One problem for the U.S. is that many foreigners invested their dollars in U.S. Treasury securities.
More dollars have been leaving the U.S. to buy imports than returning to buy exports: the trade deficit. Some have collected overseas and used for trade in lieu debased currencies, while others have found their way back to the U.S. to invest (since this return of dollars does not represent the purchase of exports, it does not reduce the trade deficit). Everything seems okay: foreigners are using the dollars they receive for imports to invest in the U.S., that must be good, right?
Many of these dollars were invested in government bonds. For the economy as a whole these are malinvestments, since most do not increase productivity or future tax revenue. As Martin Brock might say, 'politicians are selling entitlements to the future product of American labour, and then spending in a manner which reduces the capacity of American labour to satsify those entitlements'.
Ordinarily, a businessman might sell stocks and bonds to fund expansion, refurbish or update equipment, or whatever else. The idea is to use any money borrowed to increase future productivity. These are real investments in the future of an economy; they forego consumption today for more tomorrow. But it seems to me that many foreigners were investing in mortgage backed securities and government bonds. For the economy as a whole these are a burden.
Government bond holders may have been paid (at least so far), but the risk and cost of malinvestment was simply shunted on to taxpayers. Letting bureaucrats decide how to invest an economies' savings is extremely risky, only that risk is not born by the lender or the borrower, but everyone else.
Real investment has to compensate for the burden and waste of government debt to keep future output high. By "investing" the U.S. Government, investors have actually burdened the U.S. economy in the long run, by redirecting capital to wasteful government programs and away from real investment in the private sector. Ultimately, foreign investors will also suffer as the value of their dollars declines.
A trade deficit need not a problem, but under particular circumstances it can be. Or at least that is what I think … for now.
T L HoladayJanuary 22, 2009 at 5:35 pm
That was quite sensible. I applaud.
Lee KellyJanuary 22, 2009 at 5:41 pm
I should clarify. It is not the trade deficit which is a problem; it is possible for a trade deficit to accompany great prosperity, especially when trading partners do not fare so well.
The problem is that the recent trade deficit has been partly fuelled by bubbles and fiscal deficits.
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One problem for the U.S. is that many foreigners invested their dollars in U.S. Treasury securities.
More dollars have been leaving the U.S. to buy imports than returning to buy exports: the trade deficit. Some have collected overseas and used for trade in lieu debased currencies, while others have found their way back to the U.S. to invest (since this return of dollars does not represent the purchase of exports, it does not reduce the trade deficit). Everything seems okay: foreigners are using the dollars they receive for imports to invest in the U.S., that must be good, right?
Many of these dollars were invested in government bonds. For the economy as a whole these are malinvestments, since most do not increase productivity or future tax revenue. As Martin Brock might say, 'politicians are selling entitlements to the future product of American labour, and then spending in a manner which reduces the capacity of American labour to satsify those entitlements'.
Ordinarily, a businessman might sell stocks and bonds to fund expansion, refurbish or update equipment, or whatever else. The idea is to use any money borrowed to increase future productivity. These are real investments in the future of an economy; they forego consumption today for more tomorrow. But it seems to me that many foreigners were investing in mortgage backed securities and government bonds. For the economy as a whole these are a burden.
Government bond holders may have been paid (at least so far), but the risk and cost of malinvestment was simply shunted on to taxpayers. Letting bureaucrats decide how to invest an economies' savings is extremely risky, only that risk is not born by the lender or the borrower, but everyone else.
Real investment has to compensate for the burden and waste of government debt to keep future output high. By "investing" the U.S. Government, investors have actually burdened the U.S. economy in the long run, by redirecting capital to wasteful government programs and away from real investment in the private sector. Ultimately, foreign investors will also suffer as the value of their dollars declines.
A trade deficit need not a problem, but under particular circumstances it can be. Or at least that is what I think … for now.
That was quite sensible. I applaud.
I should clarify. It is not the trade deficit which is a problem; it is possible for a trade deficit to accompany great prosperity, especially when trading partners do not fare so well.
The problem is that the recent trade deficit has been partly fuelled by bubbles and fiscal deficits.