11/12/2010

American trade deficit game is simply brilliant

The American trade deficit with China not only works to its benefit, but is also intentional and planned. An illustration of how this works by using the latest issue of US$600b may help to make the game plan clearer. US$600b can buy a lot of stuff especially from China where the cost of goods is very cheap. Think of what the Americans could buy with that kind of money. All the goods made in China ended in America to be enjoyed by the Americans. The Chinese ended with US$600b of paper notes in exchange. The Chinese could go to America with the same money to buy American products. The American will sell some to them, say US$100b. So China ended up a trade surplus of US$500b. Looks pretty good. But what can China do with this money if it can’t buy things from the Americans? The US$500b becomes money on paper but worthless in real terms. To continue to deceive the Chinese, the Americans told the Chinese that they could buy American Treasury Notes or IOUs which pays a good interest rate. The US$500b will then be returned to the Americans in exchange for another form of worthless notes. The Americans do not mind paying whatever interest as it will be a small fraction of the US$500b. When the Treasury Notes or IOUs are due, the Americans will sell the Chinese more notes or IOUs a second time and on and on. In effective or real terms, the Americans are printing money to buy real goods from the Chinese, and the more the better, and all they have to pay are worthless notes worth the weight of the piece of paper it printed on. And the Chinese can only look at their monthly statements showing how much the Americans owed them, and they can smile and smile and smile. That is about all they benefit from the exchange. Now comes the best part. The Americans can then accuse the Chinese for chalking huge surpluses or imbalance of trade. And the fault is with the Chinese. The Chinese is causing the problem, selling more and buying less. In the meantime the Americans got to enjoy all the goodies the Chinese produced while the Chinese got useless paper notes in the bank accounts, and cannot translate them into real stuff.

19 comments:

Wally Buffet said...

Sorry Mr. Bean, you lost me.

The part where you say that the Chinese can only buy US$100 billion and not more.

Why not more?

Exchanging self destructing 'Made in China" trinkets for Boeing planes and components for bullet trains isn't possible? It's already being done. What about all the prime real estate in Manhattan and New York owned by China SWF, Chinese companies and individuals? They're already bought in US dollars.

The only casualty in this exchange as far as I can see are the ordinary Americans who are seeing their currency relegated to the level of some African banana republics.

Focking themselves to fock others?

Pray explain.

Thank you.

Chua Chin Leng aka redbean said...

There are many things the Americans want to sell but the Chinese could make them cheaper themselves. There are many things the Chinese want to buy but the Americans do not want to sell.

The thing the Chinese can do is to spend those money on anything that they can buy quickly. The banana currency is taking shape very quickly. If all the countries just keep appreciating their currencies and give the banana currency a miss, it will become banana currency in double quick time.

Chua Chin Leng aka redbean said...

Oh for political and strategic reasons the Chinese would want to buy Airbus instead. And use the banana currency to pay first.

Anonymous said...

Best if China can use the US Dollar to buy over the hearts of the Americans.
That is if the Americans appreciate and are grateful to acknowledge that the PRC People have been working very hard to make quality goods to sell them to Americans at dirt cheap prices and buying the American Bonds to keep the US Dollar worthy as a currency.

Matilah_Singapura said...
This comment has been removed by the author.
Matilah_Singapura said...

redbean,

Lucky for singapore, you're not writing their economuc policy.

I can assure you you wally and myself run HUGE trade deficits. and our personal "economies" are stable and sustainable.

E.G. I have a trade deficit with nearly every Asian restaurant in a 10 km radius. I run big trade deficits with the Apple computer company, also numerous pornographers, previously breweries and hard-liquor manufacturers. In fact, everything I consume on a daily basis -- I run a trade deficit with those producers.

Not a single one of those producers "buys my stuff" -- not one. I am constantly in deficit.

For a good explanation of "trade deficits" and how wrong many so-called economists are about the term, I suggest you visit FEE and/ or The Mises Institute and listen to some of their lectures on the topic.

Chua Chin Leng aka redbean said...

Deficit budget is not necessarily bad. It can be good but up to a point. Just like housing price, going up is good, but up to a point. Foreign workers is good, but up to a point.

Matilah_Singapura said...

And wally is correct:

The Chinese are buying real, tangible assets, not just trinkets and real estate, but US companies -- oil companies, energy etc.

American congress is blowing a lot of hot air trying to make trouble by invoking the "trade deficit" argument.

The problem is FIAT currencies -- both the US and the Yuan. Both currencies are heavily manipulated by their countries. China is no "innocent babe" in this area -- it is a HUGE inflater, historically WORSE than the US.

Undervalued Yuan also affects the competitiveness of more fragile Asian economies -- Indonesia, Vietnam, Thailand. They *hate* a low Yuan, because they can't compete, but shut the fuck up because China invests in those countries.

The crux of the world's financial woes rests on the the existence of the US Fed, with their ability to print as much USD -- the world's reserve currency -- as they like.

Quantitative easing leads to Quantitative easing -- a tit-for-tar currency "war", or "competitive debasement". You inflate, I inflate. You deflate, I still inflate -- making you more expensive and less competitive.

If it gets serious and the US and China really wage financial and economic war on each other -- the rest of the world will get nicely anally raped as a result.

Aust, Canada, singapore and Brazil are trying to "be responsible" by mopping up all that printed "stimulus" money, hence their currencies are rising. But there is still A HUGE AMOUNT of stimulus money out there, plus the CREDIT created.

Sooner of later the piper has to be paid, and these countries will have no choice (politically) but to inflate.

The best strategy is to mop up the extra money, and hang tight -- but that causes lots of pain: unemployment, deflation, social unrest, so politically inflation in these countries will eventually come again.

Kopi tiam kopi o $2 yet?

The price of a cuppa is $4-5 here in Perth. I can remember when it was $1.

Matilah_Singapura said...

redbean

Budget deficit and trade deficit are NOT THE SAME THING!!

Chee bai!

Anonymous said...

I have a bad feeling about all this money printing by the Fed.

There is no way the BRA can reduce its budget deficit, or even to balance its budget and there is no way they can ever reverse the trade deficits with China or Japan. So, rather than flogging a already dead horse, why not just print as much money as possible and go on a last fling before abandoning the greenback before it reaches banana currency status.

I know that such a thought is unthinkable and no one will ever contemplate that happenning, but BRA is now in such desperate straits, you do not know what other irrational ideas they have up their sleeves. Something real serious is brewing.

Chua Chin Leng aka redbean said...

Of course I know they are not the same. And I have been talking only about trade deficit. How did you get so confused that I am talking about trade deficit and budget deficit at the same time?

In my comment, the budget deficit is used in relation to the American philosophy of spend now pay later. And this is causing the mess in the American economy and ultimately, banana currency.

Chua Chin Leng aka redbean said...

Something is brewing for sure. The Europeans are raising an alarm that the ETFs, or exchange traded funds, is morphing into another monster like the CDOs.

We have been warned. Hope when these really turned into the same monster, no one is going to stand up, with eyes wide open, and say 'I don't know' or we were caught by surprise.


Actually all derivatives are killing the real value of stocks that are backed up by company assets. These are instruments that are highly geared and with minimal asset backings. Solely as gambling chips.

Anonymous said...

The MSM seems to have avoided talking now about the mortgage foreclosure fraud, but that problem has not been resolved yet for sure.

The MSM is not talking much about the hollowing out of the state pension fund, which is insolvent and probably unable to meet it obligations.

So many problems. I really think the imperial empire is really descending into third world banana republic status.

Anonymous said...

Tne Americans are safe at the moment because the greenbacks are being used as currency in the whole world. What if the whole world gets smart and bring all the greenbacks back to America and spend them in American soil?

I think it will become a banana currency overnight.

Anonymous said...

Right, so China must buy more Boeing Aircrafts, even Patriot Missiles instead of building similar items themselves.
The rest of the world must use greebacks to help the Americans
to live better.

Chua Chin Leng aka redbean said...

But the Americans would not want to sell defensive weapons to China in case China uses them to defend against an American attack. Dunno what terms they are attaching to the sales of Boeing? They don't mind selling shoes and shirts to China, and hamburgers and cokes.

Anonymous said...

Selling shoes and shirts to China is like carrying coal to Newcastle lah.

Anyway all the consumer products that BRA makes (if there are any factories left making them) are already manufactured in China (in American factories now located in China) at a fraction of the cost, so the Chinese must be really dumb to pay a high price for such things from BRA when they can get it cheaper, better and faster.

The statistics indicate that for every US$1 China buys from BRA, they sell back to them US$3.50 worth of Chinese goods. I am no economist, but how in the world are they going to reduce their trade deficit if they continue to devalue the US$ further and get China to make the Yuan stronger?

Military spending makes up about 54% of the BRA budget and this will be unlikely to be cut down much, since they are now preoccupied with overshadowing China militarily and this is going to be their downfall, just like the Soviet Union.

Anonymous said...

The Chinese and only the Chinese has an understanding that they somehow know from the nature of being, 'fengshui lunliu zuan'. It means the wind of fortune (will have to)change.
Everyone will gets it's turn to regression or be afflicted with poor or bad luck. There is no infinite or endless superiority.

Anonymous said...

History is already littered with fallen empires, so what is there to ensure that the USA will be the exception?

The British Empire was even more grand, powerful and all encompassing during its heyday, its presence felt on every continent. What is left of the British Empire today?

The USA, a bankrupt country now, cannot afford their present rate of military spending, simple as that.

Like the British and Russian counterparts, military spending will contribute largely to their downfall.

On the other hand, without the kind of military spending, they cannot continue being the superpower of the world.

Either way, whether they continue to spend or cut back drastically on their military expenditure, their downfall is imminent.