≡ Menu

Supply Creates Its Own Demand (Not Its Own Debt)

I respectfully disagree with this interpretation by David Altig of the current-account deficit:

The connection between the current account deficit and our net foreign asset position is pretty straightforward. The important thing to recognize is that foreigners do not provide us with more goods than we provide to them out of the goodness of their hearts. They do so because they expect to be paid back sometime in the future, and they collect promises to do so in the form of financial assets – like Treasury securities — that pay off in dollars. A current account deficit therefore means that U.S. citizens are increasing their indebtedness to foreigners.

It’s true that when foreigners buy Treasury securities "U.S. citizens [because they are obliged to foot the bill for debts incurred by Uncle Sam] are increasing their indebtedness to foreigners." (I’d word it differently: "Whenever Uncle Sam borrows money, U.S. citizens are forced more deeply into debt." The fact that some, or even many, holders of this debt are foreigners strikes me as immaterial.)

But it’s unhelpful to describe the accumulation by foreigners of dollar-denominated assets such as American real-estate, equity in U.S. corporations, or dollars themselves, as increasing American indebtedness to foreigners.

It’s true, as David says, that "foreigners do not provide us with more goods than we provide to them out of the goodness of their hearts." They do indeed want something in return. They want either goods and services today — in the "current" period — or goods and services tomorrow when they cash-out their dollar-denominated assets acquired in earlier periods. But American real-estate, equity, and cash are not debt, at least not in any economically substantive way.

Like foreigners, I (an American living in America) don’t supply my sterling teaching and writing services out of the goodness of my heart; I want something in return. I spend part of my current earnings on dollar-denominated assets, such as shares of U.S. corporations, intending to cash these out in the future and spend the proceeds then on goods and services. But there’s no debt here.

When I buy shares of Microsoft, no debt is created. Microsoft owes nothing to me; I owe nothing to Microsoft. No one, as a result of this transaction, is any further in debt than they would have been had I spent my money instead on a case of California wine.

It’s true that in the future I can, and will, sell my shares and then use the proceeds to exercise my ‘claim’ on goods and services. So, yes, my acquisition today of equity shares enables me to dip tomorrow into the economy to get goods and services for my consumption. But it’s incorrect to say that anyone owes me anything.

Put differently – and with an appreciative nod to the great J.B. Say – anytime anyone sells goods or services, that person acquires claims on other goods and services of equal market value. If we don’t regard anyone, or the economy in general, as going more deeply into debt whenever an American supplier uses his sales-proceeds to buy, say, dollar-denominated equity or real-estate, why talk as if Americans, or the American economy, goes more deeply into debt when foreigners buy such dollar-denominated assets?