Walter Williams:
There's the bugaboo about trade deficits, as in complaints that we buy more from Japan than they buy from us. That's not only mythology, but it's not true. Let me use domestic trade to make my point. I buy more from my grocer than he buys from me, but is there a "trade deficit?" When I buy $100 worth of groceries, the value of my current account(goods) rises by $100 but the value of my capital account(money) goes down by $100. By the same token, the grocer's current account(goods) goes down by $100 and his capital account(money) rises by $100. There's no trade imbalance whatsoever; I've given him $100 worth of value and he's given me $100 worth of value. Similarly, when a Japanese automaker sells us a $15,000 car, his current account goes down by $15,000, and ours goes up. He might purchase $15,000 worth of AT&T stock instead of buying California oranges. But just as in the grocer example, his capital account rose by $15,000 and ours goes down.
56 posted on 09/17/2003 11:46 AM EDT by LIBERATENJ
What is the enormous flaw in this argument?
#1 If you go $200,000 into debt on credit cards you will have to pay it back plus interest. You pay to "rent" this money. Same with the USA if we buy so much more from China and they hold US Treasuries rather than spend it, which in fact is what they do. Once more interest is collected as it is from all debtors.
#2 Let's say you own two busy auto repair shops. You can sell one for $200,000 and be debt free. Same for the USA. The Chinese can take $100 million of the US Treasuries they hold and buy some productive assets in the USA. Could be farms, factories, income producing real estate what have you. ChiComs sure don't buy much finished products from us.
#3 The key here is the difference between going into hock to buy finished products and owning an asset that produces profit or income. Sadly enough the ChiComs have an income producing asset even when they just hold Treasury bonds. It's about finished products versus assets.
The problem here is the debt, not what's done with the money. Should we refuse to sell Treasury securities to foreigners?
#2 Let's say you own two busy auto repair shops. You can sell one for $200,000 and be debt free. Same for the USA. The Chinese can take $100 million of the US Treasuries they hold and buy some productive assets in the USA. Could be farms, factories, income producing real estate what have you.
So we get their goods and they get farms, factories, and real estate that stay in this country---while the sellers of same get to reinvest in even more productive assets.
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We expect the people buying bonds to put the interest into buying more bonds instead of collecting the money. Eventually, with the accumulation of bonds the potential interest will build until there is no way to createn enought more bonds to satisfy it, and no way to pay the interest without bankrupting the nation. We are deferring a disaster through employing methods that make the eventual disaster worse.