Mainstream theory concludes that the overall trade
by ufl (2024-02-21 07:54:11)

In reply to: Thanks. Unfortunately, not much consensus here and  posted by Raoul

Cannot Reply Return to Political

deficit has nothing to do with the factors you list. They determine what stuff we import and export rather than the amount by which one exceeds the other.

The trade (current account) deficit is determined by saving (including government dissaving) and investment. If you want a little evidence that this story is right, go back a few years. It was pointed out a couple of decades ago that the U.S. was a massive importer of oil. One story that was out there went like: "If we could reduce our dependency on foreign oil, that would largely eliminate our trade deficit".

We did and it didn't.

So as long as we are running huge government deficits
by Raoul  (2024-02-21 08:51:16)     cannot delete  |  Edit  |  Return to Board  |  Ignore Poster   |   Highlight Poster  |   Cannot reply

and thus dissaving, we will have a trade account deficit of some type? And a shrinking trade deficit is unlikely, and if it were shrinking, it would probably be because the government deficit was going down and may well be associated with lower interest rates, but not because of the trade deficit?
That's the basic idea
by ufl  (2024-02-21 09:15:11)     cannot delete  |  Edit  |  Return to Board  |  Ignore Poster   |   Highlight Poster  |   Cannot reply

and it works out with bilateral trade balances as well as the overall balance.

Countries that save a lot should run current account surpluses with countries that don't (which shows up as a deficit for the latter). What country has a low saving rate? U.S. What country saves a lot? China. The U.S current account deficit with China is the largest in the world.

That's because China floods the market with cheap goods, right? Is that why we have a very large trade deficit with Japan? all those cheap Japanese goods? No. It's because Japan has a signficantly higher saving rate.

This one of those questions where the economists' orthodoxy and popular perception are far apart. It's also on where the economists' story works pretty well.
Good stuff. *
by Raoul  (2024-02-22 08:30:56)     cannot delete  |  Edit  |  Return to Board  |  Ignore Poster   |   Highlight Poster  |   Cannot reply