The “horrors” of The Trade Deficit

The “horrors” of our Trade Deficit going up is back in the news!

However, what is not explained is the mirror image of this deficit.

What professor Perry points out in his blog post (note when this was published and when pundits are back at it again):

“Because international transactions are calculated using  double-entry bookkeeping accounting, international payments HAVE TO  BALANCE, and the balance of payments has to equal ZERO.

Since 1990, the cumulative capital inflow from foreigners investing in the U.S. (FDI + indirect portfolio investments) has totaled to $7.6 trillion, which has provided valuable investment capital to the U.S. economy that has financed the  expansion of U.S.-based business, and in the process has boosted U.S. stock prices and supported million of jobs.  But all we ever hear from the media, politicians and pundits is hand-wringing over America’s supposed economy-draining “trade deficit,” with no recognition of the offsetting, economy-energizing capital inflow.” (my emphasis added).

When we buy something made outside the U.S., we send dollars “over there.” “Over there” wants to do something with those dollars because dollars just sitting in a foreign bank do not earn anything. Some “over there” do one thing with their dollars, and others do another:

“Of the $556 billion capital inflow to the U.S. last year, $234 billion was for foreign investment directly into acquiring U.S. firms, investing in joint ventures with U.S. firms, or expanding operations of existing U.S.-based operations (e.g. BMW building a new factory in South Carolina).  The other $322 billion was for indirect “portfolio investments” into U.S. stocks, bonds and other securities.”

Moral of the story: We send dollars “over there” when we buy their goods. Those dollars coming back are put back to work when they come back “over here” from “over there.”

Table source: BEA

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  1. Flipside of Trade Deficits | Better Financial Education Blog - January 23, 2013

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