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PostPosted: Sun Jul 29, 2007 11:10 pm    Post subject: Additional Paragraphs Reply with quote

Brad, you stated: "I wonder who finances the united
states large ongoing current account deficits..."
Export-led countries finance them, which need the U.S.
(e.g. to keep their employment levels high) more than
the U.S. needs them. So, the U.S. share of gains is
larger (e.g. the gains in consumption and investment
exceed the losses in production). U.S. budget deficits
are also financed by export-led countries (e.g.
directly through purchasing U.S. Treasury bonds and
indirectly through increasing the U.S. tax base). The
U.S. benefits in many ways, e.g. international trade
increases the total economic pie (e.g. through the Law
of Comparative Advantage), U.S. multinational firms
outsource to foreign economies with lower input costs
to increase revenues (rather than discontinue lower
profitable goods), and increase profits, U.S.
consumers pay absolutely (i.e. domestically) and
relatively (compared to export-led countries) lower
prices, based on income, U.S. interest rates are
absolutely and relatively lower, because of foreign
capital inflows, U.S. competition is heightened (e.g.
through cheap imports), which also lowers prices for
many domestic goods, The U.S. has a low household
saving rate and a high debt level, since lower prices
and interest rates induced demand. However, low saving
and high debt will keep future U.S. employment high
(to pay-down debt and build-up saving), to increase
future GDP. Also, eventually, U.S. exports will
increase faster than U.S. imports, to narrow trade
deficits, which will also add to future GDP
(particularly, given improved U.S. "terms of trade").
Large foreign capital inflows have added to higher
U.S. GDP. However, large U.S. negative net exports
have subtracted from U.S. GDP. Export-led countries
will also gain less, than the U.S., e.g. through low
returns on U.S. Treasury bonds and premiums for U.S.
stocks and physical assets. Foreign capital will stay
in the U.S., although inflows will slow. So,
export-led economies can maintain some level of
growth. Consequently, U.S. long-run GDP growth will
continue to be substantially higher than the E.U.,
while the U.S. will continue to benefit much more on
the consumption side. The U.S. dollar will remain the
most demanded hard currency.

Posted by: Arthur Eckart | Saturday, July 28, 2007 at
09:11 AM

Lafayette, you stated: "The real risk is that the
Chinese no longer want to buy T-notes, at any price."
China's economy reminds me of's business
plan, i.e. to increase revenue at any cost and then
cut cost or raise prices to increase profit through
economies of scale and market power. China has been
successful at increasing output at any cost, because
it provided cheap inputs for foreign firms and Chinese
firms exported at low prices. So, foreign firms made
large profits, while Chinese firms made little or no
real profits (taking social costs into account and
perhaps selling below real costs). Obviously, this
plan cannot continue, because China's economy will
eventually collapse. So, China will have to cut costs
or raise prices. However, it will be difficult for
China to cut costs, because that may raise some costs,
e.g. to offset low wages and negative externalities.
It will also be difficult for China to raise prices,
because China has many competitors, i.e. other low
cost countries. China may need to scale back and focus
on industries where real costs are low and improve
quality to raise prices.

Posted by: Arthur Eckart | Sunday, July 29, 2007 at
12:17 PM
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