The Presumptions of Ptolemaic Economics Die Hard

by Don Boudreaux on October 3, 2011

in Balance of Payments, Myths and Fallacies, Trade

My friend Donald Marsh sent my letter addressing C. Fred Bergsten’s recent New York Times op-ed to Mr. Bergsten.  Today comes this e-mail:

Professor Boudreaux,

Your comment on my op-ed for last week is ridiculous.

Of course the American seller of land to the Chinese COULD buy US pharmaceuticals.  But she could also save all the proceeds.  Or use it to buy more imports from China and elsewhere.

We would never have a trade deficit in the first place if your postulated scenario were to occur in the real world.  Come on!

Sincerely,

C. Fred Bergsten

First of all – and despite calling my argument “ridiculous” – Mr. Bergsten, in his second paragraph, concedes that my scenario is possible.  But apparently he believes it to be so far-fetched that it deserves his derision.

He misses my larger point that much of the U.S. trade deficit “comes back” as spending power to the U.S.  I offered in my letter just one example to show that his suggestion that the trade deficit necessarily reduces demand for U.S.-made outputs is mistaken.

So let’s mention some other ways in which the dollars in the U.S trade deficit come back as spending power to America:

(1) if foreigners buy stock in U.S. firms.  (U.S. trade deficit rises; sellers of stock have more money to spend – and U.S. firms have lower costs of capital.)

(2) if foreigners directly invest in America: those investment expenditures raise America’s trade deficit, but there’s no reduction in domestic spending of the sort that Mr. Bergsten implies in his NYT op-ed.

(3) if foreigners lend to Americans: the U.S. trade deficit rises.  If Americans spend the borrowed funds (and why else would they borrow them?) there’s no reason at all why total expenditures need be lower in America in this case than if Americans never imported in the first place and instead spent all the money directly on the good and services that (in this hypothetical) they buy with dollars borrowed from foreigners.

Now Mr. Bergsten might worry that people hoard dollars (see his e-mail to me).  But even if we grant that that is a problem, it has nothing to do with the trade deficit.  The same problems would be created if Americans don’t trade at all with foreigners (or trade only in a “balanced” way) and yet hoard lots of dollars themselves.

There are other problems with Mr. Bergsten’s response to my letter – problems that I’ll address in a subsequent post.  Suffice it here to say that his presumption that U.S. trade deficit = reduced aggregate demand in the U.S. economy is – while common – utterly without merit.

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{ 69 comments }

rhhardin October 3, 2011 at 7:40 pm

The only thing on God’s green earth you can do with a US dollar is tell the US economy what to do next.

Or burn it, in which case the Fed notices the money supply is low and just replaces it.

Harold Cockerill October 4, 2011 at 6:56 pm

I think their policy is to duplicate your dollar just in case you might burn it (or maybe just not spend it quite as fast as they see fit).

Stone Glasgow October 4, 2011 at 7:50 pm

US dollars can be used completely independent of the US economy. If a dollar is traded to a Chinese citizen, who trades it to an Ecuadorian, and it remains there forever, how has that impacted the US?

kyle8 October 3, 2011 at 8:08 pm

What about foreigners purchasing USA produced movies, music, and art?

Our culture is devoured by the rest of the world.

vidyohs October 3, 2011 at 8:12 pm

I wonder if Mr. Bergsten ever takes vacations out of the USA, and what he uses for currency when he does.

David Caddock October 3, 2011 at 8:34 pm

Isn’t all of this as simple as:

Trade Deficit (or surplus) + Capital Surplus (or deficit) = 0

AKA Trade is always balanced?

Don Boudreaux October 3, 2011 at 8:41 pm

Yep

SweetLiberty October 3, 2011 at 9:43 pm

Yeah, I think it is the actual accounting mechanism that is inadequate to the task. It’s like reporting an Income Statement that only shows expenses, not revenues. While the expense reporting might be accurate, it doesn’t show the whole picture.

muirgeo October 3, 2011 at 10:25 pm

Isn’t all of this as simple as:

Trade Deficit (or surplus) + Capital Surplus (or deficit) = 0

NOPE. More like;

Capital Surplus = Capital Surplus – Productivity Deficit + cheap plastic stuff you now own

As they say in Texas hold’m the professor is ALL IN on this…

Andy October 4, 2011 at 4:37 am

Putting random stuff into an equation is fun!

Maybe you should look at how many cheap foreign things you own.

muirgeo October 5, 2011 at 2:07 am

Andy October 4, 2011 at 4:37 am
Putting random stuff into an equation is fun!

Maybe you should look at how many cheap foreign things you own.

Maybe you should look at our urgent economic state…..

Michael October 4, 2011 at 8:42 am

Against my better judgement…

You realize that, according to your formula, the Productivity Deficit and “cheap plastic stuff” are both equal to zero, right?

If you’re going to troll at least have it make sense.

Michael October 4, 2011 at 8:44 am

EDIT: the sum of Productivity Deficit and cheap plastic stuff is equal to zero. The point still stands.

Harold Cockerill October 4, 2011 at 6:59 pm

Seeing the name muirgeo is like coming up on a bad accident. You know it’ll be awful but you just can’t look away and as it goes by you go “ewwwww”.

muirgeo October 5, 2011 at 2:17 am

Michael October 4, 2011 at 8:42 am
Against my better judgement…

You realize that, according to your formula, the Productivity Deficit and “cheap plastic stuff” are both equal to zero, right?

Michael do you realize that when you are not producing things and only buying things on credit and using past surpluses to pay off your debt you do NOT get richer/ you do NOT produce more wealth… I reference the current state of the economy.

Invisible Backhand October 4, 2011 at 11:03 am

also there is a correlation between trade surplus = lower unemployment and trade deficit = higher unemployment

The rentiers don’t like low unemployment though.

Economic Freedom October 4, 2011 at 11:56 am

there is a correlation between trade surplus = lower unemployment and trade deficit = higher unemployment

The correlation exists only inside your fevered brain. During the Great Depression, the US had a trade surplus and high unemployment.

Invisible Backhand October 4, 2011 at 2:03 pm
Economic Freedom October 4, 2011 at 5:37 pm

I must have fever dreamed this link then:.

Ooooo, no fair! Linking to the great Dr. Alex Feinberg! He’s one of the proverbial “heavy hitters” in economic analysis. When Doc Feinberg speaks, even Paul Krugman listens.

So the eminent Dr. Alex Feinberg confused correlation with causation (a fallacy pointed out to high school students in their statistics 101 course), and then you fever-dreamed Feinberg’s confusion. You’re one fine scholar, Invincibly Backward.

Anyway, I’ve already pointed out a historical fact: during the Great Depression, when we had as high as 25% unemployment, we also had a trade surplus. ERGO, “CORRELATION” OR “NO CORRELATION,” TRADE DEFICITS DO NOT ****CAUSE**** UNEMPLOYMENT. Get it?

Eduardo October 5, 2011 at 5:44 am

Hi everyone!
Actually, I see a link between current account imbalances and employment, though not a direct one.
You have to assume many assumptions about the nature of the economy.
From regional economics: The capital surplus, when it is used for consumption or not properly invested (when it doesn’t create more production) can have effects on the appreciation of currency (inflation), undermining competitivity with other currency zones. This logic can be observed at different scales. Cities (always more expansive than rural zones), regions, countries. Less competitivity in intensive-labor sectors leads to reallocation of capital towards other zones with cheaper factors..
Do you think this rationale is consistent?
(please apologize my english.)

vikingvista October 4, 2011 at 1:09 am

Since each individual trade is balanced, there is no way for a collection of trades to get unbalanced. The balance of payments is an accounting of that balance. Nonzero BoP means something was overlooked or miscounted

Gary Rogers October 3, 2011 at 8:35 pm

I am glad to see that you added a sceneriio of loaning dollars back to us. With a government that borrows over one and a half trillion dollars a year, that borrowing can significantly affect our trade deficit and the number of items manufactured in China instead of the United States. Point one is that if we buy goods from China and they do not buy from us the dollars become more and more plentiful until there is no way they can maintain a low exchange rate for their currency. Point number two is that borrowing money out of an economy is the opposite of of quantitative easing. A borrowed dollar cannot be spent by the lender until it is paid back so you can stimylate an economy with QE which is nothing more than paying back borrowed money with cash that can be spent. Borrowing is the opposite of quantitative easing in that it takes money out of the pool that can be spent. In this example that would be China. By loaning us hundreds of billions of dollars, they allow the Chinese currency to remain much cheaper and they export more goods.

So, is that bad? Not by itself. Trade is almost always good and the ability to borrow is good as long as we don’t run up our debts and squander what we borrowed. However, borrowing on one hand so that we can throw money into our economy in a vain attempt at economic stimulation is foolish and borders on criminal. I wish more economists would take time to understand the unintended consequences of borrowing rather than spending so much effort looking at the spending.

SweetLiberty October 3, 2011 at 9:45 pm

If our government limited itself to just the spending established in the Constitution, we wouldn’t need to borrow at all.

Gary Rogers October 4, 2011 at 10:33 am

Absolutely correct. And if policy makers understood the unintended consequences of borrowing there would be more call for staying within Constitutional limits.

Methinks1776 October 3, 2011 at 9:25 pm

Can someone please help me with this?

I know that Ptolemy was the first Greek Pharaoh of Egypt. He was one of Alexander the Great’s generals and founded the dynasty that ended with Cleopatra. If I remember correctly (and I may not), the dynasty retained a lot of what was common to past Pharaonic rulers in order to keep the loyalty of the Egyptians. What is Ptolemaic Economics? These posts of Don’s are the first time I’ve ever heard of it. Thanks in advance.

Don Boudreaux October 3, 2011 at 9:56 pm

Dearest Methinks:

By “Ptolemaic economics” I allude to “Ptolemaic astronomy” – that is, pre-Copernican astronomy. Bergsten’s economics is mercantilism – and mercantilism is to modern economics what Ptolemaic astronomy is to Copernican astronomy.

W.E. Heasley October 3, 2011 at 10:10 pm

“…and mercantilism is to modern economics what Ptolemaic astronomy is to Copernican astronomy“.

Making a slight edit:

“…… and Potomac Economics is to modern economics what Ptolemaic astronomy is to Copernican astronomy“.

Harold Cockerill October 4, 2011 at 7:04 pm

How about some Krugmanian Astrology?

Methinks1776 October 4, 2011 at 8:14 am

Thank you, Don.

muirgeo October 3, 2011 at 10:38 pm

Methinks,

Ptolemaic Economics as in thoroughly debunked. Instead here we go with Astrological Economics… it makes more sense. What’s your sign?

Methinks1776 October 4, 2011 at 8:34 am

You don’t want to see the sign I have to show you.

Fred October 4, 2011 at 9:06 am

“What’s your sign?”

A raised middle finger.

simon... October 3, 2011 at 9:37 pm

Ptolemaic model == Geocentric model: http://en.wikipedia.org/wiki/Ptolemaic_model

Methinks1776 October 3, 2011 at 9:39 pm

Thank you, Simon! Googling “Ptolemaic Economics” turned up Cafe Hayek.

Economic Freedom October 3, 2011 at 10:07 pm

MiLady1776:

I believe what Don has in mind is the idea that the naive economic ideas on which an apparent trade deficit rests can be compared to the naive astronomical model of Ptolemy, since both models appear, superficially, to be correct, but disintegrate upon closer observation. In the case of astronomy, as observation became better and more detailed, scholars from antiquity to the time of Copernicus were so reluctant to discard the Ptolemaic system, that many layers of “ad hoc” assumptions, patches, and fudge-factors had been added — not so much to explain the more recent observations of their day, but really to “explain away” those observations in order to make them consistent with the basic assumption of geocentrism. The Ptolemaic system was finally abandoned forever by the combined observations, assumptions, and researches of Copernicus, Galileo, Kepler, and finally Newton — the last having neatly derived all of the disparate mathematical assumptions of these earlier scholars with his calculus and assumptions of Universal Gravitation, and who was really responsible for driving the final nail into the coffin of geocentricism.

One of the best sympathetic explanations of the geocentric system — especially its influence on writers of the middle ages such as Dante — is by C. S. Lewis, in his last scholarly work entitled “The Discarded Image.”

[PS: I did try to post links to Britannica for "Ptolemy" and "The Ptolemaic System" but -- for what appear to be arbitrary reasons -- my original post went into "moderation." There doesn't seem to be any rhyme or reason as to which links trigger this. Anyway, hope the above is helpful.]

Methinks1776 October 4, 2011 at 8:32 am

Thank you, EF! The reference was to astronomy. I wanted to make sure I wasn’t missing a literal reference.

BTW, when a post contains more than one link, the site puts it into moderation (from which the post never emerges). It seems to be a typepad quirk.

vikingvista October 4, 2011 at 3:39 am

Not all geocentric systems are wrong, or at least no more wrong than the Copernican system.

Economic Freedom October 4, 2011 at 12:34 pm

Of course not. The geocentric model was actually very useful in terms of its predictive ability; eclipses, for example, could be accurately predicted many years in advance. I believe the Ptolemaic system was discarded because so many anomalous observations eventually had to be incorporated into it, which could only be done by making increasingly more ad hoc assumptions — cycles upon epicycles, retrograde motion of certain planets, etc. By the time Newton finished his own astronomical investigations, the elegant simplicity of the heliocentric model, combined with its greater predictive accuracy, assured its acceptance over the older model. Much later, even some Newtonian aspects of astronomy had to be revised in light of anomalous observations explainable only by general relativity.

I think the metaphor of a “Ptolemaic economics” could also be applied to important aspects of classical economics: the labor theory of value, the cost-of-production theory of price, the productivity-of-capital theory of interest, the “iron law of wages”, the Ricardian theory of rent, the paradox of use-value vs. exchange-value, etc. All of these were overturned completely by the “Copernican revolution” in economics of the subjective-marginalist school (Menger, Wieser, Jevons, et al.).

Chucklehead October 4, 2011 at 2:36 pm

“Newtonian aspects of astronomy had to be revised in light of anomalous observations explainable only by general relativity.”
The assumption that space itself was curved by gravity is a improved model based on relativity. I wonder what the economic theory equivalent is ?

Economic Freedom October 4, 2011 at 7:02 pm

I wonder what the economic theory equivalent is ?

1. Subjective theory of value.
2. Valuation “on the margin.”
3. All costs are opportunity costs.
4. Imputation: expected final price determines costs of production, and not the other way around.
5. Interest determined solely by time preference, not productivity of capital.
6. Wages are limited by labor’s marginal revenue product.
7. Boehm-Bawerk and Wicksteed’s explanation of the “Total Utility Curve” — an impressive response to Marshall’s metaphor of the two blades of a scissors — i.e., one blade is demand, governed by the consumer’s subjective marginal utility; the other blade is supply, governed by the producer’s costs of production — as an explanation of price. Wicksteed, especially, has an excellent discussion of this in “The Commonsense of Political Economy,” showing that BOTH blades of the scissors actually represent the consumer’s demand: one blade (downward sloping) represents the consumer’s demand for the particular product under consideration (e.g., coffee); while the other blade — the upward sloping one that Marshall would’ve called “supply” — is actually the consumer’s demand for everything else in the economy EXCEPT coffee. This latter demand releases or retracts those factors of production that would otherwise go into the former demand. Thus, it is demand — subjective satisfaction — that is the ultimate determinant of prices.

Stone Glasgow October 4, 2011 at 7:59 pm

This is a brilliant list, EF. Can you clarify what you mean by “expected final price determines costs of production?”

vikingvista October 4, 2011 at 3:42 pm

“heliocentric model, combined with its greater predictive accuracy”

Yes, with respect to specifically the Ptolemaic models used by the ancients. But if you take the best models of the solar system that a modern day NASA uses, and move your point of view from the sun to the earth, the predictive accuracy doesn’t change.

Economic Freedom October 5, 2011 at 12:24 am

@ Stone Glasgow: Can you clarify what you mean by “expected final price determines costs of production?

The basic idea of “imputation” — developed from insights by Menger and then extended by Wieser — is that economic values (or more precisely, the process of economic valuation) starts within each individual as a subjective preference for some good that satisfies a want or need; i.e., a consumer good that is used for no further purpose than to satisfy a want or need. The subjective value the consumer places on this final consumer good — called by Menger “Goods of the First Order” — is then transferred by implication, or imputed back one step to those goods that were used in the production of the final consumer good. Such goods — called by Menger “Goods of the Second Order” — are, of course, the inputs, or factors of productions used in making the First Order goods. In other words, the Second Order goods (the production factors) have an economic value because the First-Order consumer good they create is valued by consumers as an end in itself. This process of backward imputation is then repeated again for “Goods of the Third Order”, which would be those factors of production used in creating the Goods of the Second Order, etc.
You can see how this works with a concrete example such as wine-making. Consumers value wine as an end in itself; as a good that satisfies some want or need. Wine, therefore (at least, in this scenario) is a First-Order Good. It is because consumers value wine that vinyard owners value grapes. The investors in the winery value the land they bought — a Third-Order Good, because it’s one of the factors necessary to produce grapes — precisely because vintners value grapes. Etc.

This is a real “Copernican revolution” in economic thought because it inverts the older, naive, classical notion that the wine had economic value because the grapes that went into producing it had value; and the grapes had value because the land on which they were cultivated had value, etc.

So much for the imputation of value.

The significance of this process for the notion of money-costs is this: since the process of subjective valuation begins with the individual consumer, then so does monetary valuation. Rather than seeing the final consumer price of a bottle of wine as a kind of “epiphenomenon” — an event that is caused by other earlier events but which causes nothing further — which was the classical view of things, the subjectivist view is that the selling price of the bottle of wine — more precisely, its expected selling price — determines how much the producers of wine are willing to bid on the various factors that go into producing wine. The anticipated selling price of the final product informs the wine-entrepreneur’s decisions on the amount he is willing to bid for land, labor, grapes, fermenting technology, bottling, corks, etc. Since these factors have other potential uses by other entrepreneurs — e.g., the land on which the wine-entrepreneur wants to cultivate grapes might also be valuable to a hotel developer — the entrepreneurs will be engaged in a competitive bidding process, which will tend to raise the selling price of that parcel of land to its most valuable (meaning: most valuable as subjectively estimated by each bidding entrepreneur) marginal use. In other words, the wine-entrepreneur will bid his marginal unit of dollars based on what he anticipates will be the final selling price of his fine wine; likewise, the hotel-entrepreneur will bid his marginal unit of dollars based on what he anticipates will be the final nightly rental of one of his fine hotel rooms. The land will obviously go to the highest-bidding entrepreneur, and whatever the outcome, it will reflect that entrepreneur’s idea of what he thinks his consumers will want.

The important point here is that, contrary to the classical notion that the final selling price of a First Order Good is determined by the money-values of its costs of production, the Austrian approach teaches that the final selling price of a First Order Good is initially an anticipation by an entrepreneur, who then bids up the inputs, or production factors, until they just about equal the selling price. What determines how high he will bid is the intensity of competition by other entrepreneurs, who are also bidding up their factors of production to just about parity with their anticipated final selling price (e.g., a hotel room rental).

Needless to say, unless the entrepreneur wishes to lose money or go out of business, the highest he can bid for factors would be the anticipated selling price of his product (wine, hotel room, etc.) discounted by the going rate of interest. He has to earn a revenue that is at least equal to the interest rate; if he earned anything less, he would be losing money, for he could just as easily withdraw his capital from his business enterprise and deposit it in a bank, where he would not only get interest, but gain back his leisure time as well.

Menger’s “Principles of Economics” probably has the best introduction to the Theory of Imputation (he uses tobacco as an example rather than wine), but you can find many valuable insights by Bohm-Bawerk as well. See his essay “The Ultimate Standard of Value.”

muirgeo October 3, 2011 at 10:10 pm

Gordon Chang and Prof. Peter Navorro have a better idea on trade with China.

http://www.msnbc.msn.com/id/37560195/#44763042

muirgeo October 3, 2011 at 10:12 pm

Gordon Chang with more reality based advice on trade with China.

http://www.forbes.com/sites/gordonchang/2011/10/02/the-lets-get-serious-about-china-bill/

Economic Freedom October 3, 2011 at 10:26 pm

We would never have a trade deficit in the first place if your postulated scenario were to occur in the real world.

He seems to have this backward. Don’s postulated scenario — i.e., the one in which the American seller of land uses the revenue he receives from the Chinese buyer to purchase pharmaceuticals — shows how the accounting method would record the entire transaction as a “deficit.”

Don Boudreaux October 3, 2011 at 10:28 pm

Yep. This error of Bergsten is among the other errors that I’ll address in that promised follow-up post on Bergsten’s e-mail.

Chucklehead October 3, 2011 at 10:39 pm

So hoarding $ = savings is bad. But spending and borrowing is good? No wonder we are in the crapper.

Harold Cockerill October 4, 2011 at 7:11 pm

Spending and borrowing IS good which must mean we really aren’t in the crapper it just looks like it because at one point George Bush was president.

Don Lloyd October 3, 2011 at 10:41 pm

Let’s say the dollars spent for Chinese imports do not come back at all and are stuffed in the mattresses of Chinese leaders.

If this represents any kind of problem for the United States, then it would be nullified if some friendly island nation called THE FED prints new dollars and sends them to the US as replacements. So we have a problem, and a remedy.

But what if the problem goes away, but the remedy doesn’t?

It seems to me that logic demands that a belief in the problem also demands a belief in the remedy. I.E., a belief that the FED can create prosperity by merely printing new dollars.

Regards, Don

Don Lloyd October 3, 2011 at 11:33 pm

From another direction :

We have two Feds, Fed 1, and Fed 2.

Fed 1 does nothing but add dollars to the US economy.

Fed 2 does what Fed 1 does, plus something else.

The something else is to use up and sap both labor and material resources from the US economy.

Which Fed is better for the US economy?

It has to be Fed 1, which doesn’t consume resources from the US economy.

But Fed 2 is an exact description of what China effectively does when it buys US exports with US dollars.

How can we consider it a problem if Fed 2 (China) is inactive?

Regards, Don

vikingvista October 4, 2011 at 1:04 am

How do you imagine Fed 1 adds dollars without consuming resources? How do you think those dollars make their way into the economy?

And what exactly is the Chinese central bank doing that the Fed isn’t doing on a proportionately larger scale?

I get your point about resources being the goal. It is useful to point it out to those who don’t understand it, like the trade deficit cranks. But the big picture is that no parties ever agree to trade that isn’t balanced. There is only more or less trade, not balanced or unbalanced trade.

Stone Glasgow October 4, 2011 at 8:06 pm

Most of the dollars that enter the economy are created by new bank loans, not the Fed. Dollars are created with a keystroke, and traded for the collateral listed in the loan contract. This process does not consume resources.

The same process occurred in WW2 POW camps. A central store was set up and purchased all of its supplies with paper money, printed from thin air. The store would trade a piece of paper for a bar of soap, and agree to trade the soap to anyone with paper at any time in the future.

In the same way, a bank creates new paper and agrees to trade it for collateral at any time in the future. The asset held by the bank as collateral is “sold” to the borrower when he repays his loan.

Don Lloyd October 4, 2011 at 9:43 pm

@ Stone Glasgow,

“Most of the dollars that enter the economy are created by new bank loans, not the Fed. Dollars are created with a keystroke, and traded for the collateral listed in the loan contract. This process does not consume resources.”

Nonetheless, it is the Fed that effectively controls the creation of new credit by regulating the reserve requirements of the fractional reserve commercial banks. A given bank may not loan to the full extent of its capability, but under normal conditions this would be sub-optimal for the bank. At least this is my understanding off the top of my head tonight.

Not all loans involve collateral.

I agree that the creation of new money (or credit) does not consume resources.

Regards, Don

vikingvista October 5, 2011 at 2:07 am

What do you mean, then, by “sap up resources”? Does any use of money do that? Are the t-bills that the Federal Reserve saps up with its newly created money properly called “resources”? How about the labor and materials sapped up by the Treasury with those dollars following a t-bill auction?

Clearly a central bank effects a redistribution of resources toward itself. Whether that is appropriately called sapping up or consuming, it results in some folks getting use of those resources at the expense of denying that use to others. And not all use is equally productive.

Don Lloyd October 5, 2011 at 8:25 am

@vikingvista,

“What do you mean, then, by “sap up resources”?”

For example, when Boeing sells an airliner to China, all the labor and copper wire, etc. used in its manufacture are denied to the rest of the US economy, raising production costs and reducing profits for everyone else.

Regards, Don

vikingvista October 5, 2011 at 3:56 pm

“raising production costs and reducing profits for everyone else.”

Really? Including American Airlines? The people who fly American Airlines? Federal Express? The people who ship Federal Express?

Losing resources, and making productive use of trade, are not exactly the same thing.

Stone Glasgow October 5, 2011 at 5:01 pm

All loans involve implied collateral. If the borrower does not pay his assets can be taken, and his debt is itself collateral.

When banks create money, it is always a voluntary exchange of dollars for assets, even when the Fed buys with new money, the sellers are willing to accept the new paper without force. Attacking this process is like blaming an artist for printing off copies of his work, and trading peacefully.

The trouble is not that he prints and trades, it is that he is the only artist allowed by law.

vikingvista October 4, 2011 at 12:44 am

Pretty pathetic and careless response to a professor of economics. He’d be wise to actually give your letter some consideration, or not respond at all.

Bastiat Smith October 4, 2011 at 1:04 am

Does this depend upon a currency that can only be spent here in the U.S.A.?

On the micro, I have a trade deficit with Walmart, and they NEVER employ my capital, lend me money, or otherwise buy from me; nor does the currency demand such. What keeps China from spending all of their dollars in another dollar accepting country? I don’t buy the capital account balance argument as a realistic answer. Even in these cases, the trade deficit doesn’t matter as long as we create more wealth than we purchase. I don’t care about my “trade deficit” with Walmart so long as I create more wealth than I spend.

China doesn’t have to buy ANYTHING from us and we can all still be better off. If Americans spend within their means, they’ve nothing to fear.

Speedmaster October 4, 2011 at 5:55 am

Dr. B., do you ever feel like just banging your head against the wall in frustration? :-)

Economic Freedom October 4, 2011 at 12:39 pm

I gave up that practice. Today, I’m much more interested in banging other people’s heads: I’ll gladly play “Moe” to Bergsten’s “Larry” and Krugman’s “Curly.”

sethstorm October 4, 2011 at 7:39 am

Let the currency bill pass along with automatic national security objections to any Chinese blood money.

Money is only fine as long as China has no possibility of influence or access to any entity involved with the Department of Defense. Same with other Third World countries.

Methinks1776 October 4, 2011 at 9:04 am

Do you wear a white hood or are you guys trying to blend in these days?

sethstorm October 4, 2011 at 10:46 am

The way that country’s government is acting, your comment misses the point. Things need to be going the way of Dubai Ports, and not the way of Lenovo when it comes to national security objections.

About every developing country that was touched by China has condemned the practices of China. When China comes in, the CPC-backed companies say they won’t conquer, but their practices are anything but peaceful. It’s quite bad when South America starts complaining about their Faustian bargain.

Again, money is welcome, but their influence is not.

vikingvista October 4, 2011 at 3:48 pm

The influence of trade does work both ways. There is a considerable Western presence in China today. And the nature of the influence–trade–perpetuates its own incentive for further peaceful influence. I would say China is changing more in the direction of the USA, than the other way around. If the nature of the influence were military conquest, the subsequent changes would reflect that.

sethstorm October 4, 2011 at 4:25 pm

The way that China has proceeded, I highly doubt that. They have only found ways to do totalitarian things faster and better – due to the West handing them the technology.

vikingvista October 4, 2011 at 6:51 pm

“only found ways to do totalitarian things faster and better”

Don’t you think “only” is a bit too strong a word? Look at the big picture. Has China become more, or less, totalitarian?

Stone Glasgow October 4, 2011 at 9:20 pm

Don,

1. Assuming dollars must return to the United States to purchase American goods and services is an error. Dollars may be circulated indefinitely without enjoying the ownership of an American citizen ever again. Some nations use them as national currency, others use them as central-bank reserves, and foreign individuals may hold them as investments, trading them back and forth absent American ownership.

2. You’re assuming that when American buys something from China using dollars, that those dollars are not immediately traded for Chinese currency on the forex.

3. Americans are the primary debtors to US banks, and are therefore, as a group, more negatively affected by deflationary pressure on US dollars. The supply of dollars is made lower if they are held in foreign bank accounts, because US banks no longer include them in the reserve calculations used to create new dollars. The citizenship of the dollar’s owner is always irrelevant — it is only the citizenship of the bank that matters to Americans.

The reality is likely that dollars are either quickly repatriated using currency exchanges, or that foreign companies hold accounts with US banks, and payments are accepted in dollars that never leave the United States banking system.

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