U.S. households will likely respond to the shocks of the pandemic by increasing their savings rates, as will foreign households. If the U.S. government does not decisively increase spending, higher American household savings will force either American debt or unemployment to rise even more.
The debate about whether it is U.S. consumers or Chinese businesses that pay for American tariffs on Chinese-produced goods reveals absolutely nothing about whether the tariffs harm or benefit the U.S. economy.
There are conditions under which governments can create money—or debt—without fear of inflation or excessive debt burdens. There are other conditions under which debt or money creation can lead to inflation and balance sheet problems.
Taxing capital inflows is a far better way to balance trade than imposing tariffs. This would address the root causes of trade imbalances, improve the productive investment process, and shift most of the adjustment costs onto banks and speculators.
Facebook seems to think its new digital currency Libra will be used mainly for purchasing goods and services and for current account transactions. But it will probably be used mainly for capital account transactions. Do we really want to eliminate frictional costs on the capital account?
Income inequality in the United States hampers growth and forces up debt. In advanced economies in which investment is not constrained by scarce savings, high levels of income inequality lead automatically to either more unemployment or more debt. Such inequality undermines not only the health of the economy, but eventually also the rich.
While foreign investment usually benefits developing economies and creates local economic benefits in advanced economies, it generally does not benefit advanced economies on the whole except in very limited cases. On the contrary, foreign investment in advanced economies is more likely to lead to higher unemployment or rising debt.
A number of recent articles suggest that Chinese officials may reduce their purchases of U.S. government bonds. It is very unlikely that China can do so in any meaningful way because doing so would almost certainly be costly for Beijing. And even if China took this step, it would have either no impact or a positive impact on the U.S. economy.
Although standard trade theory predicts that highly advanced economies with sophisticated financial sectors, like the United States, should generally run trade surpluses, the country has run persistent, and often large, trade deficits for five decades. This can only be a consequence of significant global economic distortions.
Debt is rising more quickly in the United States than most people would prefer. This is happening in part because the U.S. current account deficit and the country’s high level of income inequality distort the structure and amount of American savings.
Analysts are increasingly skeptical that China’s very high reported GDP growth rate provides a meaningful picture of the economy’s health. There are, however, at least three very different ways that reported GDP can fail to reflect the underlying economy.