Monday, April 18, 2011

Net importers wealthier than net exporters

What is wealth?

Some folks believe that wealth is pictures of dead people on pieces of toilet paper. Other folks believe that wealth is shiny metal. But neither is true. Weath is stuff.

Now I hear you saying, "but if I had millions of dollars, I'd be wealthy!" Uhm, and what would you do with that millions of dollars? Would you put it all in a big room and roll around in it like Scrooge McDuck? "I'd buy a new house", you say? "I'd buy a new car", you say? Yes. Because the money itself isn't wealth. What you buy with the money is wealth. Money has to serve as a temporary store of value because of the time lag between trades -- i.e., you trade something to someone in exchange for money (if you're an ordinary working slob, you trade your labor for money, generally), and then at some point after you receive your paycheck, you spend it on food and rent and such. But the operative word is temporary. In a functioning capitalist economy, money that sits under mattresses turns into lumpy mattress stuffing from the perspective of the economy, not money. Which, as I've previously pointed out, is why capitalism requires inflation -- to drive money out from under mattresses (where it would be losing value) and into the real economy where it can be used to facilitate trades of goods and services, which is the whole reason money was invented in the first place.

Now I hear you say, "but... but... billionaires! They have lots of money!" Well, actually, no. The average billionaire could not put his hands on more than a few hundred thousand dollars at best on short notice. What billionaires have is lots of stuff -- they own corporations, they own government bonds, and yes they own houses and cars and stuff but mostly what they own is the building you go to work in, the tools you use for whatever your employment is, the banks that lend you money at 29% interest that cost them 1.5% interest to borrow from the Federal Reserve window... if you wanted a million dollars from a billionaire, he'd have to go out and sell stuff to get his hands on that much money. Which just emphasizes that it's not the million dollars that is wealth -- it's what that million dollars bought (the stocks, the bonds, the businesses and physical assets) that is the wealth. Otherwise the billionaire would have never traded that million dollars for that stuff in the first place.

So anyhow, one of the canards of "conventional common sense" is that it's bad that the United States is a net importer rather than a net exporter. Being a net importer is called "running a trade deficit" and spoken about as if it were as evil as the satanic love child of Stalin and Pol Pot. But... but... the United States ends up with more stuff that way, i.e., becomes wealthier as a nation by being a net importer!

So why does "conventional wisdom" say that net importers are "bad"? It's because they conflate money with wealth. They confuse the instrument used to facilitate the trade of real wealth in a market -- money -- with the actual wealth that is being traded in a market. A net importer ends up with less money from a series of trades than a net exporter, meaning that a net importer thus has "less wealth" if you're an idiot and think money, not stuff, is wealth. But since stuff is wealth, and since we have a printing press and can always print more money as needed, the fact that some money went overseas and never came back is no big deal -- we just print more for the next set of trades.

Of course, this presumes that people overseas are willing to send us more stuff in exchange for more freshly printed dollars that never come back buying exports from us. It also presumes that the resulting imported wealth is not offset by a reduction in locally-produced wealth due to rising unemployment taking productive assets (workers) out of the market. It also presumes that in fact people overseas are not running a tab on us and getting ready go all Ottoman on us. But given that our trade is being conducted in dollars, not in foreign currencies (the problem the Ottomans had -- their debts were denominated in foreign currencies), we can handle even that situation by simply printing more dollars... though after doing so, if we want to borrow we'll get charged *huge* interest rates to compensate for the risk that the lender is taking that we might default by printing money. So it goes.

But at the moment we're nowhere near that point. The world economy is dollarizing because oil is denominated in dollars, and right now there seems to be no shortage of states willing to trade goods for pieces of toilet paper with pictures of dead people on them. We get "stuff". They get fancy toilet paper. How is that not a good deal for the United States? Other than the effect upon employment, if imports supplant local production, with resulting possible social disorder... but we have mechanisms for dealing with that too, though the teabaggers may call those methods "socialism". So be it.

-- Badtux the Economics Penguin


  1. Pardon me, but I believe that the ideais that eventually the dollars do come back, in the form of capital investment.

    The Chinese don't buy American goods. They buy American assets, American companies, and American bonds (establishing a long-term stream of interest out).

  2. Phoenician, I don't have data to either support or refute your assertion about what the Chinese are doing with all the dollars we're sending them. What is your source of data for that assertion?

    - Badtux the Dragnet Penguin
    ("Just the facts, ma'am.")

  3. Tux -

    Did I inspire this post? It's pretty convincing, but there are some holes, I think. One occurred to me as I was reading, and you touch on it here:

    It also presumes that the resulting imported wealth is not offset by a reduction in locally-produced wealth due to rising unemployment taking productive assets (workers) out of the market.

    Bingo! Pretty clearly, this presumption is DOA, so that loss of jobs and loss of wealth needs to be corrected. I don't see a plan, or even serious consideration of this issue anywhere on the political spectrum.

    Another thing that seems not quite right is your black and white assertion that money is not wealth. Especially since you consider stocks and bonds in the category of "stuff." Financial stuff and money are almost perfectly fungible, so the distinction seems artificial and forced.

    Also, for money to not be wealth, don't you have to negate the money function as a store of value?

    Plus, Phoenician has a point. Don't Asian nationals own some big chunks of California? My former employer - a once proud American company - is partly owned and completely operated by a foreign company. I think the water utility in Indianapolis is owned by a French company. The point is easy to overstate, perhaps, but foreign investment here is significant.

    Anyway, we do export to China. if I can believe what I've read, they fucking LOVE Buicks over there, and that is what is keeping that vehicle line alive.


  4. Good points. Thinking about it, it's clear that trading toilet paper for valuable goods cannot go on forever. Long-term, it will suppress local production because local production uses real assets from local markets. The end result would be de-industrialization. Hmm, where have I noticed that happening? :).

    And yes, you inspired this article. Most of my articles are inspired by other bloggers, just as most of my songs are inspired by other songs.

    - Badtux the Easily-inspired Penguin

  5. Hello, Tux. Jazzbumpa sent me a link to this post.

    Don't remember where I read it, but I found it striking that if hoarding ("under the mattress") leads to deflation, then even money under the mattress is effectively earning interest. (Gaining in value.)

    Setting aside the topic of trade deficits for now, I agree that good definitions are important, and the simpler, the better. I like to use the words "wealth" and "riches". The golden goose is wealth. Her eggs are riches.

    This means "wealth" is the same as "capital". I can live with that. An education would count as wealth; and the riches you spent getting it would be investment.

    Money would generally count as riches. The king was in the counting-house, counting out his money... But in a deflationary economy, idle money grows, and therefore is wealth.



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