Actually, I don’t care whether foreign interest in U.S. securities disappears, altogether. The U.S. government has no need to trade T-securities for dollars. A monetarily sovereign nation produces its own money by spending. Borrowing its own money is a relic of the gold standard days.
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Rodger Malcolm Mitchell

Why unsustainable?

Rodger Malcolm Mitchell

The problem with those solutions is that any of them would destroy the business-friendly climate that has allowed us to support a massive trade imbalance over the last 15 years. If foreigners are unwilling to invest in the US, then they will be unwilling to accept dollar-denominated payments in excess of their current needs.

One way or another, the present situation is unsustainable.

In a recessionary period manufacturers and traders cut back on inventories in order to preserve cash.

A time then comes that whilst it appears one is still in the recessionary period those same manufacturers and traders decide that the time is right to start rebuild their raw materials and stock in order to satisfy what they perceive as increased demand which hopefully would result in increased exports and sales.

The problem is, have they got the timing wrong and or is the defecit in imports over exports as a result of sucking in consummer products as opposed to the materials required for export products.

It doesn’t have to be that way: Germany has fairly high labour costs yet is a net exporter of goods, including to both the US and China. But in Germany, investors have long term horizons and employers invest in staff and plant, while the education system produces highly competent and technically sophisticated workers with high productivity levels.

I’m a little puzzled as to what kind of conventional wisdom that statement would be “obvious”. It’s not trade balances that affect employment, rather domestic conditions (including employment) that affect trade balances. In fact, the US has had a growing trade deficit since the mid 70′s during preiods of economic expansion and the only time this trade deficit has decreased has been during the 4 recessions (i.e. the exact opposite of the “obvious” conclusion you’re making). One extremely important factor to keep in mind is that the value of imports does not differentiate between raw material and finished products. Much of the imports to the US are for raw material used in the manufacturing of goods for both domestic consumption and exports.

Also to Mr. Mitchell with that rather simplistic view. You can not simply print money and expect your money to be worth the same amount to your trading partner (i.e. the Chinese are neither stupid nor your “servants”). As the supply of money goes up (i.e. you print more money), the value of your currency depreciates, making the same goods cost more the next time you import them (i.e. your trading partner will ask you for more money for the same item). This will go on until it costs less to produce the same item domestically at which point you’ll see the US trade deficit starting to come down. This is not going to happen until at least the middle of this decade when Chinese labour costs near those of the US – which means US labour costs will shrink and Chinese ones will expand. In other words, until this master servant relationship is shattered, you will see China’s export driven economy be a drag on the US.

Clearly a weaker currency increases the costs of imports, and the appetite for them of the US consumer is unparalleled in the Western world.