A deficit is not debt. … ?
January 4th, 2007
Opinion, Uncategorized
I’m not an economist, don’t pretend to be. But I can detect mumbo jumbo when I hear it. And it is particularly disturbing when it comes from someone who claims to be an economist and who has achieved great heights in the academic world. Don Boudreau, Chair of the Economics Department at George Mason University.
In fact, though, America’s trade deficit is evidence of its economic vigor and promise. Here’s why:
When Americans buy foreign-made goods and services, foreigners earn dollars. The only way America would run no trade deficit is if foreigners spent all of these dollars buying goods and services from Americans. Instead, though, foreigners invest some of their dollars in America. They buy American corporate stock, they build their own factories and retail outlets in the US, they lend dollars to Uncle Sam, and they hold some dollars in reserve as cash.
Boudreau, a few sentences later, goes on to state authoritatively:
Remember: A trade deficit is not synonymous with debt.
This is most interesting: then can I assume that if I spend more than I make (a “deficit”) and max out my credit cards, this is NOT synonymous with debt? Eventually, the interest on my credit card approaches my income, leaving less and less dollars for me to spend on “goods and services”. I stop buying goods and services OR, I find a way to take on more debt OR I increase my income. When a “foreigner” “invests money”, that’s debt. A return on that investment is expected. Further, when “they lend dollars to Uncle Sam”, I imagine they expect to be repaid in the future, earning interest on the loan until repayment. At least that’s the way my bank works. And that is what I understand to be “debt”. And as for stocks, as long as the dividends and capitalization provide a good return on the “investment”, that’s great. But if profits fall, stocks prices tend to fall disproportionately – a fact that drives U.S. capital out of the country – capital that can be used to increase income. And, on the other side of the ledger, if that foreign cash does come back to stock, factories, and retail outlets - it no longer is “foreign” and should offset the “deficit”.
Running a deficit is only “good” if it becomes someone else’s problem. The only question is “whose problem”?
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