TRADE DEFICIT BOGEYMAN

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP87-00462R000100150029-9
• Release Decision: RIFPUB
• Original Classification: K
• Document Page Count: 2
• Document Creation Date: December 22, 2016
• Document Release Date: February 22, 2010
• Sequence Number: 29
• Publication Date: September 13, 1985
• Content Type: OPEN SOURCE

Approved For Release 2010/02/23: CIA-RDP87-00462R000100150029-9
-"-tie: V -_'LL STREET JOURNAL FRIDAY, SEPTI IER 13, 1985
P,26
As bogeymen go, the trade deficit
is the biggest hit since "Jaws." The
balance of trade is one of the least un-
. derstood statistics on the economic
horizon, perhaps because it is one of
---the least important. Normally no one
needs `to understand the trade bal-
ance; it's better to forget it. But at the
moment the trade deficit is at the cen-
ter of a lot of protectionist babble that
nay talk us into a new Smoot-Hawley
Tariff and a new Depression, so we
...had better spend a few moments ex-
plaining it.
For openers, what happens if a
country runs too big a trade deficit?
.-Its currency falls. So if we continue to
run a big trade deficit, the dollar will
fall. But everyone on six continents
thinks the dollar is too high. If it falls,
everyone ought to be happy. A lot of
folks have a notion that if the dollar
falls, exports will rise and imports
-will decline, and that the Europeans
will not need to keep up interest rates.
So why is everyone complaining about
the trade deficit? Anyone who wants a
.lower dollar should be rooting for a
.:.bigger deficit.
~ Some of the wisest' words on this
'subject were uttered by a Treasury
advisorycommittee
that studied the in- Toying
ternational ac- With
counts' back in Depression
1976: "The words
..'surplus' and 'deficit' should be
avoided insofar as possible," it wrote.
"These words are frequently taken to
mean that the developments are
'good' or 'bad' respectively. Since that
interpretation is often incorrect, the
terms may be widely misunderstood :
and used in lieu of analysis."
The trade deficit Is one entry in an
accounting identity. By definition, the
"-international accounts must balance.
When an American spends a dollar on
Hong Kong-made chopsticks, the dol-
lar doesn't vanish. The chopstick
maker only wanted it so he could buy
something. Eventually the dollar will
come back to the U.S. Where it shows
up in the international account de-
pends upon what the chopstick maker
decides to buy.
REVIEW & OUTLOOK
Trade Deficit Bogeyman.
The dollar shows up in the mer-
chandise trade balance, for instance,
if the chopstick maker uses it to buy
U.S. soybeans for his tofu. It would
also show up in merchandise trade if
he used it to buy Oregon timber to
chop into chopsticks or Alaskan oil to
run the chopping machine, but he
can't spend it on those commodities,
since the same Congress that's in a
panic over the trade deficit has out-
lawed their export.
If the chopstick maker uses his dol-
lar to buy a hotel room in San Fran-
cisco or a blueprint from Bechtel, it
shows up in the current account,
which includes not only goods but
services. If he uses his dollar to buy a
share of IBM or a Treasury bond, it
doesn't show up in the trade balance
at all; it shows up in the investment
account of the balance of payments.
The whole panic over the trade def-
icit is a panic over which account the
chopstick maker's dollar shows up in
when It comes back to the U.S. We
wonder how many of the congresspeo-
ple lamenting the trade deficit even
know which account they are talking
about.
w ? w
The government used to Issue a
confusing plethora of international ac-
counts-a "net. liquidity balance," for
instance. -Then it made the opposite
mistake of emphasizing only the trade
account, leading congresspeople and
others ' to think only: trade counts.
A zero trade balance is not normal
or even desirable. The U.S. ran a
trade deficit for nearly all of its first
100 years, and generated trade sur-
pluses under Smoot-Hawley in the
midst of the Great Depression. Nor-
mally, a rapidly growing economy
will demand more of the world's sup-
ply of real resources and run a trade
deficit. It will also provide attractive
investment opportunities and attract
capital inflows. In a healthy world,
the two will offset each other, for pe-,
nods of perhaps a century.
Approved For Release 2010/02/23: CIA-RDP87-00462R000100150029-9
 Approved For Release 2010/02/23: CIA-RDP87-00462R000100150029-9
The trouble comes when voluntary
trade is not offset by voluntary invest-
ment flows. Then the international ac-
counts have to balance through offi-
cial financing, exchanges among cen-
tral banks. In the international ac-
counts, it has always seemed to us,
the bottom line is not the trade deficit
but the official financing.
The sensible concept is this: the
trade account, the capital account and
official financing, the three of which
must by definition total zero. In 1977,
for example, the trade account ran a
deficit of $15.2 billion. The capital ac-
count ran a deficit of $13.4 billion, as
investors fled the dollar. With trade
and capital accounts falling apart at
once, official financing had to jump to
$28.7 billion, a sign of sure trouble.
(This was detailed in these columns in
"A Dollar Primer," Aug. 14, 1978.)
The basic problem back in 1977 and
1978 was that the Federal Reserve
was creating too many dollars. This
was corrected with the appointment of
Paul Volcker in August 1979. With a
tighter monetary policy, investors
moved back into dollar securities and
the capital account recovered.
In 1984, the deficit in the balance
on current account jumped to $101.5
billion. But foreigners made large
purchases of dollar securities and
U.S. banks stopped lending abroad,
leading to net capital inflows of $101.3
billion. Official financing was negligi-
ble. In short, the mounting trade. defi-
cit has been amply offset by voluntary
capital flows. Therefore the dollar has
not declined, as a large trade deficit
would normally suggest. The system
is working fine despite the trade defi-
cit-indeed, because of it.
Since the bogeyman's usual threat
is so obviously not coming true, some-
one has had to invent some new ones.
We hear worries about being in debt
to foreign countries and going the way
of Argentina or Mexico. But there is a
big difference: the Argentine and
Mexican debts were denominated in
dollars while the U.S. foreign debt is
denbininated in dollars. So long as the
debts are in our own currency, it
doesn't matter where they are held or
to whom they are owed.
We hear worries about exporting
jobs, though this is about the only
economy in the world that is creating
jobs. We hear worries that the trade
deficit will continue while the capital
inflows suddenly stop; this worry we
hear even from Paul Volcker, the man
whose policies control whether it will
ever happen.
So let us give you our own interpre-
tation of the international accounts:
They reflect Chairman Volcker's suc-
cess in controlling inflation and Presi-
dent Reagan's success in stimulating
recovery in the real economy. Mr.
Volcker's tight monetary policy
makes the dollar the currency of
choice for investors the world over;
this leads to capital inflows. The ad-
vent of Mr. Reagan's supply-side tax
cuts-delayed until Jan. 1, 1983-set
off a U.S. boom that needed a dispro-
portionate share of the world's re-
sources; this leads to a trade deficit.
And it also increases the capital in-
flows, since it makes U.S. investments
even more attractive, given the stub-
born refusal of European and most
other nations to imitate the successful
U.S. policy mix.
It all happened once before. Back
in the 1920s, Andrew Mellon and Cal-
vin Coolidge took a lot of heat for
what would now be called supply-side
tax cuts, while Benjamin Strong kept
money tight enough to keep prices sta-
ble and even declining. But England
declined to repeal its wartime tax
rates, and Germany embarked on
austerity. Protectionist sentiment ex-
ploded in the U.S. Congress, both the
capital account and the trade account
collapsed, and the Roaring '20s turned
into the Great Depression.
It could happen again, if we get
scared by the bogeyman. When you
hear him rustle, remember this: It
isn't that capital inflows are needed to
offset: the trade deficit. Rather, the
trade deficit is essential to offset the
capital inflows. If we grow while other
countries insist on stagnating, we will
suck in all the investment in the
world. And if we refuse to recycle
these investments in trade, we will'be
starting a spiral into the abyss.
Approved For Release 2010/02/23: CIA-RDP87-00462R000100150029-9