A few days ago I took issue with Scott Sumner’s use of the term “repay” (as in, for example, ‘Americans must repay the U.S. trade deficit’). I revisited this issue again in my letter earlier today to Tony Hart. In a comment on the Cafe Hayek post of my letter, GMU Econ doctoral candidate Jon Murphy correctly notes that the words “repay” and “debt” have precise meanings – or, at least, meanings that are precise enough to cause confusion if these words are used as synonyms for similar but nevertheless distinct phenomena.
“Repay” is not a synonym for “give something in return for something else given.” Likewise, to be “repaid” is not simply to “receive something in return for something else given.” “Debt” does not mean “a hoped-for receipt of something in return for something else given.”
To repay is to make good on a debt owed. And a debt is a debtor’s legal or ethical obligation to return principal (usually with interest) to a creditor.
It is talk too loose, too careless, and too pregnant with confusion to say, for example, that when foreigners sell goods to us they expect to be repaid if what is meant is simply that foreigners expect to receive something in return for whatever it is that they sell to us. Put differently, to be paid is not to be repaid. The Norwegian who holds the U.S. dollars that he is paid in exchange for the goods that he sells to an American of course wants eventually – perhaps today, perhaps ten years from now – to exchange those dollars for real goods and services. But despite the fact that many Americans stand ready to sell goods or services to this Norwegian in exchange for those dollars, no American owes this Norwegian anything.
The Norwegian’s dollar holdings are not really – neither legally nor economically – a debt claim against any American. That these dollars might be recorded in some accounting ledgers as American “debt” changes nothing: no American is obliged to turn over anything – to sell anything – to that Norwegian in exchange for that Norwegian’s dollars.
It will not do to respond by saying that U.S. dollars are claims against U.S. goods, services, and assets. Again, no owner of a good, no supplier of a service, and no owner of an asset is obliged – legally, economically, or ethically – to transfer to another person who is not that person’s formal creditor his or her ownership of any good or asset, or to perform any service, in exchange for the dollars. Dollars give their holders the right to bid to acquire goods, services, or assets; they do not represent an obligation of owners of goods, assets, and labor services to accept those bids.
Nor will it do to protest by saying that dollars nevertheless can in practice be used to purchase goods, services, and assets. Yes they can; dollars are indeed a medium of exchange. But – see above – dollars are not actually I.O.U.s that oblige us Americans to fork over that which we don’t wish to fork over.
“Still,” I hear those who fear and loathe the U.S. trade deficit complain, “dollars held by foreigners nevertheless will, in practice, be successfully used eventually to acquire goods and services from Americans” – to which I reply, “So what’s your complaint? You – you current-account-deficit ‘hawk’ you – are utterly delighted when foreigners who earn dollars on their exports to America spend those dollars immediately (in the “current” period) buying American exports. You celebrate these American exports. You proclaim that these expenditures made by foreigners to purchase Americans exports enrich Americans. Yet these exports are the goods and services that foreigners ‘claim’ with their U.S. dollars. Why is it a splendid occurrence for foreigners to make such ‘claims’ on American exports today but a dreadful calamity for foreigners to make such ‘claims’ tomorrow? The ‘claims’ exercised tomorrow differ in no essential ways from the ‘claims’ exercised today.”
Bottom line: It’s a fact that foreigners generally expect to receive something of value from us Americans in exchange for the things of value that we buy from foreigners.* It’s also a fact that this expectation by foreigners, even when held in the form of dollars or in non-debt dollar-denominated assets, is not an expectation of repayment, and much less a legal right to repayment. To call “repayment” those goods and services that Americans might, but are not obliged, to sell to foreigners in exchange for dollars is to mislabel and mislead. The false impression is conveyed that Americans actually owe something to foreigners – that Americans in the past mortgaged some of their future prosperity to foreigners. Yet such an impression isn’t accurate. Once again, only formal debt obligations must be repaid.
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* I regard as unfortunate the fact foreigners generally expect to receive something of value from us Americans in exchange for the things of value that we buy from foreigners. I regard it to be an unfortunate reality that foreigners would not sell things to us if they expected never to be able to buy things from us. We Americans would be much more prosperous if foreigners really behaved in the way that many protectionists assume them to behave – that is, if foreigners really were intent on giving to us rivers and streams of valuable goods and services in exchange either for nothing at all or for mere pieces of paper embossed with monochrome portraits of dead American statesmen.
