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Audacious Debtors

What’s the relationship between Uncle Sam’s budget deficit and the U.S. current-account (‘trade’) deficit?

I spend too much time these days pondering this question.  There’s much to say on it, for the relationship is more complicated than some people think.  But I confine myself here to making a point that should be obvious to one and all, but that nevertheless seems never to be made.

Many people think the trade deficit to be synonymous with debt.  It isn’t.  But part or all of the trade deficit can become debt.  It becomes debt if, and to the extent that, foreigners lend dollars to Americans.  Of course, such lending can be made to private American borrowers as well as to American governments (most notably, to Uncle Sam).  Few people worry about foreigners lending money to private companies.  The larger and deeper the capital market, the better for all involved (save inefficient producers whose rents are destroyed by new firms, new products, new ways of doing business financed by capital).

What about foreigners buying government bonds – that is, foreigners lending money to the government?  Many more people worry about this phenomenon.

There might well be something to worry about, but that something is too-often misidentified.  The only problem with large government budget deficits is that they enable government to waste even more resources than it would waste if it had to balance its budget.  The debts will come due and must be repaid – meaning, in the future, higher taxes, spending cuts, or inflation.  The nationality of the holders of the debt is meaningless.  (If you doubt this claim, ask yourself: If in a state of drunkenness you finance a spectacular party for you and your friends by running up an immense amount of credit-card debt, do you really care about your creditors’ identities?  You suffer in the future – when you must repay – whether your creditors are men, women, white, black, southern, Midwestern, heterosexual, homosexual, bisexual, red-haired, blonde-haired, bald, tall, short, liberal, conservative, American, Chinese, Icelandic, whatever.  The problem is your having to struggle to repay; it’s not the identities of the persons you must repay.)

If foreigners are investing in U.S. government debt, and if the money the government borrows today is spent wastefully (as almost everyone sensibly assumes), then we Americans (through our government) are living high-on-the hog today at the expense of future American taxpayers – who will have to pay off the debt.

So the problem is excessive deficit financing by Uncle Sam – deficit financing that results in foreigners buying lots of Treasury bonds.

But what’s the solution bandied about by pundits and politicians, such as Senators Charles Schumer and Lindsey Graham?  It’s this:

First, self-righteously point accusing fingers at foreigners – today, especially at the Chinese – and scold them for buying too many Treasury bonds.

Second, threaten to raise the taxes (i.e., tariffs) that American consumers pay when they buy foreign goods and services, in the hope that Americans will buy fewer imported goods and services.

Third, hope that through some mysterious process, steps one and two will make Congress and the President fiscally responsible.


Think about this.  Think about it hard.  Think about it deeply.  Think about it seriously.

It’s as if Congress is saying to foreigners: “We don’t want to borrow all this money.  But because the American people buy so many goods and services from you, and because you are willing to lend us lots of the dollars that you earn from these sales, we here in Washington have no choice but to run large deficits and borrow from you much of the money necessary to finance these deficits.  Damn you!  Damn you! – for we all know that this much borrowing is irresponsible and bad for the long-run health of the American economy.  And yet you continue – you continue! Damn you a thousand times! – you continue to lend us, the government, money whenever we ask for it.

“This will not do!  No sir!  We’ll show you!  We will force our own people, American consumers, to pay prices for your goods and services that are much higher than those that you ask them to pay.  This is our way of teaching you foreigners a lesson – which is, don’t offer attractive deals to American consumers, because if you do, then you’ll earn dollars, and if you earn dollars, you’re too likely to lend those dollars to us – the political class – who simply cannot resist borrowing those dollars from you and spending them on utterly wasteful programs that harm the economy.  How dare you!!”