Although I tend to support Don Boudreaux’s opinion, which he gives at TCS today. Don cites as the primary cause of concern:

“[The] conventions of international commercial accounting, which records investments separately from imports and exports… When foreigners sell things to Americans they earn dollars. If foreigners then spend all of those dollars on American exports, trade is ‘balanced.’ There’s no trade deficit or surplus. But if foreigners instead invest some of those dollars in dollar-denominated assets — say, by purchasing that factory in Utah…they obviously must buy fewer American exports. So the trade deficit grows as investment in the U.S. rises.”

On the contrary, today’s WaPo article, U.S. Trade Deficit Hits All-Time High, raises some points that I’d like to address.

“[D]eficits must be financed by increased borrowing from foreigners, who so far have been happy to sell us their products and hold U.S. dollars in payment which they invest in U.S. stock, bonds and other assets.”

Followed by:

“The concern is that at some point foreigners will want to reduce their dollar holdings. If the change occurs at a rapid pace it could send the value of the dollar, U.S. stocks and bond prices all plunging.”

When you carry this reasoning to it’s logical end, you’ll see it doesn’t hold much water. A rapid decline in the value of the dollar would be terrible for foreign investors, allow me to explain by means of a simple problem:

If a Japanese company buys a $1M USD investment with a promised return of 5% after one year, when the exchange rate is Y110:$1, and then the exhange rate falls to Y100:$1 – the investment, having been purchased in USD will be remunerated in USD. $1.05 Million – which at the onset cost 110 Million Yen, will only return 105 Million at the end of the year.

But, you’ll notice: Nobody wants to invest a dollar to earn 90 cents. You wouldn’t do it, I wouldn’t do it. Neither will the Chinese, or the Japanese, or the Kurds, or the Finns, or whomever else might wish to invest in USD assets. If foreign investors are willing to subsidize US Capital Growth (which is what investments do) by means of the reduction in the rate of return on their dollar-denominated assets due to the depreciation of US Currency, it’s fine by me.
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But, let us assume that something happens which does cause the value of the dollar to depreciate vis-a-vis other currencies – considering a cheaper, yet stable dollar, not a volatile shit-heap like the Argeninian peso, is this a bad thing?

For example, that “factory in Utah” which previously was listed at 1 Million dollars, or 110 Million yen, could now be had for 1 Million dollars, the equivalent of only 100 million yen. Exports will increase as an effect of the increased demand for the relatively cheaper US goods.

But it does mean that we won’t be able to get as much stuff from foreigners – this ought to make the scaremongers happy: the cheap dollar, and consequently cheaper final goods in the US market would increase foreign demand for everything we currently produce. The cheap dollar would spur investment in this country as the “real” wages of employees, and the “real” costs of capital investment and final goods would fall.
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But Don is quick to point out that, “Of course, part or all of the trade deficit can become debt. This happens whenever Americans borrow dollars from foreigners. As it happens, the most prodigious borrower today is Uncle Sam.”

As spending on government programs increases, funding is requested for a a war in Iraq (and countless other operations worldwide), the epxansion of the welfare state are creating the bad “debt,” which comprises only a fraction of the “deficit.” If you want to affect change for the positive, you’ve got to recognize that the government shouldn’t be spending money hand-over-fist.

But interest groups (like the AFL-CIO spokesman in the WaPo article) are able to exploit public fear and general ignorance towards economics and financial matters. They are then able to push for extortionary protectionist measures which benefit their own interests at considerable expense to just about everyone else.