Bob Murphy on why trade deficits are no big deal

[Smiling_Dave]

For a limited time, meaning until tomorrow at 10 AM, schiffradio.com lets you download bob murphy talking about the trade deficit.

The site says their guest will be “Robert Murphy, adjunct scholar at the Mises Institute & author of “The Politically Incorrect Guide to Capitalism,” on why trade deficits are no big deal.”

Am downloading the show while writing this.

EDIT: Just noticed there is a link on the right side of the page allowing one to listen to the interview alone, without the rest of the show.

EDIT: Some juicy quotes. Asked why the trade defict is no big deal, Prof Murphy replied:

Bob: I don’t think that anymore. I’ve learned my lesson.

[Now for some paraphrase, since he talks faster than I can type]

Bob: Peter Schiff was warning about it, and I wasn’t looking at the big picture.

It could be possible [to have a healthy economy with a huge trade deficit], but that’s not what’s happening in our economy.

If our economy was so great that foreigners want dollars to trade with us, that’s one thing.

Pinto: But that’s selling a piece of our farm instead of giving the a bushel of corn.

Bob: If we borrow to produce that’s good, like a corporation borrowing to increase their capital.

Bob: But the Fed printing money is what is causing this trade deficit, and for the last 30 years has been setting us up for crashes.

[DanielMuffinburg]

Who’s the guy interviewing Bob? He keeps cutting off Bob. Bob. Bob.

[Smiling_Dave]

It’s Mike Pinto, a fill in for when Pete is away.

[vaduka]

Esuric wrote it before, I will write it now. Trade deficits are not inherently bad for the “economy” or for the individual actor. The case you are discussing is trade deficits as a result of the… the activity of the FED. If the FED can create nothing else but disturbances as a result of its activity, then the logical conclusion is that a trade deficit caused by a FED policy is a disturbance. But we are here talking about the cause for the occurance of this particular trade deficit, not the nature and peculiarities of every trade deficit. A trade deficit can occur for many reasons, but if it does so as a result of the concrete factor FED - it is always a trade and a monetary disturbance.

[Smiling_Dave]

vaduka,

I am glad we are in agreement.

My discussion with Esuric was about today’s deficit, with him arguing we are the most productive nation in the history of mankind at this very moment, and that today’s deficit is a sign of great strength rather than great weakness.

I argued that trade deficits are not inherently good or bad, but depend on what we do with it. Are we borrowing to produce [=good] or borrowing to consume [=bad]? Prof Murphy made the same distinction on the show, as well as in writing.

[vaduka]

The argument that the FED creates trade and monetary distrubances includes in itself the changes in the monetary balances and the changes in the capital structure, i.e. what is the mode of application of the borrowed money. It look like you are arguing two different things:

First, a trade deficit is bad if it is caused by the FED.

Second, a trade deficit is bad if such and such consequential occurances happen.

The first one talks about the cause of the trade deficit and the second one about the effect of the trade deficit.

[Catalan]

Regarding dollars that are exported to China, a large percentage of these return in the form of purchased government debt, so it doesn’t exactly reflect spending activity in the private sector.

[Smiling_Dave]

vaduka,

Prof Murphy was very concise in his explanation about the Fed. All he said was that the Fed caused it. He did not elaborate, as you did, that the Fed caused imbalances and that therefore things got messed up. So I am not sure what he meant. He may well have meant that all that money printing gave people and the govt the wherewithal to start borrowing to consume. Indeed that’s what he says right here: http://mises.org/daily/4130

He also writes I definitely think that America’s current account deficits in the last few years are due to “unproductive” debt

And here he goes again:

It seems very unlikely to me that our present trade deficits should be attributed to the wonders of the US economy. Instead, it seems more likely that the artificially cheap credit of the early 2000s fueled various wealth bubbles, leading Americans to consume their capital without realizing it.

Once more:

My refrain was always that yes, a massive trade deficit could be a sign of American profligacy and a day of reckoning down the road, but it could also be a sign of superior financial institutions and investment climate.

He then goes on to say that the former possibility is the correct one.

A close reading of his articles will explain how it all ties together, the Fed, fiat money, borrowing to consume, and what the problem is.

[Smiling_Dave]

Jonathan,

What does the govt do with the money it borrows? It certainly does not use it to build factories that run at a profit. It borrows to consume. So govt spending is the same problem.

As Prof Murphy put it so eloquently, it is just more “American profligacy” ensuring “a day of reckoning down the road”.

[Catalan]

What does the govt do with the money it borrows? It certainly does not use it to build factories that run at a profit. It borrows to consume. So govt spending is the same problem.

I don’t want to rehash this debate, but government spending doesn’t always result in the consumption of the means of production it uses. It does always lead to a loss, represented by an opportunity cost. However, a loss in production is not the same as saying that the means of production used were unproductively consumed. They may be used less productively than they would have been had they been distributed towards the attainment of more important ends (which can only be decided by the individual).

All of this, though, is entirely off point. My point is that government borrowing does not necessarily reflect spending patterns in the private sector. In other words, that there is a lot of government spending doesn’t mean that private individuals are also spending. To assume as such is a non-sequitor.

[Smiling_Dave]

Interesting.

[John_James]

I think it’s nice that Murphy came around and is so able to change his mind and admit when he’s wrong. What gets me is how someone so well-versed in Austrian theory could miss something so bad. Actually Smiling Dave and I had a conversation about this some time ago in a pm (it includes links to a few of Murphy’s articles where he offers his “deficits aren’t inherently bad” case):

I don’t really get how people can’t understand it either. Or perhaps more accurately, in their vast knowledge of details, they miss the obvious. For example Frank Shostak is a well-versed Austrian. He’s an adjuct scholar at the Institute and his articles are top-notch. But if you see this one regarding trade deficits, he echos the same theme we heard quoted from Rothbard in that thread. He talks about how trade deficits aren’t inherently a bad thing. Fortunately he continues on to say that if they are caused by inflationary fiat currency created out of thin air by a Federal Reserve, then they are bad. But in his interest in dispelling the myth that deficits aren’t inherently bad or good, and (rightfully) pointing the finger at the Fed, he completely misses the other danger. Get what he states:

The fact that the Chinese producer has invested the dollars in American corporate bonds doesn’t pose any threat to American economic fundamentals. What we have here is a situation where claims on real savings have been channeled to America Inc. Once these claims are exercised and real savings are employed efficiently it only promotes a further expansion in US real wealth. Is anything wrong with this? All we have here is that instead of buying final American consumer goods, the Chinese producer buys future US goods.

Well hell. What if they US doesn’t produce any goods the Chinese want/can buy in the future? He completely overlooks this possiblity. Interestingly, Bob Murphy (another great Austrian) almost did the same thing in a response to Schiff’s book on the meltdown. Thankfully he conceded the possibility of an unsustainable deficit and that we basically have one…but only in the very end. Then, more recently in March of last year he addressed the issue more succinctly in this article. In that one he actually explicitly differentiates between types of debt: “Specifically, the problem occurs because foreigners can invest in ‘American assets’ to fuel either production or consumption.”

My problem is that like Shostak and others, it seems his focus is so geared toward dispelling the myth of deficits being inherently bad, that his articulation of ways they are bad is left wanting…So much so that readers who aren’t careful could easily fall into the trap of thinking we currently don’t have a problem. And I think that’s where some of these guys are. It’s like they’re at that point where they know just enough to get themselves into trouble…whereas if they read (and more importantly, understood, more books and Austrian theory) they’d see it most clearly. My guess is another facet of it is that they’re so used to pointing out how conventional wisdom is wrong, and being able to tell people they don’t know what they’re talking about, that they get carried away and forget that sometimes, conventional wisdom is actually right…sometimes deficits are bad.

[Smiling_Dave]

James,

I think the problem is that we are in a unique position not covered by the textbooks [whether standard or Austrian], because until now the situation we are in just did not exist.

No two countries ever traded until now unless both got something useful out of it. After all, until 1971, paper money was redeemable in gold. And up to the 80’s we were a creditor nation. The situation now, of China giving the US goods and getting paper money in return, in huge amounts every month year after year, has never happened before. So it takes insight to realize that now things are different from what the textbooks describe.

Same thing with Ricardo’s Law of Comparative Advantage. Some posters have claimed that the current trade situation between the US and China MUST be wonderful for all sides, because that is what Ricardo’s Law says, and Ricardo’s Law is a praxeological and mathematical certainty.

And once again, they miss the boat, for the same reason. Ricardo is clearly talking about when both countries PRODUCE things, not when one country produces and the other has nothing to give in return but paper money. But since from Ricardo’s time until today such a thing has never happened [and with good reason, because who would be stupid enough to trade this way], they don’t get that the present situation is not covered by Ricardo’s law.

[John_James]

But Shostak? Murphy? These aren’t exactly CNBC analysts.

[Smiling_Dave]

They were probably thinking “The Chinese can’t be THAT stupid. They must be saving up those dollars because they want to buy something of ours eventually. They have perfectly good reasons to do what they are doing, so it will probably just keep happening.”

Bob Murphy says this explicitly in one of his articles [before he changed his mind]. “Now we’ve finally hit the point where I’ve lost patience with Mr. Schiff. Does he really mean to say that these silly foreigners know less about their billions in investments than he does?”

What I think happened is that the Chinese switched not from Communism to Capitalism, but to Mercantilism. Only instead of thinking that the object of the game is to stock up gold, like the old mercantilists, they thought the object is to stock up on dollars, the world’s reserve currency and therefor the modern replacement for gold. Or so they think.

[John_James]

That’s a really good catch. Obviously Murphy did believe foreign governments were wiser than they are. And I had never heard that mercantilism assessment before, but that sounds incredibly accurate.

[Giant_Joe]

I would agree that trade deficits aren’t inherently bad.

The US economy does not need to be very productive. The Chinese aren’t making a claim on “future US goods” but future dollars… which the fed can print. We can’t confuse dollars as being goods/gold. They’re effectively infinitely reproducible.

Just as the fed enriches those closest to it within the nation’s economy by effectively draining wealth from the later recipients of the money (those affected down the line by inflation), the fed makes the US richer by exporting printable dollars to the world in exchange for real goods. Two key facts allow the US to continue operating in this manner:

1. Supremacy of US military might.
2. USD is the international reserve currency, and is required for oil trade in international markets.

The BRICs are trying to nullify the second fact. The news that China and Japan would trade directly without any USD is big news.

[John_James]

@Giant_Joe

The US economy does not need to be very productive.

Okie dokie.

The Chinese aren’t making a claim on “future US goods” but future dollars… which the fed can print. We can’t confuse dollars as being goods/gold. They’re effectively infinitely reproducible.

You seriously think they’ll never attempt to use those dollars to buy things?

Just as the fed enriches those closest to it within the nation’s economy by effectively draining wealth from the later recipients of the money (those affected down the line by inflation), the fed makes the US richer by exporting printable dollars to the world in exchange for real goods. Two key facts allow the US to continue operating in this manner:

1. Supremacy of US military might.
2. USD is the international reserve currency, and is required for oil trade in international markets.

The BRICs are trying to nullify the second fact. The news that China and Japan would trade directly without any USD is big news.

I can’t believe you would even mention the reserve currency status as a reason the US could print and export dollars “indefinitely”. That has to be one of the most naive things I’ve heard in a while. The world does not have to trade in US dollars. It was almost a year ago now I believe Russia and China began agreements to trade in their own currencies. The world can (and will) drop the dollar without much problem at all (of course those left holding dollars will lose out, but that’s their problem.)

And military might? You mean like, we can do whatever we want because “we got the bomb”? That may be even more naive than the reserve currency thing.

[Giant_Joe]

Do you agree that if nations are forced into doing something, they will do it?

[Esuric]

I argued that trade deficits are not inherently good or bad

Yes you did. I fact, I think you literally said that trade deficits and debt are inherently bad.

with him arguing we are the most productive nation in the history of mankind at this very moment, and that today’s deficit is a sign of great strength rather than great weakness.

Nope, that wasn’t my argument at all. Can anyone link the actual debate?