Trade deficits are enabled by the creation of debt for the following reason. In a trade deficit, foreigners can either hold more U.S. dollars [and they already have a boat load and do not have any real need for more]; buy U.S. assets from domestic holders; or buy U.S debt at what they perceive to be interest rates that will provide reasonable compensation [or at the very least allow their export driven economies to continue to export to the U.S.] from domestic sources ... usually with newly created Treasuries and GSE debt as the first choice.
Does that make Pat's statement "ridiculous" or only technically incorrect?
After the party is over, the debts both internal and external will remain to be repudiated [through outright default]; inflated away through inflation; or continue as a drain on the taxpayer / average Joe homeowner.
If I pay cash for a CD player that's made in Japan, how is any debt created? It isn't. I get their CD player and they get my dollars. If they use my dollars to buy goods from us no deficit is created. If they use those dollars to invest in our economy instead, a current account deficit is recorded but a capital account surplus is also created and they balance out. The balance of payments is fine and that's all that really matters. All this says is that the U.S. is currently the best place to park one's money right now. The fact that we run a capital account surplus is an unambiguous market signal that our economy is vibrant and the best place to invest. Money flows to where it's treated best. This flow is providing us with the capital to grow our $12 trillion economy at 4% a year.
..buy U.S debt at what they perceive to be interest rates that will provide reasonable compensation [or at the very least allow their export driven economies to continue to export to the U.S.]
Central banks will manipulate their currencies to help their export driven economies. That's true. It still doesn't account for all the others who choose to buy our treasury debt and it most certainly doesn't offer any validity to the assertion that trade deficits cause debt. Government spending more than it takes in is what causes debt. Period.
Does that make Pat's statement "ridiculous" or only technically incorrect?
Pat should know better. That he does this to rile those who don't know any better makes him, and his statement, ridiculous.
the debts both internal and external will remain to be repudiated [through outright default];
Believe what you want but despite the increases in debt, both consumer and external, our household net worth has reached a record $51 trillion. Since Bush took office our external debt has grown by $2 trillion. However, our household net worth has increased by more than $10 trillion. Our net worth is increasing five times faster than our external debt and you think, because of this, the party's coming to an end and we're at risk of default?
The fact is public debt as a percentage of household wealth is shrinking. In addition, household credit is hardly a problem and public debt as a percentage of GDP is also decreasing.
inflated away through inflation; or continue as a drain on the taxpayer / average Joe homeowner.
Inflation has averaged about 2% annually over the past 20 years and average Joe homeowner is doing better than ever. Even if inflation weren't tame, it's great for those who own tangible assets.
