Wednesday, March 26, 2008

Knowledge Deficit on Trade II

I received an interesting comment regarding my post "Knowledge Deficit on Trade" from a reader by the name of Chris that I'd like to answer here. I will post the comment in it's entirety and then proceed to answer each point made by Chris:

"Explain something to me here. You said that American dollars will make there way back [someday]. Then how is that China holds over a billion of dollars in US cash. Is it because maybe they have been stock pilling it and not sending it back through the system.

I guess this also means that there really isn't a national dept either since deficits don't really exist.

I also wonder how complex economics were in the 18th century."

Chris is correct that I said that US dollars will make there way back someday, and they will through future purchases and investments. He asks how China holds over a billion dollars in US cash and wonders if they've been stock piling it. The answer to that question is that even though China owns over a billion dollars in US cash, the United States holds the equivalent in goods and services. My mentioning that US dollars would come back to America, sooner or later, was not used to demonstrate that there is no trade deficit, it was merely a tangent.

Chris guesses that because America doesn't have a trade deficit, it doesn't have any national debt. This is wrong for the simple fact that a budget consists of income and expenses. When America's budget shows more expenses than income, it must sell bonds to third-parties, many of which are foreign countries and investors. The balance sheet then includes additional income offset by liabilities to balance against expenses. Foreign trade on the other hand is between private companies from either nation transacting business.

As for economics in the 18th century, economic theory is like any scientific discipline. For more information on who Adam Smith is, click here.

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