On May 5, George P. Shultz and Martin Feldstein explained, according to the headline of their Washington Post article, “everything you need to know about trade economics, in 70 words.” Shultz is a former U.S. secretary of labor, treasury, and state, and Feldstein, whose recent article in Project Syndicate I wrote about in a Bloomberg piece two weeks later, is a professor of economics at Harvard University, former chairman of the Council of Economic Advisers, and president of the National Bureau of Economic Research.
Here are the seventy words:
If a country consumes more than it produces, it must import more than it exports. That’s not a rip-off; that’s arithmetic.
If we manage to negotiate a reduction in the Chinese trade surplus with the United States, we will have an increased trade deficit with some other country.
Federal deficit spending, a massive and continuing act of dissaving, is the culprit. Control that spending and you will control trade deficits.
The Mainstream View: The Savings Account Drives the Capital Account
This view is also the mainstream view, but it is based on implicit assumptions concerning trade that I would argue have become obsolete. The model Shultz and Feldstein use is the same model, on the surface, that I and most other trade economists use, and is built around accounting identities that can never be violated. However, accounting identities do not tell us the direction in which causality flows, and so all identity-based arguments must implicitly make assumptions about which of the variables drive the other. This is where these arguments can get terribly confused.
U.S. investment exceeds U.S. savings, and the United States runs a trade deficit that is by definition equal to the gap between investment and savings.1 It also runs a capital account surplus equal to the gap because this is the amount of net foreign capital inflow that bridges the gap, and the trade account and the capital account for any country must always balance to zero. So far there is no disagreement here.
Total U.S. savings, of course, consist of the sum of household savings, business savings, and government savings. Governments usually spend more than they receive in revenues, and the fiscal deficit is a measure of this excess, or of government dissaving. Reducing the fiscal deficit, according to Shultz and Feldstein, causes total U.S. savings to rise, and as total U.S. savings rise, the gap between U.S. savings and U.S. investment must fall, bringing down both the capital account surplus and the trade deficit. This is why Shultz and Feldstein claim that cutting the U.S. fiscal deficit would cause the U.S. trade deficit to fall.
We can state these as formulae:
Trade deficit = Capital account surplus = Total investment – Total savings
Total savings = Household savings + Business savings + Government savings
And because the fiscal deficit is simply the negative amount of government savings, the second formula becomes:
Total savings = Household savings + Business savings – Fiscal deficit
Combining everything, we are left with:
Trade deficit = Total investment – (Household savings + Business savings – Fiscal deficit)
Which Is the Independent Variable and Which Dependent?
Here is where it starts to become messier. According to Shultz and Feldstein, household savings, business savings, and the fiscal deficit are all more-or-less independent variables. Total investment is also an independent variable. All four are determined by other conditions that might include the level of interest rates, the growth in household income, the tax rate, and so on.
To be sure, they are not wholly independent of each other, and there is some feedback among them. For example, we can easily argue that U.S. businesses and households watch and worry about the U.S. fiscal deficit, and as the fiscal deficit declines, the confidence of U.S. businesses and households will rise and encourage them to spend more. Alternatively, we can argue that the fiscal deficit creates stronger demand in the economy, and a reduction will cause U.S. businesses and households to spend less. This complicates the argument somewhat, but we can safely ignore these linkages without changing the thrust of the argument, and so we will ignore these effects and assume that the four accounts can be independent of each other. Relaxing this assumption has no effect on the underlying argument.
If we accept the four as independent then it is obvious what happens if we increase one of the three savings accounts. For example, if we reduce the fiscal deficit, total savings must rise, in which case the gap between savings and investment must decline with that both the capital account surplus and the trade deficit must decline.
That is the nub of the claim Shultz and Feldstein make. They argue that if we cut the U.S. fiscal deficit, the U.S. trade deficit must automatically decline.
Specifying the Assumptions
There are two important assumptions that must be true if Shultz and Feldstein are right, which lead to the third bullet point below:
- First, U.S. household, business, and government savings are determined independently as a function of the savings preferences of each relevant sector.
- U.S. investment is determined independently as a function of interest rates, confidence, economic prospects, and so on.
- Because the capital and trade accounts are wholly defined by these four independent variables (the three savings rates and the investment rate), they are the dependent variables and they automatically adjust to balance U.S. investment and savings as these change.
Today’s Trade Regime: The Capital Account Drives the Savings Account
The reason I call their view the mainstream view is because most people accept implicitly the idea that the three savings rates and the investment rates are the independent variables, and that the capital and trade account automatically adjust to balance them. This is just a way of granting the U.S. economy autonomy.2
But there is almost immediately a problem. If U.S. investment exceeds U.S. savings, then by definition the savings of the rest of the world exceeds their investment by exactly the same amount. Savings and investment, after all, must balance globally. If the U.S. determines its own investment and savings rates, then it must determine both the excess of U.S. investment over U.S. savings and the excess of foreign savings over foreign investment. Does this mean that the U.S. determines foreign savings rates? (I’ll get to why we must focus on savings rates, and not investment rates, later.)
China, Germany, and Japan together have among the highest savings rates in the world and together account for the bulk of the savings excess, not because their households are ferociously thrift but rather because very deep distortions in the distribution of income have left households in each country with much lower shares of GDP than in countries like the United States, and so they suffer from deficient domestic demand. It is very clear, in other words, that they have large excesses of domestic savings because of very specific domestic conditions, and so it is far easier to argue that their domestic conditions determine their domestic savings rates than it is to say the same in the United States, and yet the sum of all excesses of investment over savings in trade-deficit countries is exactly equal to the sum of all excesses of savings over investment in trade-surplus countries. There are only two ways to explain this:
- Except for very small countries that can treat the world as an essentially infinite source of external demand and supply, the savings and investment rates of most countries, and certainly of all large countries, must be determined jointly subject to the requirement that the global balance of trade must balance. Either savings and investment rates in the rest of the world are determined by the United States, or savings and investment rates in the United States are determined by the rest of the world, or each determines the other, but both sides cannot be autonomous.
- Mercury, the god of commerce, or perhaps it is Ganesh, is extraordinarily busy, spending all his time managing trade, investment, and savings, country by country, with such precision that at every single point in time, by what seems an astonishing coincidence, all the savings rates and all the investment rates in each of hundreds of more-or-less autonomous economic entities in the world balance out perfectly.
For those agnostics who think it is the former, the idea that American savings rates might be determined by foreigners seems shocking, but bear with me. In order for this to be the case, it turns out we only need to make two assumptions:
- The U.S. capital markets are completely open to foreigners.
- They are deep, flexible, and liquid enough that foreigners can automatically turn to the U.S. market to meet their financing needs.
Are U.S. Financial Markets the Global Shock Absorber for Capital?
I have already explained how this works in several essays, including recent blog entries on Mexico’s role in the U.S. trade imbalances and on how the U.S. trade deficit affects the U.S. economy, along with my most recent Bloomberg article. History certainly does seem to suggest that U.S. capital markets are essentially shock absorbers for capital flow requirements around the world. The U.S. economy moved to the center of the global trade and capital regime about a century ago, and during roughly the first five decades of that period, the global economy was characterized by two world wars and urgently needed investment to rebuild infrastructure, agriculture, manufacturing, and logistics. This was a time, however, in which income in most rich countries had been devastated by war, making scarce the savings needed to rebuild the global economy. The world urgently needed savings and the United States, the only major economy not devastated by war, accommodated this need by running the largest trade surpluses in history along with the largest capital account deficits (that is, it exported net savings). Capital inflows into Europe and Japan allowed investment to rise, and rising investment powered growth.
By the beginning of the second decade, however, during the 1960s and 1970s, the economies of the rich countries had been substantially rebuilt and income soared above pre-war levels. The global economy no longer suffered from scarce savings, and it was now demand, not capital, which it urgently needed. It was around this time the U.S. capital account swung into more-or-less permanent surplus, and the trade account into deficit, as a way of accommodating global needs.
This is why the United States has been at the center of the global trade and capital regime, and why, as I explain in my December 6 essay, if it withdraws, the alternative is not a new system centered on China but rather the disappearance of an orderly global trade regime. All around the world, including in the United States, investment decisions are made that determine the direction of vast amounts of capital flows. During periods of excess liquidity or excess global savings (or, to put it differently, of deficient demand), especially when central banks are accumulating vast hoards of reserves, the excess savings have to end up somewhere, and this ultimately means that excess savings flow into the U.S. financial markets, leaving the United States with a capital account surplus and its obverse, a current account deficit.
The Obsolete Trade Regime
It wasn’t always this way. For much of the nineteenth century, the United States also ran trade deficits and capital account surpluses, but while there were already capital flows driven by investors making independent decisions about where to park their money, roughly 90 percent of the international business done by London banks consisted of trade finance. In those days when imports exceeded exports, either the deficit country would ship abroad some monetary asset—probably gold or silver—or it would borrow the difference. Typically, in the old days, the importer would have asked his bank to issue a letter of credit, and this would be sent to and accepted by the foreign exporter’s bank. In that case, as we can plainly see, the capital account (that is, the loan that flows from the exporting country to the importing country) is simply a residual. It exists because of the trade imbalance.
That is not how capital flows work today. Around the world, foreigners are investing money in the United States based on decisions that have nothing to do with financing trade. These include the Chengdu billionaire eager to take his money out of China, a bond manager in Edinburgh, a Japanese car manufacturer looking to build a factory in Michigan, an Australian company acquiring the marketing savvy of a Brooklyn high-tech start-up, or any of a thousand other foreign investors making decisions to buy stocks, bonds, real estate, or production and logistic facilities in the United States. In a world of excess savings, inevitably the bulk of capital flows settle in the least resistant market—and that is the United States.
What About Investment?
The argument made by Shultz and Feldstein depends on another implicit assumption, and this has to do with investment. They assume that in the United States, desired investment is broadly in line with actual investment. It’s not that there are no good investments that urgently need to be made in the United States—it certainly needs better physical infrastructure, as by now nearly everyone knows, but this isn’t what I mean by desired investment. I simply mean that American businesses or governments are fully able to fund all investments on their own merits.
In developing countries, it is often hard to raise the funding needed to make investments in infrastructure or manufacturing because local savings levels are too low, and foreigners have a very limited appetite for bringing money into the country and will only do so at very high rates. That is not the case in any developed country and certainly not the case in the United States. American businesses and governments are able to borrow as much money as they want at extremely low rates as long as they are creditworthy. In fact, one of the problems today is that many companies around the world, and especially in the United States, are sitting on massive piles of cash and seem to have no interest in investing anywhere.
What Happens If the U.S. Fiscal Deficit Is Cut?
Let us return to the Shultz and Feldstein equation:
Trade deficit = Total investment – (Household savings + Business savings – Fiscal deficit)
According to this, if the fiscal deficit declines, total savings will rise, and because investment will be unaffected, inevitably the trade deficit must decline. But this also means the capital account surplus must decline. If it doesn’t, there is no way the trade deficit can decline because they are equal by definition.
But will it? If the United States is running a capital account surplus mainly because the world is awash in excess savings, then it is unlikely that a cut in the fiscal deficit will cause a drop in the U.S. current account surplus. In fact, if investors are worried at all about the U.S. fiscal deficit, then if anything a cut in the deficit will cause even more money to enter the United States, and if the U.S. capital account surplus rises, then so must the U.S. trade deficit, which is the opposite of what Shultz and Feldstein claim.
The Different Impacts
This turns out to be a lot more complicated than seventy words permit. With just one or two very reasonable assumptions, the recommendation by Shultz and Feldstein—to lower the trade deficit by cutting the fiscal deficit—could seriously backfire. Rather than reduce the trade deficit, it might simply raise unemployment.
In order to show the range of things than can happen if the U.S. fiscal deficit were cut by $100, here is the best I can do working in only two dimensions:3 There are two key sets of assumptions. The first is about whether or not savings are scarce in the United States—if they are, desired investment exceeds actual investment. I believe they are not, and I think Shultz and Feldstein agree with me.
The second assumption is about whether the capital account simply adjusts to balance the trade imbalance or is determined independently by foreign and U.S. investors. I believe it is the latter, with U.S. and foreign investors moving capital around the world and leaving the United States with a capital account surplus. I don’t know what Shultz and Feldstein would say they believe, but implicitly they must believe that the capital account is driven primarily by the need to finance the trade imbalance.
There are four different sets of assumptions you can have, in other words, and depending on which set is true, this is what happens if the U.S. government were to cut the fiscal deficit by $100:
| Desired investment exceeds actual investment | Desired investment is broadly in line with actual investment | |
| The U.S. capital account is driven by trade, and mainly reflects the need to finance the deficit. | It’s hard to say whether or not the trade deficit will decline. If the fiscal deficit is crowding out investment, cutting it will cause investment to rise, and it might rise by the full $100, in which case both savings and investment will rise by enough to have no impact on the trade deficit. In this case, the United States runs a “good” trade deficit, driven by higher investment, not lower savings. | Shultz and Feldstein are mostly right. The trade deficit will decline, but by less than $100 if cutting the fiscal deficit causes consumption or private sector investment to rise (by increasing confidence, perhaps) or to fall (by reducing government spending). Unemployment is largely unchanged, but it could be lower or higher, depending on how the cut in the fiscal deficit affects the economy. |
| The U.S. capital account is driven mainly by the independent decision of foreign investors to invest excess global savings. | The U.S. trade deficit will not decline, and may even rise if it causes foreign confidence in the U.S. economy to rise. This is a great outcome for the United States because investment must rise by at least $100, and by even more if foreign inflows rise. | The U.S. trade deficit will not decline, and may even rise if it causes foreign confidence in the US economy to rise. This is a terrible outcome for the United States because savings must fall by at least $100, and by even more if foreign inflows rise. |
Shultz and Feldstein are in the top right box, in which a cut in the U.S. fiscal deficit will cause a broadly commensurate cut in the U.S. trade deficit with no overall change in GDP growth. I am in the bottom right box, in which a cut in the U.S. fiscal deficit will cause no change in the U.S. trade deficit because it will be matched by a decline in household savings as unemployment rises, as consumer debt rises, or both. This leaves the United States worse off.
The best case is the top left box, where a cut in government spending will “crowd in” a commensurate increase in private investment. This is typical of an economy subject to scarce savings, like the United States during much of the nineteenth century.
Conclusion
I apologize if this blog entry is a little disordered, but I started writing it quickly and wanted to pump it out before I went off on a business trip. The general discussion about trade is incredibly confused, with very intelligent people saying very different things, but this disagreement occurs not because we don’t understand how trade works but rather because we fail to clarify our assumptions. George P. Shultz and Martin Feldstein are brilliant economists and fully understand trade, but perhaps for that reason they hurry a little too quickly over their assumptions.
The two key assumptions are about what drives the capital account and whether or not savings are scarce (that is, whether or not desired investment exceeds actual investment). If you believe that trade is independent, and the capital account is simply whatever it takes to balance trade, then anything that affects domestic savings or domestic investment will work its way through the capital account. You can easily work out the trade implication of policies that change government savings, business savings, or household savings.
If savings are scarce, changes in the savings rate will directly affect the investment rate in the same direction, so that the net effect on the trade and capital accounts will be negligible. If savings are not scarce, changes in any part of the savings rate will have a limited impact on investment, if any, and so they will force corresponding changes in the trade account and the capital account.
Notes
1 Actually the gap between investment and savings is by definition equal to the current account, not the trade account, which is simply part of – usually the largest part of – the current account, but we will ignore the difference between the current account and the trade account to keep things simple. In fact doing so will have almost no bearing on the actual argument and will not affect any of its conclusions.
2 It allows us to feel indignation at our fellows, and to say foolish things like: “Americans (Spaniards, Italians, Germans before 2003, South Koreans between 1995 and 1997, and so on) are spendthrift. No one put a gun to their heads and forced them to buy that flat-screen TV.”
3 I should stress that this analysis ignores both dynamic and second-order effects. By dynamic effects, I mean the impact policies will have on the long-term evolution of the economy; for example, if you cut the fiscal deficit, that may cause a qualitative change for better or for worse in the economy in the long run. By second-order effects, I mean whether cutting the deficit will in the short run increase other forms of investment and consumption demand by increasing confidence or reduce other forms of investment and consumption demand by reducing spending.
Comments(44)
Interesting that the last time the budget was in surplus (during the late 90s), it was pretty much exactly when the c/a deficit began rising - from 1.5% of GDP in 1996 to 3.7% in 2000 (with a budget surplus of 2.2%).
"According to this, if the fiscal deficit declines, total savings will decline, and because investment will be unaffected, inevitably the trade deficit must decline. " Shouldn't that be: "total savings will increase"? That is, the decline in negative savings (the deficit) will increase savings.
Yes, Praetor, you are right. Thanks for spotting it. I will try to get it corrected right away.
Let me guess. If we can prove we're serious about controlling our spendthrift, profligate ways, investor confidence will soar and they will lead us to prosperity.
You must get sick of repeating this over the years...
Ha ha I think we need to keep repeating it until they get it. It is amazing how confused the whole trade debate can be.
Feldstein & Shultz. I'm sure they have more raw brain power than me. Yet in economics I know some things of which they are wholly ignorant. In economics, the level of intellectual corruption, I think and feel, is great. They look at the budget deficit and all they see is debt, dissaving. But the only way for the govm to purchase or use any resources at all is by issuing that debt. Suppose the govm issues currency, in other words debt, since currency is a promissory note, for, or in building a much justified bridge for 1 billion dollars. They're in debt, but in the process they reserved or saved from consumption the human and physical resources and built a bridge, a wonderful economic investment. With govm debt, so-called dissaving, they actually in real world terms saved and invested. Debt in itself doesn't say anything about what it was used for. There are other ways in which their understanding of govm debt is incoherent.
"According to this, if the fiscal deficit declines, total savings will decline, and because investment will be unaffected, inevitably the trade deficit must decline. " Shouldn't that be: "total savings will increase"? That is, the decline in negative savings (the deficit) will increase savings.
I'm thinking, perhaps incorrectly, that dollars will become harder to save if the deficit is cut. US Treasuries and Notes are risk-less by definition. In some ways cutting the deficit might act like repricing gold from $20.67 to $35.00. A devaluation. US Treasuries become more valuable while dollars become less valuable.
...the budget was in surplus ... intellectual corruption... I'm sure the budget surplus was creative accounting. If you go to the .gov website that shows yearly deficits there have been no years without a deficit in recent times. For debt backed currency a yearly deficit is considered desirable for lots of debatable reasons. I think the corruption issue is more a rules-of-the-game than corruption. To talk about an economy most details have to be left out. A person has to pick out a few items that they consider important to change and then make-their-case. I thought collecting income tax on products at the border on specific shipment lots would cure lots of bad practices. As far as I can tell no one is interested in doing that or even recognizing that it is a possibility. Lack of interest makes me think it is a practical impossibility because of issues I know nothing about.
...lead us to prosperity... Read the Professor's book. It explains why a country will always run a trade deficit if that country has a fiscal deficit. Investors are herded by government policies and lots of people get emotional over rational acts of others with which they don't agree.
Hi Huggy. Glad to me you. I have all Michaels books. I tried to read them as carefully as I could. I don't recall reading that a fiscal deficit will lead to, cause a trade deficit. I'm going to see if I can find that. If you can find that & tell me where he says that I would truly appreciate it. It would be learning for me. Yes I make emotional statements. I've spent years reading magazines, newpapers, watching business programs on TV, listening to the radio, searching for truth. And wondering why none of it ever enlightened me. One day I thought they can tell me how old the universe is, the mass of, chemical makeup, temperature at various depths, rate of energy emission, life span and manner of death of the sun. That our galaxy will collide the Andromeda Galaxy in x amount of billion years. But virtually no one could say if there was a housing bubble, or a dot.com bubble. I guess only the dummies go into economics. I agree with you - no fiscal deficit will mean its harder to save dollars. That will bother the wealthy. Its a deceit. All the worry and blaming the entitlements for the debts and deficit. All lies. Every debt is someone elses financial asset. The greed and selfishness of people, the wealthy and powerful, drives the growth in debt. The desire to acquire savings far beyond any use for yourself. Hey lets cut taxes for the wealthy. Spend some time on the Federal Reserve website looking at fed govm debt, gdp, administrations in control. What I see is that debts and deficits are bigger under rpublns. Whose the money owed to? The whole country is in hock to our benefactors.
" What I see is that debts and deficits are bigger under rpublns." Under Obama, US debt increased by 7 trillion, more than all previous presidents combined
Obama had to deal with a once in fifty (or more) years event and he did so consultatively and efficiently. The end results are not equitable because it advantaged property owners but it did stabilise the system more than has happened in Europe. They slowly reversed what could have been an economic and social catastrophe. But there are still many pieces to pick up. What he also had to contend with is a fractured Republican Party that could or wouldn't do deals. We now see that that approach is not a policy for government.
Huggy I wasn't done. Yes the budget truly was in surplus under Clinton. So federal budget deficits are bad? If the federal govm ran budget surpluses year after year it would deplete the private savings and money supply of the entire economy. The world would be dollar-less. The economy would collapse before that was reached. Federal government debt = financial assets for everyone else. It's a necessity that there be debts and deficits by the federal govm.
Excellent exposition. I'm not an economist but see it perhaps more clearly through the lens of a trader . It seems obvious that today's global market flows are not dictated independently by US but apparently many US centric Economists choose to stick to their beliefs that whenever US sneezes, the global economy will catch a cold. From the standpoint of high private sector debt that will trigger financial crisis, US economy is relatively of a lesser risk than other large economies because its private sector debt is not growing exponentially or its GDP growth is less debt induced. However, it is scary that a cut in the fiscal deficit (a mantra) can lead to a rise in private sector/household debt (Prof's Box). Are they betting on their models that are building the catalyst of a financial crisis ? Something more than they ask for ? (In bubbles, liquidities shift in milliseconds powered by algos will meltdown the paper assets. These paper assets are the leverages of the real economies of goods and services. So these paper assets are growing instead of being contained ?).
Comments like Shultz & Feldstein is typical of all the stuff you see in the media. You shdn't tak it seriously - it's propaganda. You think you're having an economic discussion looking for truth, but that's just the vehicle. It's political propaganda meant to confuse, disable and bring about identification with wealth. He's right - it is a rip-off.
... The world would be dollar-less ... (any country) has a trade deficit then (any country) has a fiscal deficit. I read that in The Great Rebalancing. Can't have one without the other. The Federal Reserve has done FX swaps many times and can provide as many Federal Reserve Notes (dollars) as needed for balanced trade. Few if any organizations in the world want balanced trade. The USA has to run a fiscal deficit if the dollar is the world's reserve currency. That means the USA has to have a trade deficit. Maybe SDRs will change that fact in the future.
...Yes the budget truly was in surplus... I will believe a budget is in surplus when debt is reduced. It wasn't according to treasury.gov. The main public official who said the budget was in surplus was convicted of perjury and lost his license to practice law in an unrelated incident.
Dear Prof. Pettis, I wonder if you read The End of Alchemy by Mervyin King. I found a lot of similarities with your views on global imbalances in there.
Ok Meofios. fed govm debt, 4th quar 1976 - 653 Carter in. 1980 - 930 Carter Out: 42.4%, 2 term rate = 84.6% 1980 - 930 Reagan in. 1988 - 2684 Reagan out: 2 term rate = 188.6% 1988 - 2684 Bush in. 1992 - 4177 Bush out: 55.6%, 2 term rate = 111.2% 1992 - 4177 Clinton in. 2000 - 5773 Clinton out: 2 term rate = 38.2% 2000 - 5773 Bush in. 2008 - 10700 Bush out: 2 term rate = 85.3% 2008 - 10700 Obama in. 2016 - 19977 Obama out: 2 term rate = 86.7%
Ok Meofios. There's the data from Fed Rsrv. You sounded authoritative. 7 trillion. I found 9.277 trillion. Compare the #s. You cherry pick. You unfair to Obama - a good portion of that spending was bailing ppl out from the rpublcn economic collapse. Just look at your her Reagan. He buried the country in debt. When he somewhat doubled the ss tax it gave him space to cut taxes for the wealthy. It's just a wealth transfer. That's all it is. To me it shows how wnp have penetrated govm, corrupted it to enrich themselves. You didn't do justice to my claim. Be intellectually honest. Verify what I have said. Acknowledge what I said as truth.
Huggie. "The Great ReBalancing." Page 161. "Foreigners Fund Current Account Deficits, Not Fiscal Deficits." I didn't see anywhere that Pettis said Fiscal Deficits cause Current Account Deficits. Someone said on the site "its from the reserve currency status position." I'd agree with that. Do you realize that this very article by Pettis is taking a position in opposition to that of Shultz and Feldstein? He's doing it in a courteous and respectful way. He said they're making an error inadvertantly. I think they're deceiving on purpose. They have a patronizing, partisan position.
Let's take a closer look at those 70 words that roused my ire. In the Line 1 "rip-off" stands out to me. It feels out of place. Stealing has more to do on the personal, emotional level but we'r talking abt macro economics. Ripping off is associated with importing more than you export, getting more than you deserve, earn. At first I thought "is he saying that he's not stealing from the reader?" Or is he saying don't hate, persecute, victimize me cause I'm telling you the truth? The courage to point out the culprit, don't blame me cause I point out a unwelcome truth. Hey, I'm the quiet, timid, little guy in all of this. Line 2 says the problem doesn't lie with the outside world. The failure of our relationship to the outside world lies within out own country. Line 3, it's the deficit spending, he fingered the criminal. We didn't want to hear it. And he didn't want to say it, but that's just the way it is. Yet, I already know, if you're seen the above, it's a fact that the rpblns deficit spend more than the dmcts. But the general public actually believes the lie, repeated continuously, that the dmcts do the deficit spending. No one in the media challenges the lie. Dmcrts, deficit spending, undeserved consumption, the entitlements. Hey, who always says "we'r gonna have to fix the entitlements." SS, medicare, medicaid, food stamps, unemployment, workmans comp. UC ran like for 4 or 5 of the initial yrs of Obama. They kicked the bucket over, then condemned Obama cause he didn't mop up their mess fast enough. What's scary, disheartening, and sad abt all this, is that it continues when the level of inequality is at historic levels. The same old implicit rpblcn message: "we wouldn't have any problems if we didn't have to take care of the poor, vulnerable and less fortunate."
Another great one, Michael - many thanks.
Huggie. I was thinking about you. I have an idea what's hanging you up. Didn't you use the expression of "debt back currency?" No. Not true. Currency is debt. Imagine: Yok: Huggie would you cut my grass? Huggie: For 20 dollars. Yok: Ok When you'r done I offer you a glass of water, exchange pleasantries. Then you say its time to go and want the 20. But my wallet is empty. You won't leave wo something and start grabbing my lawn chairs. I offer you an IOU, till my SS check comes. It says "Yok will pay to the bearer on demand $20 starting 10 days from the date of this issue." You go down the street to a gas station and cause he's known me for 30 yrs, he accepts my promissory note in payment. I just created a currency. The problem is getting it accepted. Now I owe the owner of the gas station, but I didn't have anything to do w him. When I buy a lawn mover from China, the govm of China takes that money, for Yuan, from the vendor. The Chinese Govm doesn't want to by anything from US. They'r aggressive: the want property, debt peonage, economic subjugation. So the Govt of China buys some treasury securities, just another form of debt. Even if the govm didn't deficit spend, we would run a current account deficit. Even if the govm didn't spend at all we could run a current account deficit. Right? Its dependent on the exchange of goods for obligations. Just bcs they occur at the same time ds' make the ca dependent on the bd.
Huggie, I'm gonna piss you off. Look at all the incredible deficit spending of Reagan. Amazing, in a time of peace. The economic boomed, inflation took off. Tightening by Fed csd the market collapse of 87. Spending overhang continued into Bush 1. Bush 1 had to raise taxes to bring down the inflationary flames. He was responsible. Remember the "no new taxes?"He cleaned up after Reagan. Remember "Dynasty?" "Lifestyles of the Rich & Famous?" It's glorious to be wealthy. Inequality soared. Mental hospitals dumped malingerers out on the street. Remember the "pet rock?" It was real world proof of Supply Side Economics. If you can show me where in Mikes' book, the page, you'l gain some traction with me. But I actually think you misunderstand Mike.
Consider this Huggie. BEA, GDP approx = GDI. Makes sense; gross domestic spending = gross domestic income, everyones income is someone elses spending, all the value produced is accredited the commensurate amount of vouchers. Now suppose someone doesn't want to use all his vouchers. He wants to save them. He ds' want to invest them. He puts them under his mattress. There's a problem now - 95 vouchers of demand to drive production instead of 100. Something has to happen. Production will fall, people will lose jobs, the vouchers will appreciate, the economy will deflate, debts will be harder to pay. If people become afraid more people might save - bad. Let's say he decides upon the next best thing to the mattress, a treasury security. Same situation. The govm must get those vouchers back into circulation. I might add that the govm does' need to borrow his money. It's a kind of gift, depending on the degrees of interest offered. It functions to provide stability to the vouchers and the economy. A place for people to store some value. If I wanted you to cut my grass again I wouldn't have to borrow the old voucher from the gas station - I could just give you a new one. Right? How can someone like me, with only a junior yr course in high school on economics, have greater depth of understanding, than a PHD chief of the economics dept at Harvard? Easy. He's either lying or suffering from learned incompetence, learned incapacity.
See how it all ties up together Huggie. Lying is the little brother of stealing; when you see one most of the time the other will be there too. Deceiving, stealing, ill-gotten gains, a crime, a culprit. My guess is consciousness on some level, and the feeling of guilt.
Pride precedes a fall. I'm gonna shut up.
Yes, in an open world, cross trade balances, cross capital accounts, respective domestic investment and savings rates are simultaneously and jointly determined everyday that passes. What's so hard to understand about that? It is the very definition of globalization.
I'm thinking a Smaller Fiscal Deficit will force dollar holders to invest in dollar based businesses. With immigration restricted/reversed this will cause both employment and wages in the USA to increase. Countries wanting to run a trade surplus will find it more difficult to do so because they will be funding their competition in the USA.
Wages are already going up and there's more job openings than there were before. We're having difficulty filling existing jobs, which tells me we've got a skilled labor shortage as most firms are having difficulty finding people to work. We're pretty close to full employment and wages are already rising as prices are basically falling (I recall 5 years ago buying a gallon of milk for ~$4 and I just got one for $2.50 two days ago). The idea that less immigration will increase growth is a fantasy. We're having aging demographics while Social Security, Medicare, and interest on the debt already consume >50% of our budget. But clearly, the correct policy must be to cut immigration, cut benefits for the young so they can continue to be debt slaves, and sustain benefits for the elderly while cutting taxes on the wealthly. Oh wait, that makes absolutely no sense.
I think it is obvious that a country can not run a Current Account Deficit without borrowing. I would guess it would not be called a Fiscal Deficit if all the borrowing was by private entities. I think this was the case early on in USA history.
The causation could run the other way. Or, more likely, the causation is reflexive. The current account balance is the difference between savings and investment. You wanna wipe out the current account deficit? Great. Now, tell me how a policy of tax cuts, tightening immigration, and massive infrastructure spending accomplishes any of that? Immigrants who come here are almost all of working age and (as I detailed in the other comment above, it's the elderly who collect most government benefits in the form of Social Security or Medicare) generally produce more than they consume. So cutting immigration places downward pressure on savings. Cutting taxes massively to spur demand is a policy that will reduce savings unless it's focused on the wealthy, wherein it'll raise savings at the expense of demand (and will be hugely unpopular, but you can try it to find out). And obviously, massive infrastructure spending places upward pressure on investment while the materials used in building infrastructure is very import intensive, so infrastructure spending would also blow a hole in the current account deficit. If you support the 3 policies I laid out above, you're bound to blow a huge hole in the current account deficit or you'll just have a negative impact on demand. So yea, your comments (and your past comments in previous posts) don't really seem to make sense from a policy standpoint.
DvD. Well Said
Savings are about to soar because negative savings (debt) are on the cusp of being significantly reduced. The public sector and the public sector's private sector allies must take most of the write down because no other groups have significant paper wealth. (see Venezuela). The USA Treasury Market is now more driven by rehypothecation than interest rates. Classically reducing a fiscal deficit decreases unemployment. It is not clear that having a fiscal surplus increases employment in an age of automation.
Quick question for any economists out there, please: In the Great Rebalancing, Pettis mentions in one of the first few chapters that any foreign country that every country that possesses a US Dollar will either use that dollar to purchase something from abroad or to make a foreign payment or else saving that dollar by buying an American asset, but that it cannot do anything else with that dollar--even burning the biull or leaving it forgotten under the matress does not vioate that rule. <<<Could somebody please tell me why leaving it under the mattress does not violate the rule? Thanks
Burning the bill or leaving it under a mattress is about the same as a treasury note that comes due in a hundred years. Probably would be impossible to detect a difference.
I could have said that a federal reserve note (dollar) is a 0 interest on demand debt instrument. Do nothing with a dollar and it is automatically an investment in a USA asset.
You know I was thinking about George and Martin. They surely have things reversed - the trade deficit brings about the deficit of the federal govm, the country. Through the wonders of the financial system, obligations incurred by the private sector, using dollars, obligations of the fed govm, end up being obligations between govms. Think about it. What they're selling is the opposite of the truth.
Hi Claire. I responded to this question a couple days ago at a different location. I happen to agree with you. I think Mike was in error. "Great Rebalancing, pg 18." Govm spends dollar into existence. Dollar is receipt for goods taken by govm, a tax credit. No other record of transaction except receipt, the dollar itself. Dollar taken to China or wherever and is destroyed - hey, that's it buddy. Now it can never be redeemed. The point Prof Mike was making is very important to understanding - Any currency has to eventually go home, where it is honored by everyone in all circumstances. It's the foundation for trade deficit based on capital flows. If a rich man or the govm in China wants to buy, invest, in America cause he thinks it's safe, and is willing to suffer a discount on true value, those yuan have to go home. They have to buy something from China or in China. Forgive me for being pretentious sometimes.
I am a long-time admirer of the author's economic framework and use of accounting identities to fully explore economic ideas to their logical conclusion. I wonder if there is any room for an "incentive effect" in this framework? Regardless of whether further investment desired, does raising taxes and therefor the "cost" of working change incentives in a way that is anti-growth? This is obviously a common chorus on the right and I wonder if Pettis' framework can accommodate it or debunk it.
Your too kind Professor Pettis. Schultz and Feldstein are not brilliant economists. Trump has the right instincts about this issue, but is an imperfect and somewhat inarticulate messenger. He has called out China, Germany and Mexico for their trade polices. I have the biggest issue with Germany an extremely wealthy country continuing to run-up their ridiculous surpluses on the global economy. From my way of thinking, they are exporting income inequality around the globe.
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