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Bonus Quotation of the Day…

… is from Deirdre McCloskey’s new essay “Quit Worrying and Learn to Love Trade With China“:

The talk of national balances is silly in itself, because the national balance is the result of individual voluntary deals between Harry in New York and Tatsuro in Tokyo to buy a Toyota, say, or Laura in Bloomington and Chenli in Shanghai to buy a Lenovo. Worrying about the balance of trade caused great pain from so-called “stop-go” macroeconomic policy in Britain and in Holland in the 1950s. Growth was reduced by gormless fretting about national hoards of gold.

And “our” deficit in the international balance of trade with China is not alarming even if there’s no offset from other trades, because the overall balance of payments, including IOUs, has to balance. It’s just accounting.

DBx: Yep.

But I do pick one very tiny nit with Deirdre’s otherwise excellent essay. She follows the conventional practice of regarding U.S. dollars held abroad by non-Americans as IOUs – as debt. I believe that this practice, and this habit of the lip, is misleading. Dollars held by non-Americans are not American debt.

It’s true that dollars held by non-Americans – no less than dollars held by Americans – can be exchanged in the U.S. for goods, services, or assets. Also true is a reality that the typical protectionist remains stubbornly unaware of, namely, that this ability to exchange dollars in the U.S. for goods, services, or assets is, ultimately, the only reason foreigners are willing to accept dollars in exchange for the goods, services, and assets that they sell to Americans.

What is not true is that Americans are in debt to foreigners insofar as foreigners hold dollars. To be in debt is to have a legal (or moral) obligation to repay a certain fixed amount of something – usually money denominated in some currency (such as dollars), and usually with interest and according to some specified time schedule. And legal action – or, at least, a moral sanction – can be (and typically is) taken against a debtor who reneges on his or her promise to repay.

But the mere holding of dollars by non-Americans imposes on no American any such obligation to repay anything to anyone. An American can choose to accept dollars in exchange for some of his goods, services, or assets. And this American will make this choice – often very eagerly – if the number of dollars offered to him is, in his judgment, sufficiently large. When this American makes this choice, he has a sensation very different from that of a debtor who ‘chooses’ to repay a debt.

The American seller of goods, services, or assets is pleased when the buyer – the person seeking ownership and possession of some portion of what currently belongs to this American – offers to make this exchange, and the American seller would be unhappy if he were prevented from doing so. In contrast, the American debtor would be pleased if the creditor – the person seeking ownership and possession of what currently belongs to this American – decided not to carry through with her plan to take ownership of that portion of the American’s property.

Some will respond “Mere semantics!” Not Deirdre, who has single-handedly taught me the importance of words, rhetoric, and habits of the lip. Deirdre might, nevertheless, disagree with the substance of my argument.

But I persist, because what we call something does indeed matter. And calling dollars held by foreigners “debt” – as is the conventional practice – conveys the mistaken and misleading impression that we Americans are in hock to foreigners for the value of these dollars – that we Americans are under a specific legal or moral obligation to service a debt to non-Americans – that we Americans are borrowing, as in taking out loans, to fund our current consumption or business activities.

At the risk of beating this horse too harshly, let me ask you to consider the dollars now in your wallet, in your purse, or lost beneath your sofa cushions. Who, as a consequence of your ownership of these dollars, is in debt to you? The answer is “no one.” You can spend some of your dollars at McDonald’s on an Egg McMuffin, but in giving to you an Egg McMuffin in exchange for your dollars, McDonald’s isn’t repaying any debt. McDonald’s owed you nothing. And neither you nor anyone else is cast further into indebtedness when you spend your dollars on an Egg McMuffin.

Some of the U.S. current-account deficit becomes American debt – as when, for example, foreigners lend their dollars to Uncle Sam. But when non-Americans purchase, with dollars they earn on their exports, American real-estate or dollar-denominated equity – or when foreigners simply hold these U.S. dollars – the U.S. current-account deficit goes up but there is no corresponding increase in Americans’ indebtedness.


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