Baltimore Sun columnist Thomas Schaller favorably quotes Nobel laureate economist Joseph Stiglitz’s concern about debt run up during G.W. Bush’s years in the White House:
Nobel-winning economist Joseph E. Stiglitz points out in the current
Vanity Fair. "Cumulative borrowing from abroad during the six years of
the Bush administration amounts to some $5 trillion," he writes
I’m not sure if Stiglitz is alleging that $5 trillion of Uncle Sam’s debt has been sold over the past half-dozen years to foreigners, or if this figure includes private debt. Or if Stiglitz’s figure includes also the U.S. trade deficits over these years.
If the latter — if it includes the trade-deficit figures — it’s a bogus number. The reasons are two: first, because the trade deficit is not synonymous with debt, and (2) if part of it becomes debt by foreigners using their dollars to purchase U.S. Treasury securities, then double-counting is in play if the trade-deficit figures are added to the U.S. budget-deficit figures.
But let’s assume that Stiglitz’s figure refers only to actual borrowing by Americans from foreigners (whether this borrowing be done by government or by private citizens or organizations). Stiglitz’s concern still is off the mark. Here’s a letter that I sent this morning to the Baltimore Sun:
Thomas Schaller favorably
quotes economist Joseph Stiglitz’s concern that "Cumulative borrowing
from abroad during the six years of the Bush administration amounts to
some $5 trillion" ("On economy, GOP candidates offer up slogans instead
of solutions," December 5).
Regardless of this debt’s merits or
demerits, what is the relevance of creditors’ nationalities? Whether
the creditors are in Utah or Ukraine, Baltimore or Beijing, the debt
must be repaid. And that is the burden of the debt; the nationalities
of creditors are irrelevant.
Sincerely,
Donald J. Boudreaux
If you question my claim, ask if Stiglitz would be less critical — or should be less critical — if every cent of these borrowed funds were raised from Americans. Would the borrowers (chiefly, of course, Uncle Sam) be less irresponsible or less blameworthy had they run up the same amount of debt but only by borrowing from Americans?
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Well I look at it from a family stand point. My teenage daughters always have extra clothes to get rid off. I offer my oldest daughter the option of selling her extra clothes at a garage sale or just selling them to her younger sister.
If she sells a $10 dollar shirt at the garage sale we are $10 dollars minus the actual value of the shirt richer as a family. If she sells it to her younger sister we are …er em….$10 dollars richer…no……well we still have the shirt…..umm….OK maybe you're right.
Even beyond to whom the debt is owed, the debt itself is not relevant. As Steve Landsburg points out, its the spending that creates the burden. It does not matter if the spending is funded with higher taxes, borrowing from abroad, or borrowing from home, our kids have less.
So the question is always (AND ONLY) this: was the money well spent?
Don, can you address the question in this related thread?
http://cafehayek.com/2007/11/should-american.html
It is kind of a family thing, Murigeo, or more precisely, its not a family thing. The family is real. The nation is not. Outside of family, the primary basis for transaction is the contract. So while risk and return are valid considerations, nationality is not.
There is an advantage (in addition to the costs) of restricting bond sales to Americans. Since there are fewer takers, it would be more expensive for the government to raise each additional dollar, which would make it more difficult to expand government. Maybe we ought to create a law restricting the sale of U.S. government bonds to only the 10,000 people living in a particular small town in Iowa, such that government would only be able to provide the services it ought to provide.
It doesn't matter, don't we just raise taxes on the rich, and the problem goes away? Isn't that what Hillary and Obama are going to do? We just did it here in Maryland, which will certainly solve all problems. Right? Why worry?
Muirgeo makes the mistake of equating his family with the state. His family, like many, is pure socialism and the only place where socialism can work. Only when the others in the economic system constitute the natural objects of your bounty by carrying your genes (or by being your spouse) are you going to feel as if their wealth is your wealth, or vice versa.
In fact, it doesn't work perfectly even in a family. It's not unheard of for spouses to hide assets from each other and most parents have a limit on how much they are willing to share with their children. Children often deeply resent having to support a parent. That's why we can't get social security fixed.
I forget there is an exception to the requirement that others carry your genes for you to feel that their wealth is your wealth. If you are a liberal you think everyone's wealth is your wealth.
Engram on the Back Talk blog discusses the misleading practice of using absolute numbers of (inflating) dollars rather than discussing debts in terms of percentages of GDP:
http://engram-backtalk.blogspot.com/2007/12/
economic-alarmism-in-mainstream-media.html
Ah, late to the party to kick Muirgo, all you left me were crumbs.
The USA is not a "We" and the rest of the world is not a "They". I am an "I" and when I need money, I will borrow it from whoever will lend. It's none of the Government's business.
tim wrote: "I am an "I" and when I need money, I will borrow it from whoever will lend."
Will you? Not me. We actually screen investors pretty heavily. We greatly prefer ones who bring knowledge, expertise and contacts to go with their money. I'm afraid the Chinese don't qualify.
On the other hand, I'm grateful to the foreign investors who reduce returns and make it so I pay less for money. Of course the flip side of that is that my investments make less of return. I'm not terribly happy about that.
the huge overseas investment U.S. securities was a lemon as the more recent drop in the U.S. dollar amounts to "the biggest default in history" (The Economist) in terms of value for the investors in their own currency
will the Schallers of the commentary world call those investors a "problem" when they wise up and take their money somewhere else?
Flash, you are mostly right.
But Muirgeo's mistake was showing up.
Nationalities of lenders aren't irrelevant; domestic lending doesn't involve forex markets, for one thing. Or it needn't, at least.
It's also the case that with only internal borrowing and no foreign credit, the Bush deficits would have driven interest rates higher, crowding out investment here.
Schaller's point, anyway, isn't that foreign lenders are bad — it's that fiscal irresponsibility has become a Republican dogma. And he's right.
Of course it does matter who the creditors' nations are. Politicians are hypocritical when they blame China for undervaluing the Yuan, when these same politicians made that possible because the Fed turned government debt into treasury securities that the Chinese are willing to amass.
The same also goes when companies get attacked because they become foreign owned. Everybody is upset, the politicians probably the most. Yet 50% or so of the national debt is held by foreigners. Yet they don't find that a problem.
tim wrote: "I am an "I" and when I need money, I will borrow it from whoever will lend."
Will you? Not me. We actually screen investors pretty heavily. We greatly prefer ones who bring knowledge, expertise and contacts to go with their money.
You're very confused about the difference between an investor and a debtor. I don't know what business you're in but this is the first time in my long career on Wall Street that I've ever heard of a requirement for those providing the capital as mere investors to also provide expertise.
On the other hand, I'm grateful to the foreign investors who reduce returns and make it so I pay less for money.
you mean reduce your cost of capital, don't you, Bret?
Of course the flip side of that is that my investments make less of return. I'm not terribly happy about that.
You seem to think that a lower cost of capital diminishes the return. Here's the math: (FCF/WACC). If your WACC is reduced, your return is greater. Your return is only diminished if the numerator (cash flow) is reduced by more than the denominator (cost of capital). Exactly how is foreign investment reducing the cash flow of your investments?
We have a number of questions here:
Has the US been economically strengthened or weakened by large trade deficits through the spending during GBWs leadership?
Is it ideal that the US$ is supported to the extent that it is by China and Japan?
In a very simple view borrowing money is a good idea if you're doing something clever/useful with it – what is the US doing at the moment?