Questions that are rarely asked (from the comments)

Here is Michael Dennis:

The fact that the US is running a persistent trade deficit and experiencing significant net capital inflows seems like very strong evidence that we are not in a traditional Keynesian situation, where we have ‘excess saving.’

If we have excess saving, why are we having a capital inflow rather than a capital outflow?

If combined private and public demand were below the economy’s productive capacity, why are we running a trade deficit? Doesn’t the existence of a persistent trade deficit indicate that our demand is in excess of our supply?

Very much not our grandma’s recession.


There is excess savings globally, which forces the US to save less and consume more. Michael Pettis' latest book describes this process very well.

This simple answer cuts to the heart of the issue. US capital inflows are *result of* the demand for safe investment assets. The United States has the most most liquid, safe and transparent financial markets in the world. When the rest of the world needs a place to park its money, US financial assets are highly desirable. Empirical evidence of this is returns on assets held abroad: foreign holdings of US assets earn a negative real return (like Treasuries) while US-owned foreign assets earn a healthy premium.

Caballero, Farhi and Gourinchas (2008) wrote a very lucid model of this mechanism.

But are US securities really safe assets given how much their price has been inflated?

With a large faction in Congress screaming (all of a sudden) "we're bankrupt" and condemning the bank (and shadow bank) bailouts saying the depositors should have taken haircuts, why are even US Treasuries considered safe? If US Treasuries and other creditors which include lots of government contractors not paid, then those corporations will be drawing on funds that might not be redeemed which would force sharp contractions to avoid insolvency, which would crater profits, totally undermining the rationale for inflated share prices.

The US credit market is the most liquid because of massive bailouts in the form of government equity to keep institutions solvent with equity at 1-2% of debt, and then the Fed buying debt that without the government equity would be subprime, plus the nationalized Freddie and Fannie extending credit to uncreditworthy borrowers because the private banks see these borrowers as not merely unprofitable, but as high risk.

If the Tea Party caucus manages to drag the Republicans to "the US is Cyprus" even for a day....

Indeed some Republicans do feel a short-term need to say "we are Greece" or "Cyprus." They may not often stop to consider that these slogans are not in their long-term interest, or the nation's.

But really, I'm with Virgule that there needs to be some global systems perspective, and a global savings glut, if it does exist, does both allow and perhaps necessitate certain policies. Perhaps, for instance, a global savings glut means we can and should have low cost college loans forever.

Have you not heard of Triffin's dilemma?
The USD's dual role as global reserve and a national currency forces the US to run ever increasing deficits until ...

Is the accounting for "trade deficit" off? iPhones are made abroad, and will show as imports. But most of the money is made by Apple. The thing imported is neither raw material nor a product of a foreign people in its own right - what is imported is remote labor.

Apple's efforts in designing and arranging the product and its production will NOT show as an export, since they didn't sell these efforts to anybody abroad. Foxconn doesn't buy the "design for a product the world will consume 100s of millions of", it just sells outsourced labor and production facilities.

So outsourcing and offshoring may be very badly accounted for in balance of trade accounting. But are they big enough to explain any meaningful part of the Michael Dennis's question?

Also, Apple isn't repatriating their profits to avoid being taxed on them. I don't know on which national balance sheet those profits show up, maybe Ireland or maybe they just float in the cloud somewhere.

It is entirely likely that a lot of those "off shore" profits of companies like Apple are sitting in banks in tax havens and invested in US treasuries. A big slice of the trade deficit and the capital inflows could be simply a consequence of tax avoidance schemes by major American corporations.

This is an interesting idea. Do you know if it's possible to get any hard data on this, or is the money too anonymous?

AAPL is a public company trading on an American exchange. I would expect they are 75-90% owned by Americans (though if anyone has better data please share!).

I could propose an answer which goes like this:

1) US savings rate was extremely low and debt levels were extremely high before the recession hit. So even though deleveraging is going on, it does not translate into a high rate of savings per se, just a higher one than the pre-recession one. This higher-but-still-low savings rate accounts for the trade deficit. As Virgule argues above, the US has acted as a consumer for the world markets, and with Europe in a bigger shock than the US, plus China-India continuing with their high rate of savings, continues to do so.


It seems clear to me that we have a trade deficit because corporations that have access to the capital markets can make more profit from off-shore supply. It has nothing to do with basic supply and demand in the statist sense. We like in a world of the corporate state.

Then how do you explain the net capital inflows? Why are those foreign investors investing in the US, instead of elsewhere?

International capital flows represent relative desires to save. If there is a global demand shortfall, then international allocations will not necessarily change.

I assume "Questions that are rarely asked " is code for P.K. does not approve?

yes. disagree with PK at your peril. just a safer way to do it.

'why are we running a trade deficit?'

Oil is a major component.

As generally done every month with trade figures, calculated risk does the break down -

'The second graph shows the U.S. trade deficit, with and without petroleum, through January.

U.S. Trade Deficit The blue line is the total deficit, and the black line is the petroleum deficit, and the red line is the trade deficit ex-petroleum products.' -

Link to the chart -

A chart which goes from Jan 1998 to Jan 2013.

But for the optimistic, don't worry - the U.S. will be swimming in oil. As noted here -

'The EIA projects that U.S. oil production will peak later this decade—a little below the previous secondary peak in 1985. That would result in a tertiary peak, or yet another lower high. The extra supply in the meantime means that America will be spending less on imported oil. But the modest turnaround in America’s oil fortunes won’t solve the larger problem of worldwide oil depletion which, despite American gains, has kept worldwide oil production on a bumpy plateau since 2005.'

And the latest figures from calculated risk can be seen here -

Looks like this question from the comments has been answered.

"What" isn't really an answer to "why". OK, so we import oil, along with machines, electronic, vehicles, etc. We export other things -- food, advanced machinery, oil again. That's trade.

Yes, and the money paid for that oil has to go somewhere, and the US is seen to be the best place to put it.

"Oil is a major component."

Oil is something America trade for. We import oil (net) and export other things. The question is why we have a depressed economy and a trade deficit.

Many countries import oil. Some import much more than we do (per-capita, percent of GDP, etc.). Many of the bigger oil importers enjoy trade surpluses.

It's not well know, but America's trade deficit in consumer goods is larger than our oil deficit (last time I looked).

Wal*Mart is responsible for the trade deficit... Partially true as it turns out.

Good question.

Not our grandmother's recession ... but very much the exact same pattern of the last 5 recessions.

How macroeconomies work depends (somewhat) on how they determine their exchange rates. We switched from fixed to flexible 40 years ago. We should always be looking for a difference in recession behavior on either side of that break point. It may or may not be there for any particular question we're asking, but we should always look because if there is a difference we need to think about the new period a bit differently.

And here's the thing ... policy-makers and decision-makers are unlikely to do either one. Their advisors might, but it isn't clear if they are listened to.

Perhaps they should not be asking "What macroeconomic idea from the last 80 years worked that we can use again?" because that admits the Keynesian prescription that elected officials love. Instead we should ask "What macroeconomic idea from the last 30 years worked that we can use again?"

'Instead we should ask “What macroeconomic idea from the last 30 years worked that we can use again?”'

Lower taxes, but especially for the rich?

Deregulate the financial industry?

Continually increase defense spending, particularly in the absence of any credible threat?

Oh, sorry, you didn't ask what ideas we followed, you asked which ideas worked.

Rich increasingly pay a higher percentage of taxes.
Finance industry is the, or one of the most regulated industries in the US.
Defense spending is historically low.

What the hell are you talking about?

It's amazing that "one of the most regulated industries in the U.S." can have a 3% equity/debt compared to a corporate average of 70%. Those must be some serious regulations.

Why wouldn't a highly regulated industry lever up?

Yes I suppose we should have clarified whether we were talking about regulations intended to actually prevent the industry from destroying the economy or regulations designed to look like something while doing nothing to make it through the US congress.

In the latter case, you're correct, there's no reason they wouldn't lever up.

1. Romney would love to explain how a capital gains tax at 15% is a great benefit for him personally since he ensures his 'income' is not taxed as income, but he isn't willing to release his tax releases so you can see how it is done. See also the rise in stock options as a form of 'income' which is not taxed at the same rate as actual income. Ask any tech billionaire how that works if you are curious. (For a more advanced course involving offshore tax evasion, there is this link - Don't know how it is playing out where you live, but it is a big deal here. Of course, it isn't just an American issue.)

2. Anyone arguing that America's financial industry is highly regulated compared to what it was like in 1980 needs to read up on American history. Start with the Glass-Steagall Act - you may find in the rubric known as 'learning from the Great Depression.'

3. Seriously - arguing that a single country spending ca. half of the entire world's current military budget by itself is somehow is currently experiencing 'historically low' defense spending may want to look up America's defense spending in the same era as that of the Glass-Seagall Act. In 1937, the U.S. spent 2.2% of its GDP on military spending. In 2010, it was 4.8%. We could cut our current defense budget in half (and thus reduce the entire world's military spending by a quarter in a single stroke of the pen), and it would still look anything but 'historically low.' (Except, admittedly, in comparison to the Cold War era.)

1. He released them some time ago. Mostly we learned he donates 30% of his income. "What the hell are you talking about?" was about right.

2. If you think there are fewer regulations today than in 1980, then... well, what the hell are you talking about? Yes, Glass-Steagal's repeal allows them to do some things they could not before. There are also about a million more rules regarding what they can't do.

3. In 1937 we had a much smaller government, period. And a few years later defense spending was MUCH, MUCH higher than today, and remained so for quite some time. Anyways, much of the world seems to prefer Pax Americana to funding their own defense.

I wonder how much of the puzzle is merely due to aggregation in the analysis/specification. I would suspect if we take a closer look at where disposable income is, what the US produces and what is produced outside the USA.

Just because total demand for domestic production may be interior doesn't mean that spare capacity can be turned to producing for other demand that is satisfied by imports.

The logic here doesn't add. The important part from my post (

"Actually, since the financial crash, the trade deficit has fallen. So if you follow Dennis’ syllogism, wherein a trade deficit implies more saving, then we’re actually saving less.

And yet there’s been overall deleveraging in America."

But there are a few other important points –

1) Dollar-standard and safe-asset shortage creates a captive demand for American capital which make a trade deficit almost inevitable.
2) In Keynes' time GNP, not GDP, was the preferred measure. (Till 1991) And I'd submit this is better when talking about debt and foreign inflow. A capital inflow from abroad is a foreign claim on future domestic earnings. While investment is deferred consumption, all the earnings will finance demand abroad moderated only by the international marginal propensity to import from America.

So I don't think the framework used is correct, but even if it is, the total private+public deleveraging coincident with falling trade deficits (tautological) doesn't sit well in my mind. Remember private deficit + public deficit + foreign deficit = 0.

We have a monetary inflow rather than a capital inflow. If that was invested rather than hoarded we would not be in a depression, but those with the money or access to it see no opportunities or are unwilling to take the risk, and those without it and unable to obtain it can't spend it. .


Use actual economic concepts not Galbraith crackpot junk nonsense.

It's an interesting point but ultimately not that complicated. While true in the sense that it doesn't represent a 'traditional' keynesian recession, the underlying dynamic in the national economy is exactly the same: demand for goods produced falls below capacity due to excess savings in domestic currency. The capital inflows are driven by exogenous or orthogonal factors compared to the US business cycle. You don't have to agree with keynes to recognize that the trade deficit doesn't refute the theory. One point this brings up for me is that if the rest of the world wants to lend the US money, should we depreciate the currency, expect private citizens to take out debt or have the federal government take out debt? Seems like a combination of the 1st and 3rd option would be best.

I have an unrelated question: Why is interest from certain municipal bonds exempt from federal taxation? It seems to me that the primary effect of this exemption is a transfer from the Federal government to municipalities, with the secondary effect of a small increase in post-tax returns for investors who have low risk tolerance and face high marginal tax rates. Was this the product of a legislative compromise intended to secure support for passage of the Sixteenth Amendment and/or Underwood-Simmons Act, by sweetening the deal for local governments?

Very interesting point. I've certainly never heard Krugman argue we should be spending more to help employment in China (although from a utilitarian perspective that's actually a pretty good argument -- still a whole lot of extremely poor Chinese -- but not one that plays well with the Democrats) and the alleged capacity overhang should discourage net capital inflows. I also don't see much reason foreign investors (who consume in their own currency) would see Treasuries as particularly safe, esp. given the downgrades under Obama.

BTW Lars had a related post re the looser Japanese monetary policy, arguing the recovery will be driven more by domestic consumption than exports.

It seems that you are missing the key factor of the magnitudes involved. Savings in the US close to $15T/year (

Trade deficit is around $50B/month, or $600B/year.

Completely different ball park.

stop trying to use facts, Cowen is on another anti-Krugman post he likes to outsource.

Isn't the obvious answer that there is a global demand deficit? Look at Europe. This is the simple corollary of global excessive savings.

I have literally no idea what the logic here is supposed to be, but it's trivially backwards.

If the real rate is above equilibrium you will get:

1) A demand shortfall

2) A disequilibrium high exchange rate leading to... a current account deficit!

And since we are in a *liquidity trap* the real rate is above equilibrium.

Aren't the trade deficit and net capital inflows two sides of the same coin? I.e., the excess dollars overseas resulting from the trade deficit are recycled back into the country as capital inflows. So there's just one mystery here, not two: ie., can a country have insufficient aggregate demand and still run a trade deficit? And on reflection, it's not really that mysterious, since these seem to be fairly orthogonal things. Insufficient AD is about demand relative to potential output. The trade deficit is about demand relative to current output.

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