October 19, 2011
Thomas Friedman tells readers that we should want China to raise the value of its currency, but the real problem for the United States is that we are not building up our infrastructure and we don’t save. While the first point is right, the second suffers from ignorance of national income accounting.
If we have a trade deficit then we must have negative national savings. At full employment, we will have a large trade deficit, unless our currency declines in value. This means that we will either have large budget deficits (which Friedman really doesn’t like) or we will have negative private savings. There is no way around this. So the problem of low savings is the problem of an over-valued currency, they are not separate issues.
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