The Price of Everything

Yes, it turns out our China trade deficits are partly due to those darned bankers.  America’s financial system may be working a little too efficiently. 

My econ classes taught money flows from developed economies to build up evolving countries.  The Brits and Dutch invested lots of money in the Colonies because that’s where the returns were.  Investment (factories, tools, etc.) is more effective in places that don’t already have a lot of money.

Now, The Economist tells us:

The average income per head of countries with current-account surpluses is now much less than that of countries with deficits (see chart). Most notably, America’s deficit is largely being financed by poor countries’ purchases of treasury securities. Does the lack of foreign capital hurt emerging economies’ growth? By borrowing from abroad, a developing country should be able to boost its investment and hence its rate of growth. However, a paper by Eswar Prasad, Raghuram Rajan and Arvind Subramanian of the International Monetary Fund surprisingly finds that developing countries that run current-account deficits (ie, that borrow from abroad) have grown more slowly than those that run surpluses.

One explanation is that developing countries have limited capacity to absorb foreign capital, because of their underdeveloped financial systems, which makes it hard for firms and households to borrow. If productivity growth increases, households save much of the rise in income instead of spending it, while firms’ investment remains limited by internally generated funds.

Our sophisticated financial system is affecting trade deficits.  Part of the reason Chinese keep their money in American securities is because it’s tough to properly invest it at home.

Bankers: Take the afternoon off.  If you must work, go make some bad loans.  We’re all waiting for deficits to go down already.

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