From Andy T.: Economics professor Walter Williams is a buffoon. Here are his words in the March 29 PBD:

I buy more from my grocer than he buys from me. That means I have a trade deficit with my grocer.

In one year Williams will have nothing (except maybe some rotting vegetables). But the grocer will have Williams’ money… plus the yield on the assets he bought with those funds.

In a national sense, China’s now buying U.S. assets, like real estate. This will cost us more over time. We’re paying China the yield on those assets. This divergence will grow if the U.S. runs deficits… compounding the problem.

Reeves’ Comment: Andy, a Chinese landlord would receive rent checks in U.S. dollars. But he can’t spend those dollars in China. So he has two choices…

He’d have to use them to buy more goods, services, or assets in America… just like an American landlord would. In this case his nationality has no net difference on the economy.

Or he could exchange those dollars for Chinese currency (yuan) at a Chinese bank. If others followed suit, the supply of dollars would rise as the demand fell. That would weaken the dollar against the yuan… and make U.S. exports cheaper.

The Chinese would then trade their stronger yuan back for dollars to buy cheaper U.S. goods… and the balance of trade would swing back again.

There’s no doubt selling more debt to whoever will buy it—like the Chinese—is debilitating for America’s long-term prosperity.

But Williams’ primary point—that trade deficits are illusory without including countries’ capital accounts—appears sound. Thanks for your letter.