Whose Debt is it, Anyway?

In the sense that another blonde’s spendthriftery is not my problem, I think he is correct.

But if the sum total of everyone in the country’s spendthriftery is high, does that not signal that there will likely be future liquidity problems for the country as a whole? Isn’t it a tool to help identify national economic trends?

Besides, if the vast majority of the blondes run up large debts, eventually the redheads, brunettes, etc might not want to loan money to blondes – even the blondes who were responsible with their money.

I am STILL at pains to discover what in the h_ll this administration, which claims to be conservative are up to ? Dick Cheney is not an economist, yet to this day, argues ‘Reagan proved deficits do not matter’. The number two in charge is economically illiterate !! The number one in charge is spending tax payers money as if he were a horde of drunken sailors !

Does anyone have any idea what they are up to ?

Likewise why care if the unemployment rate is rising if you have a secure job?

Doesn’t a rising unemployement rate impact the security of my job? E.g. I get paid a certain price because the supply of people doing what I do justifies that price. But if the supply of people increases, my job at my salary is at risk.

But that doesn’t seem true with the blond analogy. The spendthriftiness of my fellow blond does not negatively impact my spendthriftiness… in fact, in many ways it postively impacts me. E.g. When I use a cash back credit card, it’s a net positive for me because I pay off my balance every month. Whereas for spendthrifts (who presumably don’t payoff their balance) it’s a net negative because they payout way more in interest than they receive in cash back bonuses.

Measuring the supply of labor force seems to be something that would have impact on everyone with a job. On the other hand, measuring the trade deficits of our country seems as arbitrary as measuring the trade deficits of:

• states
• municipalities
• blonds

Why do we not we care at all if S. Carolina has a trade deficit with New Jersey? Or that Green Bay has a trade deficit with Chicago? Or do we care and I just don’t know about it?

Actually there is, if anyone is dependent on the maintenance of trading partners, who will not stay without a sustained Profitability to themselves. There would be loss of exotic taste fulfillment at the minimum, freezing to death at the maximum. lgl

Interesting use of analogy. Before working through the problem let’s start by saying that analogies are tools to seed a new domain not deductively reason about a problem. This analogy is incomplete for a number of reasons with the real world. If blonds are a group like nations, then they would issue a common currency (one among many things). It is a common currency that links the blonds together as a collective (blond is merely a decriptor) and a trading block. Following the analogy red heads and others would have collective currencies. Now if a small set of blonds begin running debts with red heads using the blond currency, then all blonds are hurt. Funny, this is how it happens in economic thought as well … blonds really don’t have more fun (for long).

This problem also shows how a small set of people (blonds) can hurt a those (blonds) who behave prudently …

Again, let’s be careful with analogies … don’t use them to replace logical thinking … they are only a starter tool …

“Why do I care about the trade account of the average American?”

You don’t, per se.

But the fact is that there is a goverment and its actions can affect the average American’s trade account so that it differs from what it would be independent of government action, if only individual Americans were creating it, for better or worse.

Take the trade deficit/capital surplus. They are two sides of the same coin, so their existence can be driven either by a nation providing superior investment opportunities which attract a capital surplus that creates a trade deficit, or its wastrel spending that produces a trade deficit which requires borrowing from abroad creating a capital surplus.

Which way does causation go, and is the result good or bad?

I’d say that if the situation just involves individual actors in international markets, there’s no problem. It can be ignored — and probably even is beneficial. But if the government is creating the situation, watch and be wary.

E.g. foreign direct investment came into the US in big way in the late 19th Century as the US industrialized, and also up to 2000 through economic boom, driving US trade deficits. As those trade deficits were the result of individual actors in market transactions, I’d say they were fine and the debt they represented was actually beneficial.

But todays’s trade deficit, and the growing debt it involves, is in large part a result of the US fiscal deficit, i.e. domestic politics, and of foreign government interventions in currency markets. Foreign direct investment in the US has largely dried up. It’s not the result of individual actors in markets, but of politicians’ doings.

Since this current debt situation is being manipulated by governments, governments can and should be judged by it, and by the future consequences that could be shared by their citizens.

Pearlstein might want to take Logic 101. Just because three goods have two features in common,you can’t conclude that Feature 1 CAUSED Feature 2. It’s an “invalid syllogism.” He also might want to enroll in Psychology 101 where students are warned about assuming that “correlation implies causation.”

Excessive inflation in the education market is due to the monopoly by a small minority (people with doctoral degrees) using a protectionist policy (tenure). Another factor is the norm that universities require no more than three or four undergraduate courses per year. Government funded scholarships for poor Americans isn’t a big factor in the spiraling cost of college education, although the research money provided by NIH, NSF, etc. is.

Inflation in the health care industry is caused by the use of advertising to create runaway demand for drugs (Prozac, Paxil, Xanax, Vioxx, Viagra, etc.) and overly generous patents to corporations. And other things (e.g., monopoly by people with medical degrees). The existence of Medicare and Medicaid is a tiny piece of this pie. The fact that Uncle Sam lets Eli Lilly deduct advertising expenses is a big factor.

I’m not sure what causes inflation in the housing market. It seems like the desire to live beyond your means (love that cash-out refi!) is a cause, but I don’t know how. Section 8 and other government subsidies for housing don’t have much to do with the bubbles in San Diego, NY, etc. Allowing mortgage interest to be tax-deductable does.

Pearlstein wants to believe that social welfare programs have negative externalities. So he convinced himself that the reason for inflation in education, health and housing was the existence of government programs to provide these goods to people who otherwise not afford them.

It’s like that Calvin and Hobbes cartoon where Calvin said, “Many geniuses did poorly in school. I do poorly in school. Therefore, I’m a genius.”

The currency used as the “U.S. Dollar” is actually “private” currency. It consists of banknotes issued by individual district banks in the Federal Reserve System. They are not backed by the full faith and credit of the U.S. Those District banks are owned by the member banks within the ditricts. The U.S. Gov’t. licenses the Fed to issue “legal tender” Notes all others are taxed out of existence. The Feds pay a part of any profits from currency issues to the U.S. Gov’t.

The currency is “backed” by assets at the banks consisting of U.S. Gov’t. obligations (debt) and obligations of business and personal borrowers – that’s it [guess what backs the Euro!]. Thus, the fundamental backing of currency is the future productivity of U.S. Businesses and individuals.
That productivity is the source of taxation for meeting the Federal Debts as well as for meeting private obligations. So, U.S. money is backed by U.S. productivity – the fate of all Fiat currencies.

The “U.S.” does not have a “trade deficit” (or surplus) with other jurisdictions. Trade is by businesses and individuals. Non-domestic holders do hold claims on U.S. Gov’t. obligations. In effect, the Treasury sells bonds to foreignors (not directly, but ultimately). The trade balances are private, and are settled regularly on private commercial terms.

The “U.S. Gov’t.” does not have a “curent account deficit.” The current accounts are almost totally among large (or central) banks, and represent the effects of commercial settlements of private transactions.

All of this bears directly on the impulses of the non-U.S. to purchase (or hold) U.S. obligations. The need of the U.S. Gov’t for such purchases and holders arises from public expenditures exceeding government revenues. If the non-U.S. holdings decline. more must be issued to banks (via the Fed) and thus more fiat paper can be issued by banks and price levels can be affected.

Otherwise, the U.S. Gov’t has no concern with trade or current account deficits.

All money is essentially a call on future (near and long-term)goods and services (including satisfaction of prior obligations. Most money is in the form of credits of some kind.When we look at those two major balances, we are thus looking at expectations of future productivities. At present, and based on most recent decades, they favor U.S. results.

RRS

roger that, dsquared.

Argentina’s debt was denominated in foreign dollars. The US’s debt is in dollars. The US doesn’t haven’t to worry about its debt payments going up as a result of a weakened currency. All the currency risk is on lenders and on US consumers (who are fundamentally at fault for the deficits).

I agree with the view that the dollar is essentially backed by future goods and services. It’s is my view that the falling dollar will unleash a competitive machine that certain countries fear. US companies will have the profits they need to invest in their own businesses. Rising interest rates will be more of a problem for paying off current debt than for future investments. Regardless rising profitability will draw investors back into the stock market, including foreign investors. There will be plenty of capital gains to boot, generating tax revenue for federal governments that will allow deficits to be reduced.

“Soon Japanese, Koreans, Germans will start buying up New York real estate and hi tech companies for (plastic) peanuts. ”

I remember the last time the dollar was weak and the Japanese bought Rockefeller Center, with the Rockettes and all, right here in the heart of Manhattan.

Of course, they wound up going broke and selling it back to us at a half-billion dollar loss, heh, heh, rubes.

To answer the discussion question: No.

We are running a trade deficit because the rest of the world wants to hold dollars. They don’t want to hold dollars just to buy US goods, but because dollars serve the classic functions of money– a unit of account, a medium of exchange, and a store of value– better than local currencies do.

We will probably continue to be able to export hard currency, because demand is likely to remain strong as the developing world grows– even if we face increased competition on the supply side from the euro.

Read more in the essay I just posted on my web page.