Re: OT: US Presidents and Foreign Policy

From: Robert Wagner (spamblocker-robert_at_wagner.net)
Date: 03/10/05 

Date: Wed, 09 Mar 2005 18:26:32 -0600

On Wed, 09 Mar 2005 11:29:55 -0500, SkippyPB
<swiegand@neo.rr.NOSPAM.com> wrote:

>On Tue, 08 Mar 2005 12:34:38 -0600, Robert Wagner
><spamblocker-robert@wagner.net> enlightened us:
>
>>On Tue, 8 Mar 2005 15:56:05 GMT, "Howard Brazee" <howard@brazee.net>
>>wrote:
>>
>>>
>>>On 7-Mar-2005, LX-i <lxi0007@netscape.net> wrote:
>>>
>>>> Is a deficit bad? Have you paid cash for all your cars and homes? Have
>>>> you ever paid off a car or a home?
>>>
>>>It's a tax. How you rank it with other taxes depends on your situation. But
>>>it is a tax, and it will be paid.
>>
>>It will be paid with cheaper dollars. It could be a source of income
>>-- negative interest -- if the dollar devalues fast enough. How to do
>>that: run up the trade deficit faster than the budget deficit.
>
>More BS. A deficit is never good.
>
>Peter G Peterson, chairman of the Council on Foreign Relations, the
>Institute of International Economics, and the Blackstone Group, had
>this to say in the September/October 2004 edition of Foreign Affairs
>magazine:
>
>The United States is now borrowing about $540 billion per year from
>the rest of the world to pay for the overall deficit funding
>Americans' consumption of goods and services and US foreign transfers.
>This unprecedented current-account deficit is paid through direct
>lending and the net sales of US assets to foreign business or persons:
>everything from stocks and bonds to corporations and real estate. The
>United States imports roughly $4 billion of foreign capital each day,
>half of that to cover the current-account deficit and the other half
>to finance investments abroad. At 5.4% of GDP [gross domestic product]
>in the first quarter of 2004, the deficit is substantially higher than
>its previous record (3.5% of GDP) in 1987, when the dollar fell by a
>third and the stock market took its "Black Monday" plunge....

Fuzzy thinking here. There isn't one ("the") deficit, there are two.
The budget deficit causes importation of money to finance government
debt; the trade deficit causes exportation of money to finance private
investment and consumption. The latter MIGHT be financed by private
debt in the form of selling stocks and bonds to foreigners, it might
be financed by domestic savings/investment (fat chance), or it might
be, in fact will be, financed by cheapening the dollar.

Many find money supply and economics mind-boggling. I'll simplify it.
Picture four players at a card table: the US government, rich people,
poor people and foreigners. The result of current economic policies is
that rich people and foreigners will have a net cash inflow,
government will break even, poor people (consumers) will have a cash
outflow. If that's too simple, consider this analysis:
 
-- begin quotation --

The size of the U.S. deficit is causing alarm among some commentators
who are using it to draw attention to America's foreign debt. Even
though mercantilist fallacies are lurking behind these warning that is
no reason to dismiss them outright.

However, this is basically what optimists are doing when they assure
the public that there is nothing to worry about because the country is
borrowing to expand its productive capacity. As evidence of this view
they point out that the US stock market has risen relative to the rest
of the world, inferring that this rise is a reflection of increased
investment.

They also correctly point out that the US had deficits throughout the
nineteenth century. In fact, from the end of the War of Independence
in 1784 right up to 1914 America was a debtor nation, running an
annual deficit on its balance of trade until the 1870s, even though
she had built a tariff wall. (Protectionists argue that tariffs cure
the alleged ills of trade deficits).

How could this be? The answer is simple: most of the debt was incurred
by individuals who used it to import capital goods, mainly from
Britain. In other words, American entrepreneurs used British savings
to expand America's productive capacity. During this period thousands
of these entrepreneurs repaid their British loans, others took out new
loans while thousands more borrowed for the first time.

[Now, replace Britain with US and US with foreign.]

And so it went on, decade after decade and each decade saw the
American economy expand and living standards rise. Of course, some
entrepreneurs failed. But the consequences of failure were shared
between the American borrower and the British investor and not their
respective governments.

It ought to be clear that the so-called debt problem is really a
non-problem in the sense that what really matters is not debt but how
it is acquired. Therefore, running a trade surplus is not necessarily
a sign of economic health. Those who think otherwise have forgotten
that during the depressed 1930s when tariffs were strongly defended
and unemployment averaged 17 per cent America was a creditor nation
with a trade surplus.

But what the optimists overlook is that the gold was king during the
nineteenth century, which meant that countries that deviated from the
standard soon found themselves having to make the necessary monetary
corrections.

The importance of the gold standard lies in the fact that when the US
borrowed from, for example, British investors it was borrowing real
savings and not phony bank deposits. That is to say, these saving
actually consisted of deferred consumption.

Once Keynes persuaded politicians to abandon gold, that "barbaric
relic", as he called it, countries had to rely entirely on fiat money.
This created unprecedented inflation on a global scale. It also
generated bad deficits. These occur when central banks let loose with
the money supply, usually through our old enemy credit expansion, the
same process that triggers booms and inflates asset values.

But there is another side to credit expansion and that is its effect
on the trade balance. Monetary expansion inflates domestic spending
which in turn raises the demand for imports. This demand continues to
grow until the deficit reaches a point where the central bank sees it
as another warning signal that monetary policy needs to be tightened.

Now the central bank brings about credit expansion by forcing down
interest rates. This eventually causes businesses expand their demand
for loans for investment purposes. There is no reason that some of
these loans should not be used to import capital goods.

These imports would be seen by the optimists as evidence that the
deficit didn't matter because it was adding to the nation's productive
capacity. As the Keynesians say, it merely shows that investment
exceeds savings. This view only demonstrates that they are oblivious
to the fact that investment in excess of savings is just another way
of saying that the country is suffering from inflation.

Therefore, what the optimists call evidence of a healthy demand for
capital goods is really a symptom of an inflationary process.

So is the US deficit a symptom of a loose monetary policy that is
misdirecting production or a sign of healthy economic growth? At this
point I think we should let the monetary facts speak for themselves.

Using the Austrian definition of the money supply, from January 2001
to March 2004 money supply increased by more than 22 per cent, an
annual average increase of over 7 per cent.

The problem, therefore, is not foreign debt or trade deficits but a
loose monetary policy, a policy that is laying the foundations for
another recession.

http://www.brookesnews.com/041005_foreign_debts_deficits.html

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