Whatever the correlations of population density with the trade deficit, they are beside the point. The U.S. has a large trade deficit because it tried to immplement free trade theory and other nations, except England, did not.

Quite a few things in your post require consultation of facts. For instance, the assertion that the US workforce is the most productive on earth. That statement does not look right, unless tems like “US workforce” and “productive” have unusual meaning. Output per man-hour in several European countries, Singapore, Japan etc is simply higher. If one goes to specific industries (and for instance leaves out services and construction) the US may be doing better, since most labor intensive production of tradables has been moved offshore (using US production technology of course). That was just one example.

However the main reason for commenting is that one of your intuitions is correct, an that is that consumers living in high density environments have physical limitations on their spending, as well as logistical bnefits unqique to urban environments. Residents of Tokyo can easily afford several cars per houshold but have generally no place to put them or may even require a permet in certain neigborhoods. The same goes for residents of Manhattan..Urban people tend to have less space for transportation equipment and, they usually have a communal alternative that is also cheaper.

But that is not a good reason why there should not be fre trade between LA and Manhattan..Or would you like to tax only foreign urbanites?

Why? The American work force is the most productive on earth. Our product quality, though it may have fallen short at one time, is now on a par with the Japanese. Our workers have labored tirelessly to improve our competitiveness. Yet our deficit continues to grow. Our median wages and net worth have declined for decades. Our debt has soared.

Clearly, there is something amiss with “free trade.” The concept of free trade is rooted in Ricardo’s principle of comparative advantage. In 1817 Ricardo hypothesized that every nation benefits when it trades what it makes best for products made best by other nations. On the surface, it seems to make sense. But is it possible that this theory is flawed in some way? Is there something that Ricardo didn’t consider?

At this point, I should introduce myself. I am author of a book titled “Five Short Blasts: A New Economic Theory Exposes The Fatal Flaw in Globalization and Its Consequences for America.” My theory is that, as population density rises beyond some optimum level, per capita consumption begins to decline. This occurs because, as people are forced to crowd together and conserve space, it becomes ever more impractical to own many products. Falling per capita consumption, in the face of rising productivity (per capita output, which always rises), inevitably yields rising unemployment and poverty.

This theory has huge ramifications for U.S. policy toward population management (especially immigration policy) and trade. The implications for population policy may be obvious, but why trade? It’s because these effects of an excessive population density – rising unemployment and poverty – are actually imported when we attempt to engage in free trade in manufactured goods with a nation that is much more densely populated. Our economies combine. The work of manufacturing is spread evenly across the combined labor force. But, while the more densely populated nation gets free access to a healthy market, all we get in return is access to a market emaciated by over-crowding and low per capita consumption. The result is an automatic, irreversible trade deficit and loss of jobs, tantamount to economic suicide.

One need look no further than the U.S.’s trade data for proof of this effect. Using 2006 data, an in-depth analysis reveals that, of our top twenty per capita trade deficits in manufactured goods (the trade deficit divided by the population of the country in question), eighteen are with nations much more densely populated than our own. Even more revealing, if the nations of the world are divided equally around the median population density, the U.S. had a trade surplus in manufactured goods of $17 billion with the half of nations below the median population density. With the half above the median, we had a $480 billion deficit!

Our trade deficit with China is getting all of the attention these days. But, when expressed in per capita terms, our deficit with China in manufactured goods is rather unremarkable – nineteenth on the list. Our per capita deficit with other nations such as Japan, Germany, Mexico, Korea and others (all much more densely populated than the U.S.) is worse. My point is not that our deficit with China isn’t a problem, but rather that it’s exactly what we should have expected when we suddenly applied a trade policy that was a proven failure around the world to a country with one fifth of the world’s population.

Ricardo’s principle of comparative advantage is overly simplistic and flawed because it does not take into consideration this population density effect and what happens when two nations grossly disparate in population density attempt to trade freely in manufactured goods. While free trade in natural resources and free trade in manufactured goods between nations of roughly equal population density is indeed beneficial, just as Ricardo predicts, it’s a sure-fire loser when attempting to trade freely in manufactured goods with a nation with an excessive population density.

If you‘re interested in learning more about this important new economic theory, then I invite you to visit my web site at OpenWindowPublishingCo.com where you can read the preface, join in the blog discussion and, of course, buy the book if you like. (It’s also available at Amazon.com.)

Please forgive me for the somewhat spammish nature of the previous paragraph, but I don’t know how else to inject this new theory into the debate about trade without drawing attention to the book that explains the theory.

Pete Murphy
Author, “Five Short Blasts”

that frees up a lot of funds for a fiscal deficit.

also note that if the TARP puts equity capital into a bank and the bank buys treasurties with the cash, there is no need to borrow from abroad to cover the treasuries issued to finance the TARP. indeed, a lot of bank recapitalizations are done without any direct market debt issuance — the government just hands the banks treasuries in return for their existing assets/ new equity. it is a hard concept to grasp, but in this case the money does really move in a circle.

djc — so long as treasury rates are falling there isn’t much pressure to issue in yen

The big trouble with this conspiracy theory is that Citigroup got nothing from Lehman.

Lehman’s North American operations were sold to Barclays for $1 billion dollars. It’s European and Asian operations were sold to Nomura Securities for two dollars (yes two dollars).

http://www.globalresearch.ca/index.php?context=va&aid=11042

Intelligence agencies in China and Japan are focusing on the role of Citicorp as being behind a fraud against Japanese banks by the U.S. Treasury, the Federal Reserve, and Wall Street to bail out unscrupulous Wall Street bankers and mega-investors.

Chinese and Japanese intelligence agencies that look closely at financial malfeasance are alarmed that the Salomon division of Citigroup has managed to take over all of Lehman Brothers viable assets, leaving the U.S. bankruptcy court holding the debt of the failed securities firm. Lehman Brothers filed for Chapter 11 bankruptcy on September 15, 2008. Lehman had borrowed billions from two Japanese banks — Nomura and Sumitomo Mitsui — to stay afloat.

A number of CIA officers are in Beijing to try to prevent a united Asian front against Washington’s and Wall Street’s attempts to call the shots on the global financial crisis. The CIA’s top priority is to ensure that nothing interferes with China’s continued backing of the U.S. dollar.

Personally I would support a collapse, or at least a gradual decline, of the US dollar. But anybody who has the best interests of the US economy in mind should support a stronger dollar.
A strong dollar ensures the availability of low priced imports for consumption in the US; and contributes to lower interest rates on debt for the US government and for private borrowers in the US. A weaker dollar would have a very strong negative effect on demand in the US economy. How would you like to pay $20 for an all-American nail clipper instead of $2 for a made in China one?
This issue is one on which I disagreed with Brad yesterday, and I previously had a similar disagreement with him on the contribution of dollar pricing of oil trade to the invasion of Iraq.
The strong dollar has created not one but three different effects.
The first effect is quite well known, but it would be worth to get the correct perspective on it. Maintaining a strong dollar involved accumulating USD in the forex reserves of most emerging markets, notably China and Taiwan. The accumulated reserves formed the source of financing for the huge boom in the construction of large number of new houses in the US. The easy availability of this credit reduced interest rates. Ashok Bardhan’s 2007 paper attempts to provide an estimate of the actual reduction in US mortgage interest rates as a result of global capital flows.
China’s exchange rate policy was more a result of the US policy motivations to keep interest rates low, provide better margins for US importers and promote owning a home as part of the American dream and less a result of mercantilism on China’s part.
The second effect is that the strong dollar combined with low interest rates and high levels of liquidity in the US made it convenient for US banks to lend short-term to foreign banks. The total amount of claims on foreign banks payable in dollars is approximately $ 2 trillion and a bulk of this debt is of short term maturity. The foreign banks, especially in emerging markets, benefited from typically much higher local interest rates.
The third effect of the combination of low interest rates and high liquidity is that it helped American institutions invest in equity in the emerging markets on a leveraged basis. My guesstimate is that at least 20% of market cap in emerging market stock exchanges was owned by US financial institutions. These investments were providing much higher rates of returns in comparison to the cost of raising debt in the US.
The recent rally in the US dollar is due to effects # 2 and # 3 above.
#2: US financial institutions were unwilling to roll over the short term dollar denominated foreign currency debt, and this created sizeable unanticipated demand among foreign banks to buy dollars in order to repatriate the loans. The Fed’s swap lines to ECB and other central banks, and the draw down amount on them precisely reflect the need for dollar financing abroad.
#3: US financial institutions triggered a sell off in the equity markets of most emerging markets, and any other markets in which they had equity investments. Currently the US institutions are actively engaged in short selling in foreign equity markets. The increased pressure of redemption from these markets also created unanticipated demand for US dollars.

The havoc in Detroit has much more to do with local demand for motor vehicles than with the strong dollar. Sales of minivans and any kind of larger passenger transport vehicle as opposed to the fuel efficient compact and mid size auto models have dropped precipitously. Most American consumers are severely cash constrained and they would like to avoid spending more on gas, despite the recent drop in gas prices. In fact, the situation is so bad that people are not even willing to rent minivans for a weekend. If you go to a neighborhood car rental you will most likely find them offering to rent a minivan out to you at the same rate as a compact car.