More On Trade & Capital Flows

With all the political demagoguery in the air lately about trade deficits, current account deficits, and foreign-held US debt, especially in this time of presidential campaigning, it is worth noting the recent editorial by Mohammed El-Erian and Nobel Laureate Michael Spence in the Wall Street Journal this past week.

They wrote a lengthy piece about the US savings rate. Essentially, they contend that the recent appreciation in US residential real estate has resulted in unexpectedly high, near-term "savings," in the form of those real estate asset values. Many people have chosen to convert some of that newly-acquired, or realized, wealth, into other assets, via spending. Thus, US imports have risen, and dollars have flowed overseas.

The people in other countries have chosen to sell us their goods and services, and accepted dollars in payment, as savings, rather than consume more right now, themselves. They are in the wealth-accumulation phase of economic growth.

This is the key point. Over time, these people, and countries, will, as they become wealthier, spend their savings, and begin consuming more. Some of that spending will be dollars, for US goods and services. Then the trade flows will, to some extent, partially reverse.

It's a timing issue, as the authors wrote,

"Among the policy mistakes, protectionism measures in the US would derail the global adjustment. So, too, would the inability of emerging economies to navigate their complex policy challenges.

Geopolitical shocks would also be a problem, as they could undermine the free flow of goods and services."

In short, trade and capital flows, spending, deficits, and investments are long-term, continuing phenomena which ebb and flow. Once on this merry-go-round of financial spending, investment, and trade flows, it is impossible to simply take a snapshot and declare the situation to be "good," or "bad."

It's clear from recent comments in the press that most US politicians, and, more frighteningly, Presidential candidates for 2008, as I noted in this post concerning Hillary Clinton's recent idiotic comments on international funds flow, do not grasp this in the least. They are playing politics with fears of 'foreign held debt,' and 'current account deficits." To my knowledge, not a one of these candidates has an economics or even a business degree.

Sadly, as El-Erian and Spence cite, these so-called leaders may do lasting and serious damage to our international trading and investment system with their short-sighted calls for protectionism, regulation of capital flows, and other trade- and funds-flow interdicting nonsense.

Let's hope wiser heads prevail, so the natural cycle of differently-maturing economies can continue to productively interact around the globe, to everyone's ultimate better living standards, greater wealth, and peaceful prosperity for generations to come. It's a long term process, never truly capable of being declared "over," nor having "winners" or "losers" throughout the process.