QUESTION: Marty, just reported this past week America’s trade deficit hit a record $891 billion while, in the same week, unemployment report fell to 3.8%. Does this refute the conventional economic belief that trade deficits take away jobs and output?
ANSWER: What is reported as trade is not simply trade. The numbers are all screwed up. It tracks actual goods as well as services and that includes capital flows. The accounting system is set up in such a way that capital investment buying bonds, stocks, and real estate go into the Capital Account. However, all dividends and interest earned by a foreigner on US assets then are accounted for in the Current Account. It is the Current Account that people report as trade which is not correct because it also includes interest and dividends. Thus, the more foreigners invest in a country, the more it will erroneously appear to be expanding the trade deficit as interest and dividends flow back on their capital investment.