US deficit

[WildCat]

If an economy produces sufficient amounts of things with real value (by turning resources into products, for example) it can live with a massive debt, by using the growth produced by using the borrowed funds to produce more value than the debt itself is worth.

"Real Value" is in the eye of the beholder. Silver once had a "real value" much higher than it does today, for example. It makes no difference if an economy produces goods or services, value is value.

This presumes that continued massive growth is sustainable. If new value stops coming into the system, or even slows beyond a certain point, the whole things collapses. It's a Ponsi scheme with reality.

The Fed is carefully managing US economic growth. There is no reason an economy can't expand forever, it is not a pie that is to be divided.

 

[RandFan]

The Fed is carefully managing US economic growth. There is no reason an economy can't expand forever, it is not a pie that is to be divided.

Bingo, the economy is not a zero-sum game.

 

[AWPrime]

"Real Value" is in the eye of the beholder. Silver once had a "real value" much higher than it does today, for example. It makes no difference if an economy produces goods or services, value is value.

Products value is more stable than service value. Because they represent a direct conversion.

The Fed is carefully managing US economic growth. There is no reason an economy can't expand forever, it is not a pie that is to be divided.

Economies are based upon the conversion of resources. Resources are finite, therefore economies can't grow forever.

 

[Melendwyr]

Real value is not in the eye of the beholder. If it were, we could simply redefine ourselves into limitless wealth. We can't, not without driving ourselves insane.

Granted, some people resent the burden of rationality, and have driven themselves insane in response. I suppose they're happy in their dirt-mansions, but they're not happy long.

 

[Melendwyr]

The Fed is carefully managing US economic growth. There is no reason an economy can't expand forever, it is not a pie that is to be divided.

That's rather like saying there's no reason why a wildfire can't expand forever, or a bacterial colony.

In the most technical sense, I suppose you're right. But there are many, many obstacles to unlimited expansion, and it is foolish indeed to expect growth to continue unchecked.

Lastly, not all growth produces more value. If you fritter away your pyramid scheme money on diamonds and fur coats, you can't keep the system solvent.

 

[Crazytree]

I see Fox News' GDP talking points have been distributed well.

 

[RandFan]

I see Fox News' GDP talking points have been distributed well.

Damn you Fox News. Damn you all to hell!!!

I missed 'em, what where the talking points?

 

[a_unique_person]

WASHINGTON (AP) -- The Senate voted Thursday to allow the national debt to swell to nearly $9 trillion, preventing a first-ever default on U.S. Treasury notes.
The bill passed by a 52-48 vote. The increase to $9 trillion represents about $30,000 for every man, woman and child in the United States. The bill now goes to President Bush for his signature.
The measure allows the government to pay for the war in Iraq and finance Medicare and other big federal programs without raising taxes. It passed hours before the House was expected to approve another $91 billion to fund the war in Iraq and provide more aid to hurricane victims.

http://www.cnn.com/2006/POLITICS/03/16/congress.debt.ap/index.html



$30,000 for every person in the country? Put that way it sounds like a lot of money if it isn't going into infrastructure, etc.



Of course, there is a solution, if the money must be spent, and that is raise taxes.

 

[Melendwyr]

Of course, there is a solution, if the money must be spent, and that is raise taxes.

Ah ha ha ha Ha ha!

Great Depression II: the Slummening. Coming Soon to a society near you.

 

[DanishDynamite]

After all these responses I admit I'm confused again. (Nothing new )

So I reread the article. Before I translate a quote by the American professor let me just make it clear that we are in fact talking about the "balance of payments vs. foreigners", which I think is equivalent to the trade balance.

Quote:
"With a trade imbalance which will probably reach 1 trillion dollars next year, it is a question of a few years before foreigners end up owning most of the USA's capital-apparatus. Harbors, factories, companies, real-estate, yes, even our national parks. It is a question of basic bookkeeping."

I admit that the above sounds very alarmist. But remember that I'm just translating.

The article goes on to say that:
"The indiscutable consequence is that the US every year needs to borrow money or sell assets to maintain their lifestyle. If the Americans don't like that foreign countries are gradually taking over the ownership of factories etc, the alternative is that Americans must change their lifestyle. They must stop overspending, which is the basic reason that the trade imbalance is as bad as it is."

Comments?

 

[Solitaire]

No, it doesn't.
Budget deficits do not print money...

Germany was simply printing money, that's not what the US does.

You know that reminds me. A few years ago I called for paying off the entire national debt because the current policy of holding onto the debt and only paying interest results in a greater amount being taxed from citizens over their entire working lives. Another fellow argued against my position on the basis that the federal reserve utilizes part of the national debt to expand the money supply, eliminate the debt and the money supply disappears. At the time my limited knowledge of Federal Reserve's open market operations prevented me from refuting this "no debt, no money" counter argument. Well, I know better now.

When the Federal Reserve expands the money supply, it purchases treasury bonds from the market with newly printed dollar bills. Now it could just as easily buy land or cattle with those dollars, but buying of assets other than government debt drives up the cost of those assets for other parties participating in the marketplace - not a good thing. Anyway, the creation of new money, not the holding of debt, matters most in determining the money supply.

Curiously, the Federal Reserve collects investment income from interest on the treasuries it holds. It then returns those funds right back to the Treasury Department. A bit like writing a million dollar IOU to yourself then every year collecting the fifty thousand dollars in interest income you owe yourself from yourself then putting the imaginary money right back into your own pocket. Amusing, but this costs the taxpayers nothing.

Actually, the holding treasury bonds by Federal Reserve functions like an insurance policy against hyper-inflation in the economy. Suppose an financial crisis panics foreign investors and they begin unloading dollars back into the United States economy. The laws of supply and demand state that an increase in the money supply without a corresponding increase in demand by americans will cause inflation. Since the Federal Reserve holds an amount of treasuries equal to the amount of dollar bills in circulation, it can simply sell treasury bonds for dollar bills coming into the country and stop inflation in its tracks.

 

[Bjorn]

Actually, the holding treasury bonds by Federal Reserve functions like an insurance policy against hyper-inflation in the economy. Suppose an financial crisis panics foreign investors and they begin unloading dollars back into the United States economy. The laws of supply and demand state that an increase in the money supply without a corresponding increase in demand by americans will cause inflation. Since the Federal Reserve holds an amount of treasuries equal to the amount of dollar bills in circulation, it can simply sell treasury bonds for dollar bills coming into the country and stop inflation in its tracks.

Just a comment to your last paragraph here: If "a financial crisis panics foreign investors and they begin unloading dollars", do you think they would want to exchange those dollars for US treasury bonds - which are actually just papers saying the the US owes you as many dollars as you had in cash in the first place?

Personally, if I had a million US dollars in cash and "wanted to unload them" because I had worries about the value of the dollar, I would buy something else.

 

[DanishDynamite]

Anyone knowledgeable in this area able to comment on my post?

 

[Bjorn]

After all these responses I admit I'm confused again. (Nothing new )

So I reread the article. Before I translate a quote by the American professor let me just make it clear that we are in fact talking about the "balance of payments vs. foreigners", which I think is equivalent to the trade balance.

Quote:
"With a trade imbalance which will probably reach 1 trillion dollars next year, it is a question of a few years before foreigners end up owning most of the USA's capital-apparatus. Harbors, factories, companies, real-estate, yes, even our national parks. It is a question of basic bookkeeping."

I admit that the above sounds very alarmist. But remember that I'm just translating.

The article goes on to say that:
"The indiscutable consequence is that the US every year needs to borrow money or sell assets to maintain their lifestyle. If the Americans don't like that foreign countries are gradually taking over the ownership of factories etc, the alternative is that Americans must change their lifestyle. They must stop overspending, which is the basic reason that the trade imbalance is as bad as it is."

Comments?

From schooltime memory: It depends on what it is that the country buys - what is it that effectively is financed by foreigners?

Borrow (buy on credit) to build a powerplant at 1 million dollars, imagine it makes you half a million year - it's more than enough to pay back the loan/credit, make you a nice profit on top of that, and your economy is greatly improved. Well done.

Borrow to spend too much on cars or luxury or bombs or plastic surgery, your income is not improving (well, the plastic surgery ... ), but you're paying an increasing interest every year and if you keep on doing it, you might end up in trouble. Not so well done.

 

[Melendwyr]

From schooltime memory: It depends on what it is that the country buys - what is it that effectively is financed by foreigners?

Borrow (buy on credit) to build a powerplant at 1 million dollars, imagine it makes you half a million year - it's more than enough to pay back the loan/credit, make you a nice profit on top of that, and your economy is greatly improved. Well done.

Borrow to spend too much on cars or luxury or bombs or plastic surgery, your income is not improving (well, the plastic surgery ... ), but you're paying an increasing interest every year and if you keep on doing it, you might end up in trouble. Not so well done.

I'm not an expert on economics, but AFAIK you have it exactly right, Bjorn.

We Americans have been borrowing to support our lifestyle, rather like using credit cards to go get all of the nifty geegaws we've always wanted. Sure, it works fine... until the bills start to arrive.

 

[Solitaire]

Just a comment to your last paragraph here: If "a financial crisis panics foreign investors and they begin unloading dollars", do you think they would want to exchange those dollars for US treasury bonds - which are actually just papers saying the the US owes you as many dollars as you had in cash in the first place?

Personally, if I had a million US dollars in cash and "wanted to unload them" because I had worries about the value of the dollar, I would buy something else.

I imagine two possibilities. One, they buy assets in America like land. Two, they trade the dollars for their own currency. In either case the dollars wind up in the hands of Americans who will buy treasury bonds. Of course this scenario assumes that Americans think those bonds are worth owning.

 

[Bjorn]

I imagine two possibilities. One, they buy assets in America like land. Two, they trade the dollars for their own currency. In either case the dollars wind up in the hands of Americans who will buy treasury bonds. Of course this scenario assumes that Americans think those bonds are worth owning.

Sure, and it has happened before. But I was responding to the "a financial crisis panics foreign investors" scenario, in which case it might be quite a load of dollars for sale.

And by the way, your alternative 1 would imply that a lot of land in the US would be owned by foreigners, which was one of the possibilities to be worried about.

 

[pgmatg]

I believe the biggest problem with budget & trade deficit is that dollars are going away to other countries. So US is becoming more & more a debtor country. The country's economy as well as the people surviving on credit, which will have to be paid. So the only ones that are prospering & keeping the market on the level are international corporations. But very soon people are no going to have enough jobs to keep buying stuff, and economy will tank

 

[Solitaire]

Sure, and it has happened before. But I was responding to the "a financial crisis panics foreign investors" scenario, in which case it might be quite a load of dollars for sale.

Yes.

Firstly, the foreign investors can take their dollars and convert them into foreign currency. In essence the stack of dollars on the desk of the currency trade increases and the stack of foreign currency on his desk decreases. So each conversion changes the ratio between the two. Eventually the foreign investors will stop converting dollars into foreign currency because each dollar buys more in America than it would if it were converted into foreign currency.

The American on the other end receiving dollars for goods sold will probably put the money in a bank. Now if the Federal Reserve does its job, it'll up the reserve requirement for the banks, and probably sell the banks the bonds it holds removing money from the system preventing most inflation.

Foreign produced goods - cars, televisions, etceteras - will go up in price, meanwhile everything Americans produce will go down in price. In other words a reduced standard of living, but an increase in employment as American labor will be cheeper to buy as well.

And by the way, your alternative 1 would imply that a lot of land in the US would be owned by foreigners, which was one of the possibilities to be worried about.

Actually, I don't think it's one to worry about. Except for big cities on the coast where land values have been rising greatly the past few years, most land as seen by overseas investors have actually declined in value.

 

[Bjorn]

Actually, I don't think it's one to worry about. Except for big cities on the coast where land values have been rising greatly the past few years, most land as seen by overseas investors have actually declined in value.

I would like to see documentation for that claim (that foreigners' land in the US have declined in value). Are overseas investors avoiding land in cities on the coast? However, my comment was based on this, posted by DD:

"The indiscutable consequence is that the US every year needs to borrow money or sell assets to maintain their lifestyle. If the Americans don't like that foreign countries are gradually taking over the ownership of factories etc, the alternative is that Americans must change their lifestyle. They must stop overspending, which is the basic reason that the trade imbalance is as bad as it is."

If we are not worried about foreigners buying up America, just disregard my comment.

Foreign produced goods - cars, televisions, etceteras - will go up in price, meanwhile everything Americans produce will go down in price. In other words a reduced standard of living, but an increase in employment as American labor will be cheeper to buy as well.

I'm not sure if I got this right: Are you saying that a decline in the value of the dollar compared to other currencies, a de facto devaluation, would be good for the US?