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But I'm constructing a thought experiment only, not telling you that the thought experiment is the real world! In my thought experiment, the Mexicans get the money from Canada.

In the real world, much of the USD that America spent on Chinese goods was passed on to Saudi Arabia to buy oil. So the trade defecit with China is much higher than the actual USD holdings of China. The key insight is that money is not spent just once. It goes around in circles. But trade defecits are measured as only between two parties. And people keep thinking the US trade defecit with China has some scary meaning. But it is a terribly inaccurate way to measure anything, and it doesn't represent a debt that America owes to China, unless China can actually present those USD to American sellers of goods, which IMHO they can only present a fraction of.

Cpt. Charisma 10mo ago

Your thought experiment leaves out the part of the transaction where the actual deficit is created, then says it doesn't matter because you can't see it anymore. You then go on to make an argument based on that fact. Do you not see why that is a problem?

The USD is a little weird, since it is the world reserve currency. That means that yes, China can use dollars received to buy goods from other countries. That doesn't work the other way around, though. We can't send Chinese Yuan to Canada in exchange for wood. Not that it's impossible - they just don't want it. But the real problem comes when the Chinese have enough dollars to pay for everything they buy from other countries. They end up with an ever-increasing pile of dollars for which they have no use. This is the situation we are in now. A large part of the deficit has gone to treasury bonds, meaning we are literally paying interest on the deficit. The money is also used for things like the Belt and Road initiative and building a navy, that give China a strategic advantage. If China wanted to, they could just sell it all and crash the dollar. Are you starting to see why it matters yet?

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Discussion

Mike Dilger ☑️ 10mo ago

I'm humble enough to say that maybe it is I that is confused, but IMHO it is you who are confused.

Defecit and surplus can be used to describe the change in a debt, or the change in a fictional account. The current account between the US and China is fictional. it is an ACCOUNT. Think of that word. Account... when you account for how your car got smashed what are you doing? You are explaining it. An account is an explanation of why something was transferred from one place to another. It is just and only that -- an explanation. Accounting is all about explaining why money or goods moved... was the money that I received income, payback of a loan, a gift, a loan? The accounting may imply obligations, like I have to pay the money back to the lender.

But in global trade, nobody has to pay anybody back. They aren't loans, they are trades.

If my grandmother buys a vase off of Ali Express, after that happens, nobody has any new obligations on any books anywhere. It is just a trade. They get the USD, grandma gets her porcelain vase.

So again IMHO there is no defecit that I must pay attention to. I can look through all of that goobley gook directly at the actual assets and obligations, the only real things.

Cpt. Charisma 10mo ago

>If my grandmother buys a vase off of Ali Express, after that happens, nobody has any new obligations on any books anywhere. It is just a trade. They get the USD, grandma gets her porcelain vase.

This is the source of your misunderstanding. If you grandmother buys that vase, the seller *does not* receive dollars. They receive the local currency. You grandma and the seller are both satisfied, however, there are extra dollars sitting in the seller's country's banking system. The U.S. effectively owes that country the value of the dollars. What they do with those dollars effects exchange rates and interest rates.

Mike Dilger ☑️ 10mo ago

That is correct, and I used a simplification.

But if another customer of that bank buys oil from Saudi Arabia in dollars, those dollars are not used by China to get something from the US, they are used by China to get something from Saudi Arabia. And if the Saudis buy weapons from the US, those dollars come back into the US. And then they can go around and around again. And my point was simply that the trade defecit is not an obligation, but a summation. The dollars are an obligation. But the trade defecit can count the same dollars many times and so it can get out of whack with reality when you look at a single country like US trade defecit with China. But if you look at US trade defecit with everybody, that is useful.

Still I could be wrong. I'm not an economist.

freemymind 🇨🇭 10mo ago

What you mean in actual deficit? When you buy a car for 50k US-dollars, is this an actual deficit for you? Or did you have 50k Dollars and really needed rather a car then these 50k?

I mostly buy my stuff, because I beleave its price is fair when I buy it. So it is in balance.

Cpt. Charisma 10mo ago

The actual deficit is the dollars the foreign country ends up holding (or the foreign currency that ends up in the U.S.) If we buy more stuff from China than they buy from us, they end up with extra dollars. They expect to be able to buy real things with those dollars at some point. That is the deficit. The things China expects to buy for the dollars they have earned.