From The New York Times:

EVERYBODY'S BUSINESS
The Tale of the Toaster, or How Trade Deficits Are Good
By BEN STEIN

Published: April 25, 2004

SEE that Chinese-made toaster on the shelf at Wal-Mart that sells for $6.87, while the one made in America, on sale at your local kitchen and wine shop, costs $49.99? There is a story there, and it's not a bad story at all - or at least not an all-bad story.

Plug in the toaster, slide in an English muffin and pay attention. By the time the muffin is crisp, you will have learned something.

If you are a factory worker whose job has just been sent to Guangdong, you probably do not have kind feelings about Chinese manufacturers. If you are an automobile assembly line worker (as my grandfather was) whose factory is on shaky ground because of the torrent of Japanese imports, you may not feel madly in love with the Japanese. Few people want to lose their jobs. But if you are an ordinary American consumer or investor, you may want to connect the dots and see just what it means that the United States imports so incredibly much from China and Japan and how, in many ways, it is a substantial benefit to the American consumer and especially to the investor - at least in the short run.

As everyone knows, the United States runs very large trade deficits with many countries, but let's focus on China and Japan. The trade deficits mean that the Chinese and the Japanese collect a vast hoard of dollars by selling us toasters and other products, but that they do not spend nearly as much here buying cow hides, lumber, wheat and whatnot. They take these unspent dollars, turn them in to the central banks of their countries and get their local currencies to pay their workers and pay their mortgages.

The central banks then take all those dollars, or a lot of them, and buy Treasury securities in the United States. Japan loves Treasuries: in the last year, it has been buying those bonds at a rate of about $20 billion a month. To be sure, part of this has been to keep the dollar high and thus encourage additional American purchases of Japanese goods, but much of the reason is that Treasuries are a remarkably safe investment in terms of return of principal.

Japan now holds roughly one-sixth of all Treasury debt, or more than $600 billion of it. China has bought much less but still owns about $170 billion of the stuff and is adding a few billion dollars a month. (I am indebted to my statistician friend, Phil DeMuth, head of Conservative Wealth Management, for this data.)

This may seem scary, and, in a way, it is. It means that we citizens are paying a good chunk of our income tax each year for interest on debt owned by the Chinese and the Japanese.

But there are legions of positive effects from their bond buying and the large trade surpluses that their countries are running with the United States - and will continue to run, even if their commodities prices rise, because their labor costs will remain less.

First, their bond purchases help keep American interest rates low. Their voracious appetite for Treasury bonds props up the price and lowers the rate. That is a benefit for every borrower - every man or woman applying for a mortgage, every business wanting to finance a microchip plant. (And even after recent run-ups, rates remain low by historical standards.)

To the extent that the United States avoided a deep recession after the bubble burst in 2000, we owe some thanks to the nice people in Beijing and Tokyo who recycled those dollars. The stimulus to economic activity is hard to measure, but it is all good - unless you are a retiree wanting higher interest rates on your savings. Then it's not good.

Low interest rates help the stock market, too. The value of a stock is generally considered to be its flow of dividends or earnings far into the future, discounted back to the present at current rates of interest. If current interest rates are low, there is far less of a discount applied to those earnings and dividends. That makes the market rise. If rates are low, stocks seem cheap compared with bonds; this also props up stock prices.

Exporting countries like China and Japan also help to keep rates low because they have such efficient industrial machines and sell goods cheaply here. As prices stay low, the Federal Reserve is less tempted than it might be otherwise to raise rates to fight inflation. When you get your brokerage statement - and if it looks good - you may want to thank the Chinese and the Japanese.

Again, that may seem a burden for American manufacturing workers who have to compete with lower-paying foreign manufacturers, and it is. But for consumers, prices are kept low by the deluge of imports. Not every American is a manufacturing worker, but every American is a consumer, so we all benefit in some way.

BUT how long can this go on? How long can we run trade deficits in the neighborhood of $600 billion a year? What happens when the Chinese and the Japanese have bought all of the Treasury debt - or when our securities market is heavily dominated by Asian buyers? Will we become, in essence, a colony of China and Japan, working a large part of the year to pay the interest and dividends on the bonds and stocks owned in those countries?

In a way, that's the problem of the Chinese and the Japanese. At some point, if you owe the bank enough money, you own the bank. And we can always print more money to pay the interest on the debt. Anyway, that is a long way off. And to those who say that running this kind of trade deficit cannot go on forever, I offer the words of my late, great father, Herbert Stein, when asked about this very problem. "If a thing cannot go on forever," he said, "it will stop."