From the September 22 Wall Street Journal:

Those countries running current account deficits, most notably the U.S., would have to define ways to boost savings. Nations running surpluses — China, Germany and Japan, among others — would detail how they propose to reduce any reliance on exports. The U.S. would likely need to commit to a sharp deficit reduction by government.

The goal here seems to be to have every country have close to a zero deficit on the merchandise balance of payments and close to a zero surplus on the capital account. But think about the economics of this.

Consider the United States’ perennial trade deficits. In spite of the widespread condemnation they receive in the mainstream media, there are two problems with saying that these deficits are bad.

First, the offset to a trade deficit is a capital account surplus. This can take the form of more purchase of bonds by foreigners, more purchase of stock by foreigners, and more direct investment. One reason investors invest in the United States is that it still has, despite Bush’s and Obama’s attacks on capital markets, a large and vibrant economy and a stable political environment with a tradition of property rights.

Second, abundant and cheap imports are good for American consumers. What if Chinese companies send toaster ovens to American stores and we send paper dollar bills back and these bills are subsequently burned. That would be a huge boon to Americans. Jay Leno, in a 1980s add for Doritos, said, “Crunch all you want; we’ll make more.” Similarly, the cost of printing is only pennies per dollar and, more important, pennies per hundred-dollar bill. We can easily and cheaply print more dollars and get something valuable in return.

If these foreign firms didn’t burn their dollars, they could invest them or spend them. These invested or spent dollars would eventually come back to this country or not. If they never came back, it would be the same as if they were burned. If they came back, then they could be used to buy GE stock, Treasury bills, or real estate. All of these assets could have been purchased by Americans, but the Americans decided they wanted toaster ovens instead. The American consumers are better off, getting their desired toaster ovens. The American sellers are better off, selling something they preferred less for what they preferred more: money. Likewise, the foreign sellers and purchasers are better off too.

For more on this, see Herb Stein, “Balance of Payments,” Mack Ott, “International Capital Flows,” and Mack Ott, “Foreign Investment in the United States.”

H/T to Charley Hooper.