Your post raises questions that I have pondered over the years. As one who has always held the view that inflation is a monetary condition, created by the deliberate oversupply of currency, it’s been something of a mystery to me why the growth in our money supply over the past few years hasn’t been matched by inflation. Disclaimer: I haven’t been paying any attention to the money supply lately, so maybe its growth has slowed some. Anyway, I’ve often wondered if there wasn’t some relation to the trade deficit. Would that be where our oversupply of currency goes? And if it is, what are the chances it will all come flooding back? Not likely I suppose.

There are these other issues of productivity growth in the U.S. and the impact of expanded free trade. These would both tend to put downward pressure on prices, perhaps masking inflation somewhat.

The conventional Republican wisdom is that Bill Clinton inherited a recovering economy and rode it through two terms. Then the Dotcom bubble burst. But another thing that happened on his watch was trade expansion. He deserves some credit for that, and I’m now wondering if we are seeing the fruits of free trade in the recovery right now. We may be entering into another huge economic expansion, because of increasing trade. Free trade, which might also be called globalization, is a win win. I don’t see it benefiting the U.S. more than our trading partners, and I certainly don’t see it benefiting us at their expense.

Globalization is not something our country does. It’s what we do as citizens and business people. We look for the best deal at the lowest price wherever we can find it. Countries can act only to prevent that, but at the moment the only serious pressure (from a U.S. source) in that direction would be from John Kerry.

A better way to think about this issue is that globalization, ultimately, implies not only free trade in goods, but also complete mobility of labor and capital. We are no where near that point yet, but as we become more global the "wealth of nations" will tend to converge and not matter so much. Personal wealth will remain a priority for most people, but the concept of a "rich country" will slowly lose its meaning. For example, the number of billionaires located in Moscow (currently a hot topic) will be less relevant than their ability to create additional wealth and employment world-wide.

The U.S. current account deficit can be viewed as one mechanism by which the wealth convergence between nations takes place. As a nation we are slowly leaking relative wealth - no doubt about it. But so what? Our residents have a high standard of living and the growth of the world depends on us buying their stuff. Moreover, they are making that stuff with unskilled and semi-skilled labor of which they have a lot and we have relatively little. As people become freer to move about and take their resources with them, it will matter less and less who does what, where.

Those who think in terms of nation state politics and patriotism will find these concepts difficult. I include myself among them. The blessing perhaps is that globalization will occur slowly enough to allow attitudes to adjust to whatever is appropriate at the time. So it will be up to enlightened generations in the future and not irascible characters like Weidner and me.

Barnett says Globalization is a system that benefits the US more than any other nation, because it is a sort of rebuilding of the world in our image. It's an expansion to global size of the freedom and opportunity and "rule sets" we have in the US. The game of globalization is rigged in our favor, but we "pay" for that advantage by assuming many adult responsibilities and burdens.

This is what Walter Russell Mead refers to as "the American project" in his latest book Power, Terror, Peace, and War. And it's that project that is the biggest bone that radical Islam has to pick with us.

Frank,
While there is certainly increasing mobility of labor and capital, there will still be those nation states that will lay claim to a portion of it in income and other taxes. And people will rely on nation states for defense, protection of the law, and those other things that governments provide. I don't see globalization changing that.

While it may be appear that we are leaking relative wealth as you say, I think the part that's easy to miss is that we are creating it faster than it's leaking out, and probably our trading partners are doing the same, with the result that levels of wealth are rising all around - granted, in some places faster than others. So it would seem to be private outbound spending that is going at a faster rate than inbound spending. My question is why would we care except for the currency issue? Are we trading out in dollars that never come back? I don't pretend to know what happens, but then I'm not convinced anybody else does either. On the other hand, the inflation issue has been handled pretty well for about the last twenty-five years, so somebody must know something.

I question the validity of the tools used to measure the money supply. I once asked my econ101 professor what would happen if everybody went out and maxed out all their credit cards the same day. He didn't know and didn't want to think about it. One thing for sure, at that time private credit (that available to privite citizens) wasn't covered in any of the M's. I supposed that could have changed over the last 3 or so decades, but I doubt it.

There is an underground economy. Is it possible that that economy is generating a lot of unseen wealth?

The underground economy really doesn't generate "wealth," because by its nature, it doesn't actually produce anything. It only steals production from others and sells product at a profit for themselves but a loss for the companies they seize their goods from. It can make individuals very wealthy, but only by making many more people poor. Left unchecked, the underground economy eventually forces the shutdown of every other industry not related to undergroud activities, and that those industries only survive as long as they force is used to defend them.

Good lord, I really mangled that last sentence.

Let's try this again...

Left unchecked, the underground economy eventually forces the shutdown of every industry not directly related to their activities, and those industries only survive as long as force is used to defend them.

I view drug trade as underground, no one can claim it does not create products of value or that it is forcing the shut down of all non-drug organisations

what is defined as underground? that which is stolen and resold ?

If defined broadly enough an underground economy is very productive. My definition would be any economic activity that avoids or evades onerous regulations (and tax rates). The more onerous, the more active the underground economy. Italy would collapse without one.

There was a recent article on swissinfo.org about the Swiss government's crackdown on so-called "illegal working", i.e. moonlighting. Apparently moonlighting accounts for about 10% of the Swiss economy, avoiding European taxation and regulations. Clearly it would be irrational to argue that such activity is not economically productive but would perhaps be considered an "underground economy" by some.

The relevant article:

http://www.swissinfo.org/sen/swissinfo.html?siteSect=105&sid=5005458

Gentlemen (unsure if any ladies here so far): It's a pleasure to read discussions on such important topics.

Couple of comments: Several commenters seemed uneasy at the idea that the U.S. could have a chronic, essentially continuous trade deficit without some negative consequence at *some* date. Certainly that *does* seem as though it must violate some Law of Thermodynamics or some such. Or maybe gravity, or justice, whatever.

My sense of things is that nobody really knows for sure whether this is something we should either worry about or do anything about. The topic seems to have been largely avoided mostly because no reasonable person seems to believe Americans would tolerate any attempt to *stop* trade deficits. As a commenter noted, the game in politics is to kick problems into the future until their solution is someone else's responsibility!

It may well be that chronic deficits pose no problem, if (as a commenter noted) they're serving to inject dollars into the world economy, which are then used to fund trading between *other countries*. The biggest risk here is that at some point the dollar could fall out of favor as the de=facto world currency, in which case our trading partners would stop accepting our dollars in exchange for their goods. If that happened, we'd begin having to pay more for TVs at the local WalMart, but I don't see that we'd be in worse shape than that.

I think a far greater danger than trade deficits is chronic *government* deficits, since these are secured with interest=bearing loans, many of which are being funded by other countries. If a big lender, like China or Japan, suddenly stopped playing, the USG would presumably have to pay a higher interest rate to fund its spending, and things could get interesting very quickly.

Tom - the relationship between the money supply and goods is the key to understanding inflation. In fact, economic growth is at a fundamental level deflationary.

Imagine an economy where 100 loaves of bread are produced, and that is the only activity (they grow on trees or something), and there is $100. So each loaf of bread would cost $1 (assuming all are sold). Then a productivity improvement means that 200 loaves of bread can now be produced. There is still only $100, so each loaf of bread would now cost 50 cents. Serious deflation.

Of course the real world is much more complicated - to make more loaves of bread would in the real world require at least some more resources, the rate that money flows can change, meaning there effectively is more money, but the general point is there. Inflation is caused by the money supply growing faster than economic growth is growing. Serious measurement problems mean this can't be translated into a useful rule for central banks.