Ultrabulk, trans-oceanic cargo ship, Astoria, Oregon. Photo: Jeffrey St. Clair.

Okay, maybe you do read these in the newspaper, but not as much as you should.

1) The dollar’s status as the leading reserve currency does not mean we have to run a trade deficit,

2) There is no direct relationship between the budget deficit and the trade deficit,

3) The explosion in the size of the trade deficit at the start of the century cost millions of manufacturing jobs,

4) The trade deficit is considerably smaller today than it was two decades ago,

5) Manufacturing jobs are not necessarily good jobs. Unions made them good jobs, not the factories.

The graph below shows the trade deficit back to 1947. It helps to make several of these points.

The Dollar as a Reserve Currency and the Trade Deficit

Many people claim that the United States has to run a trade deficit in order to supply the rest of the world with dollars, since it is the leading reserve currency in the world. This story is badly confused for two reasons.

First, while the dollar is the leading reserve currency, it is not the only reserve currency. Euros, British pounds, Japanese yen, and even Swiss francs are held as reserves by central banks. Most reserves are in the form of dollars, but these other currencies can be and are used as alternatives. The same is true for international trade. While most trade is carried through in dollars, companies and countries use whatever currency they find convenient, and often this is not dollars.

The other point of confusion is that the United States can provide other countries with dollars without running a trade deficit. This can be clearly seen in the years from 1947 to 1973, when the US ran modest trade surpluses in most years. During this period, the United States literally was the world’s reserve currency, with other currencies being legally pegged to the dollar.

They were able to acquire dollars though US foreign investment. If the US is investing more abroad than foreigners are investing here, then we will be supplying the rest of the world with dollars without running a trade deficit.

The Relationship Between the Budget Deficit and the Trade Deficit

Back in the 1980s and early 1990s it was common to refer to the budget deficit and trade deficit........

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