Saturday, December 3, 2016

Mankiw dollar store casuistry

".... reorienting trade policy may become one of the main goals of the new prez"
" A major theme concern about the trade deficit" 

"...if better policies eliminated the present  “trade deficit drag,
gross domestic product would be higher and more people would be employed

That conclusion is correct, 

but only in a superficial sense. "

"Gross domestic product is, by definition, the sum of consumption spending, 

investment spending, government purchases and the net exports of goods and services

" If net exports rose from their current negative value to zero, and the other three components stayed the same, domestic production would increase and, consequently, so should employment." 
Right here the mankster might have gone into policy paths that could produce this golden combo of outcomes 

Instead we get the jump to this 
"...fuller look at the macroeconomic effects of trade deficits
Which "suggests" 

"  that things aren’t so simple."
What things Greg ?

We haven't looked at means to this end yet 
Complex or simple 
Instead we get an interruption to bring us pikers an important message 
" The most important lesson about trade deficits is that they have a flip side. "
" When the United States buys goods and services from other nations, the money Americans send abroad generally comes back in one way or another. "
" generally " ? 
" One possibility is that foreigners use it to buy things we produce, and we have balanced trade. " 
" The other possibility, which is relevant when we have trade deficits, is that foreigners spend on capital assets in the United States, such as stocks, bonds and direct investments in plants, equipment and real estate." 
After a sassy snide aside on in and out capital flow magnitudes we focus on inflows 

" The trade deficit is inextricably linked to this capital inflow. "
Here we have the first trick 

" Inextricably linked" ?

Be careful in attentive minds
This Is not to say unmodifiable  or un "counteractable "

By other collateral policy actions 
Oh well 
Off we go 

With this  out of sequence bit of narrative 
" When foreigners decide to move their assets into the United States,
 they have to convert their local currencies into American dollars. "

What ?

Were talking trade deficits 
Importers turning dollars already earned on net exports to US
into foreign currency is the start point relevant here
That weakens the dollar 

China has lots of dollars collected out of its trade surplus for example 
Here  a wrong channel is substituted sleight of handishly by mister wizard 
Seems not content with their existing dollar pile from net exports
Foreigners decide to buy dollars to invest in us assets 
" As they supply foreign currency and demand dollars in the markets for currency exchange, they cause the dollar to appreciate".

Here foreign traders and investors  already have dollars 

The dollar isn't strengthened by trade deficits
It's weakened
Recycling those trade earned net dollars simply offsets the weakness 
Talk of higher demand for the dollar for other reasons is obfuscatory at best
Deceptively misleading at worse 

 " A stronger dollar makes American exports more expensive and imports cheaper, which in turn pushes the trade balance toward deficit." 

Hanging from a ceiling rafter this is internally correct but contextually misdirected
" From this perspective, many of the policies proposed by Mr. Trump will increase the trade deficit rather than reduce it."

Indeed this utterly crooked perspective councilor !

Trade deficits are off set by weaker forex reducing demand for imports 
A weaker or no stronger dollar has to be part of the policy target mix 
Hence net capital inflows have to be off set by other macro instruments 
In this case the fed producing more dollars holding down policy rates 
And sustaining or lowering the current dollar forex rate 

Leaning against any dollar strengthening capital inflow winds

To continue 

" Trump 
has proposed scaling back both burdensome business regulations and taxes on corporate and other business income. His tax cuts and infrastructure spending will most likely increase the government’s budget deficit, which tends to increase interest rates."
Wait the fed can't control interest rates ? 

 "These changes should attract even more international capital into the United States, leading to an even stronger dollar and larger trade deficits."

Only if the fed sits on its hands 
" We have already started to see some of these forces at work. " 

Here Mankiw  points to a flux that the fed may or may not choose to counter
But the key will by trumps dollar forex policy 

Now we get to trumps actual policy radicalism 
" But what

"... those tariffs that Mr. Trump sometimes threatens to impose on foreign countries? "

" They would certainly curtail the amount of international trade"

" but they are unlikely to have a large impact on the trade deficit." 

Say what ? 
" When American consumers facing higher import prices from tariffs stop buying certain products from abroad, they will supply fewer dollars in foreign-exchange markets. "

" The smaller supply of dollars will drive the value of the dollar further upward."
The supply of dollars is in the end absolutely determined by the fed 
not the actions of cross currency traders 

 "This dollar appreciation offsets some of the effects of the tariff on imports, and it makes American exports less competitive in world markets."

Here the Loki of Harvard yard wants that earlier line about "inextricably linked "
to kick in
Trap snaps shut on piker brainwaves 

Not content  to scotch trumps tariff policy with automatic forex off sets 

we get this 
" But it doesn’t matter much, anyway, because in reality, trade deficits are not a threat to robust growth and full employment." 

Here is partial truth fighting fiercely in the front lines of deception 

Of course deficits in trade can be off set by macro  action 
Say a fiscal deficit of adequate dimension 

"Rather than reflecting the failure of American economic policy, the trade deficit may be better viewed as a sign of success. "
Where's that come FROM

Yes if we grow relatively faster then our trading partners this tends to increase deficits 

Of course we could all be contracting ....just us slower so 

"The relative vibrancy and safety of the American economy is why so many investors around the world want to move their assets here. (And similarly, it is why so many workers want to immigrate here.)"

Gratuitous cheerleading for a home team that deserves a huge BOO !