to take risk. But it takes more than willingness. We need the capacity to underwrite risk/ie someone needs to suffer the inevitable losses. Guys like Pettis walk around with a ridiculous 2 factor model of labor and capital and most of them (not Pettis) think both/all aspects of both are constrained. It is laughable misguided. How did Germany do it inside the EU? Very cleverly. They loaned to solvent French banks who's deposits were guaranteed by the French government. Those banks loaned to the Italian, Greek, and Spanish governments, with practically zero reserve requirements because the loans were government guaranteed (even though the governments had no way to pay back the loans). Those governments ran large fiscal deficits (and corresponding trade deficits) to finance redistribution/consumption/unnecessarily large government employment and BS well-intended white elephant infrastructure projects. The EU, that had rules about not running large fiscal deficits whined but never did anything. That channel was closed after the financial crisis. Covid now facilitates increased fiscal deficits.