Commentary: Sure, The Trade Deficit Is Scary -- But We Can Handle It

Commentary: Sure, The Trade Deficit Is Scary -- But We Can Handle It: "Which is more important, big trade deficits or high productivity? For now it looks as if productivity wins. Why? The net wealth of the U.S. is huge compared to 10 years ago, even after taking into account that Americans owe foreigners some $3 trillion because of cumulative trade gaps. Rising net wealth means the positive influence of higher productivity -- which boosts economic output -- has been stronger than the negative impact of big trade deficits. Think about it this way: The U.S. is like a family enjoying rising income even as it takes on sizable debt -- not too unusual in these days of big mortgages. You'd worry if such a family had to sell off assets or draw down savings to pay for today's consumption, a sign that it was living beyond its means. The family would soon be in trouble if it didn't curtail spending. But if the family's net worth -- assets minus debt -- is going up, its financial position is actually improving. That's essentially what's happening to the financial position of the U.S.: Not only is it getting better, it's getting a lot better. The best way to show this is to look at a new measure of national wealth that I call 'net real wealth per capita.' Start with the net worth of households as reported by the Federal Reserve. Then subtract federal, state, and local debt, and adjust for inflation and changes in population. What's left is a figure that measures, somewhat imperfectly, the average net value of the liabilities and assets of Americans, assuming that they are responsible for the government's debt as well as their own."

The comment about worrying if a "family had to sell off assets or draw down savings to pay for today's consumption" is what really drew my attention. Maybe Michael Mandel is correct and we're not selling off assets or drawing down savings, but we're taking on debt and the collateral is our assets.

I think that Warren Buffett states it pretty well in the Berkshire Hathaway 2004 annual report. "The balancing item to this one-way pseudo-trade -- in economics there is always an offset -- is a transfer of wealth from the U.S. to the rest of the world. The transfer may materialize in the form of IOUs our private or governmental institutions give to foreigners, or by way of their assuming ownership of our assets, such as stocks and real estate. In either case, Americans end up owning a reduced portion of our country while non-Americans own a greater part."

I personally don't think Mr. Mandel's attitude toward the trade deficit is safe for us as a nation. I obviously need to do more research into the impact of our twin deficits, but it always seems safest to have less debt and no more than what is manageable...as a family or as a nation.