Trade deficit reconsidered

As Addison Wiggin noted in today's 5 Minute Forecast, a major advocate of the "What-Me-Worry?" viewpoint of the trade deficit is shifting his view.

Let's sum up the debate to this point.  There's a difference of opinion among us free-market types about whether the trade deficit the United States is experiencing in the early 21st Century is a bad thing:

  1. On the one hand, as Addison pointed out in The Demise of the Dollar, a trade deficit is a good thing if the money flowing into our country is used for capital formation — in other words, to make stuff to sell to the rest of the world.  This is the way it was in the United States for much of the 19th Century, in fact.
  2. On the other hand, if the trade deficit is being used strictly to finance consumption, that's a bad thing.
  3. But there's been disagreement over whether the current state of affairs represents #1 or #2.

With that in mind, it looks as if Robert Murphy is shifting his opinion on the current state of affairs from #1 to #2:

It seems very unlikely to me that our present trade deficits should be attributed to the wonders of the U.S. economy. Instead, it seems more likely that the artificially cheap credit of the early 2000s fueled various wealth bubbles, leading Americans to consume their capital without realizing it.

Welcome to the club, Mr. Murphy.  Please encourage some of your colleagues at the Mises Institute to join up as well.

The Daily Reckoning