But I do want to point to two articles that point to a growing problem that the Obama administration has failed to address in any serious way: the exploding deficits, and the resulting need to borrow heavily. USA Today points out that tax revenues are plummeting at the same time as spending is exploding:
Federal tax revenue plunged $138 billion, or 34%, in April vs. a year ago -- the biggest April drop since 1981, a study released Tuesday by theAmerican Institute for Economic Research says.When the economy slumps, so does tax revenue, and this recession has been no different, says Kerry Lynch, senior fellow at the AIER and author of the study. "It illustrates how severe the recession has been."
For example, 6 million people lost jobs in the 12 months ended in April -- and that means far fewer dollars from income taxes. Income tax revenue dropped 44% from a year ago.
"These are staggering numbers," Lynch says.
Big revenue losses mean that the U.S. budget deficit may be larger than predicted this year and in future years.
. . .
The White House thinks that tax revenue will increase in 2011, thanks in part to the stimulus package, says the report from AIER, an independent economic research institute. But it warns, "Even if that does happen, the administration also projects that government spending will be so much higher each year that large deficits will continue, and the national debt held by the public will double over the next 10 years."
The government may have a hard time trimming spending to reduce the deficit when the recession ends. The 77 million
Baby Boomers -- those born in 1946 through 1964 -- will start tapping their federal retirement benefits soon, which means increased government outlays for Social Security and Medicare."It will be doubly difficult for federal government to reduce expenditures and narrow the deficit as rapidly as they did following previous recessions," Lonski says. At the end of the last major recession, in 1981, Boomers were in their 30s. Their incomes were expanding, as was their appetite for goods and services.
Meanwhile, in the FT, John Taylor warns that our national credit rating is in danger:
A government debt burden of that [100 per cent] level, if sustained, would in Standard & Poor's view be incompatible with a triple A rating," as the risk rating agency stated last week.
I believe the risk posed by this debt is systemic and could do more damage to the economy than the recent financial crisis. To understand the size of the risk, take a look at the numbers that Standard and Poor's considers. The deficit in 2019 is expected by the CBO to be $1,200bn (€859bn, £754bn). Income tax revenues are expected to be about $2,000bn that year, so a permanent 60 per cent across-the-board tax increase would be required to balance the budget. Clearly this will not and should not happen. So how else can debt service payments be brought down as a share of GDP?
Inflation will do it. But how much? To bring the debt-to-GDP ratio down to the same level as at the end of 2008 would take a doubling of prices. That 100 per cent increase would make nominal GDP twice as high and thus cut the debt-to-GDP ratio in half, back to 41 from 82 per cent. A 100 per cent increase in the price level means about 10 per cent inflation for 10 years. But it would not be that smooth - probably more like the great inflation of the late 1960s and 1970s with boom followed by bust and recession every three or four years, and a successively higher inflation rate after each recession.
The fact that the Federal Reserve is now buying longer-term Treasuries in an effort to keep Treasury yields low adds credibility to this scary story, because it suggests that the debt will be monetised. That the Fed may have a difficult task reducing its own ballooning balance sheet to prevent inflation increases the risks considerably. And 100 per cent inflation would, of course, mean a 100 per cent depreciation of the dollar. Americans would have to pay $2.80 for a euro; the Japanese could buy a dollar for Y50; and gold would be $2,000 per ounce. This is not a forecast, because policy can change; rather it is an indication of how much systemic risk the government is now creating.
Short term yields firmed up this week on better consumer confidence data, but short-term yields shouldn't be what we worry about. Eventually the treasury has to roll that debt or pay it off, and if interest rates spike, that can prove catastrophic--just ask Argentina. The five year, seven year, and especially the thirty year auctions will tell us much more.
If the longer-yield debt again registers weak demand, the administration is going to have to address this problem. Up until now, most of the debate over the administration's spending plans has focused on the political problem: will the American public accept higher spending? But the problem isn't the spending; it's how to pay for it. If the spending were attached to tax hikes, this would cut into its popularity (though I don't know by how much). That's one of the reasons that administrations like to fund their new spending with borrowing. But you can't long do this on a scale that freaks out the bond markets--just ask Argentina. And these days, the bond markets are easily freaked.
Typo?
From the article: "If the spending were attached to tax cuts, this would cut into its popularity. That's one of the reasons that administrations like to fund their new spending with borrowing."
Doesn't the author mean increases rather than cuts?
As has been stated before:
We "cured" the Internet Bubble by fueling a housing bubble - absurdly low interest rates + NINJA's.
We are "curing" the burst Housing Bubble by... well, a lot more of the same. Interest rates at zero, printing moneys, and more NINJA-like social programs.
What everyone here knows, but not everyone here accepts: the vast majority of the "stimulus" isn't stimulus. Worse, the vast majority of this stimulus is seed-money for programs that will require funding ad infinitum.
This is a death spiral, not a stimulus.
And, btw, as I have shown in an earlier post: if we could magically and at zero cost suddenly get our medical costs per capita down to the EU's average, we still wouldn't come anywhere near close to balancing our budget. The whole "we'll climb out of this by improving efficiencies" line is a pure lie. It's simply not mathematically possible.
The only way out of this mess, presuming we reverse the spending-palooza with a responsible government in 2-4 years:
Inflation - turn our debt into a minor burden by inflating the cost of goods.
There might be a few teeny weeny issues with this approach, but they don't seem to bother Obama and his posse.
You can't inflate away risk. If incomes don't go up atleast as fast as inflation in general, you just end with more risk in the system.
"A 100 per cent increase in the price level means about 10 per cent inflation for 10 years."
Huh? Wouldn't a 10% inflation rate double prices roughly every 7 years. If this guys grasp of math is that bad, I'm less likely to trust him.
It gets even better!
"And 100 per cent inflation would, of course, mean a 100 per cent depreciation of the dollar."
Awesome catch.
Hilarity aside, some of what he writes is hard to disagree with...
Perhaps John Taylor is just writing out the talking points his editor gave him - just because he is clueless doesn't mean the article is off base.
Still, it's got to be embarrassing for a business writer to demonstrate that he doesn't understand either depreciation or compounding interest.
Some of what he writes may be hard to disagree with, but any correlation between Mr Taylor's assessment of our systemic risk and reality is probably purely coincidental.
"The deficit in 2019 is expected by the CBO to be $1,200bn. Income tax revenues are expected to be about $2,000bn that year, so a permanent 60 per cent across-the-board tax increase would be required to balance the budget."
Maybe he mixed up deficit with revenues too. Listen up kids, cheating on your math homework to pass the class only hurts you.
Oh nevermind, deficit, not spending. Durh.
We will "cure" the budget problem by not passing a 800 billion dollar stimulus in the future budgets. We will raise revenues by not having our economy in the crapper in the future.
If either of those don't happen, we have bigger things to worry about.
Unless of course you're talking about the pre-stimulus deficits, which are somehow Obama's failure. I couldn't think of anyone else to blame that one on. Of course, we must think forward, so I guess we'll blame Obama for not fixing the economy AND the problems we had before the economy tanked?
You are seriously the world's worst econoblogger. Seriously, do you ever think? That's not trolling. It's backed by fact. You are a horrible blogger and you never think. We've documented this for a while now. Perhaps your desire to do a job with a modicum of competency would cause you to pay us heed?
Obama's own projections dont have a repeat of the $800 billion stimulus, yet show record setting deficits far into the future.
Obama ran a campaign on "change" and was consistently critical of the deficits created under Bush. Many people voted for him even though their own taxes would go up because they thought the added revenue would be used to bring the Federal budget back to some degree of reasonableness. I can guarantee that very few counted on him to both raise taxes (as he said he would) AND double the spending deficit for the next 10 years.
I think most would be willing to cut him slack given the economy on the current deficit and the next couple years -- but when he plans on record setting deficits as far as the eye can see --- that is on him.
You must be one of the most singularly unhappy people I've ever encountered. MM doesn't meet your expectations, you bitterly criticize and insult over a course of years. When she apparently does, for example her research on the Andrews biography, you snidely ask if she had some help with that.
What do you get out of this that makes your life better? Because all I see is a person who becomes angrier and more bitter with each trip around the mulberry bush, yet keeps coming back to the supplier for another hit.
Jeez, Nut, the projections don't count either the stimulus being repeated, or count the economy flatlining for the next ten years.
I think this is the biggest issue nobody is talking about (Megan excluded).
It seems every day, foreign investors are giving explicit warnings that they arent interested in financing the administration's plans. In the next two years as investors regain their appetite for risk, money will flow out of US Treasuries and the real cost of planned spending deficits will become apparent.
Sadly -- this issue is such an abstraction for the majority of voters, I wonder if they will equate this out of control spending with the eventual 25% hit to their standard of living.
Foreign investors and governments have always been upset by the role of the dollar and how the US receives enormous benefits from it. If you live in another country you talk about currency fluctuations like you talk about the weather. Most Americans don't care or need to care about it. Our unwise financial stewardship (over the last 20-30 years) is going to lead to the eventual basket of currencies that removes the dollar from its special place to the detriment of our economy.
Then we can all really feel the hurt when the dollar depreciates.
You said a mouthful. Most voters have no idea what is coming, even though they themselves will reap most of the pain.
Then again, they asked for it. To simply vote for "change," in ignorance of what that means - and Chauncey never kept any of this a secret - is inexcusable.
The combination of inflation and high interest rates is horrific. "Argentina" is mentioned here quite often, and it's a pretty good metaphor.
Printing money to fund government programs while at the same time suppressing velocity because interest rates are high. What a disaster...
Yet you heap all the blame on Obama. What a joke!! The deficit doubled under George Bush and we heard not a peep from people like you.
I assume you objected to bush's doubling of the deficit? Then how come you are not objecting to obama's quadrupling it?
How can you fault others for lacking consistency while lacking consistency?
I am rather new to this site, so you would not have heard.
I am not a Republican, I am Conservative leaning towards libertarian. I most *certainly* objected to Bush's deficits. Up to 2007 he was referred to as a Drunken Sailor, only worse - since a drunken sailor only spends his own money, while Bush was spending someone else's.
If you were listening you would have heard a lot more than "peep's." Peggy Noonan, who actually left her job to campaing and write for Bush, wrote a scathing piece about his fiscal policies in 2007. Limbaugh was all over him, as was Levin.
In fact, VIRTUALLY ALL of the conservative media were raking him over the coals on this one.
Where were you?
"It will be doubly difficult for federal government to reduce expenditures and narrow the deficit as rapidly as they did following previous recessions"
I don't know how anyone could possibly say this when we are throwing perhaps a trillion dollars in the form of one-time infusions at financial institutions and the automakers.
Unless you believe that we intend to give the banks TARP money into perpetuity, that statement is just wrong on its face. It also disregards the possibility that some portion of that TARP money -- not 100% of it, but some of it -- will be repaid to the Treasury, in some cases with interest, which can then be applied to deficit reduction.
Income tax revenues are expected to be about $2,000bn that year, so a permanent 60 per cent across-the-board tax increase would be required to balance the budget.
I tend to be a bit of a deficit hawk myself under normal circumstances, but this is frankly a ridiculous straw man. It isn't necessary to have zero deficits in order to have a healthy economy over the long run. If we can push the deficit back down to 2-3% of GDP, we'll be in decent shape and will have created a foundation for paying it down further.
Alarmism has become awfully trendy. As a contrarian, I see that as an indicator of the bottom being put in. This is just the sky's-the-limit bubble mentality inverted to the flip side of the coin.
Don't forget, Bush started throwing money at the banksters. Last I checked, no one mistook "B-52" Ben Bernanke and "Tiny" Tim Geithner for DFH's.
As stated, the CBO is calling for a deficit of $1.2T in 2016. Unless our economy is chugging along at $60T/year, $1.2T is a lot more than 2%.
If you want $1.2T to be 4% of the GDP - still a larger deficit than anyone says is "sustainable," you need to get the GDP up to about $30T.
10% inflation would get us there. Anything less than 10% inflation and you're talking about a deficit - 7 years from now, mind you, that is still well north of 5% of GDP. Probably more like 7% or 8%.
What do those seven years look like, presuming we can even magically make it to them without an economic melt-down? How many more trillions would China have to lend us? At least 5, right? That's a bare minimum.
They currently hold less than $2T, and they are *not* happy. How could we possibly presume that they will not only double that, but almost *quadruple* that?
Alarmist or not, the numbers simply don't work out. There is no obvious path to a "sustainable" deficit from where we currently are, particularly (as Megan's article points out) given Baby Boom situation.
The CBO's crystal ball isn't magic, and it isn't always right - but they tend to be non-partisan and generally rigorous. Their numbers are chilling when you realize what has to happen for us to get there.
There's nobody left to lend us the money that they say we need.
And printing it would = "Argentina."
I don't understand why other countries would rather buy our shady securities rather than invest in their own countries. Sooner or later someone's going to wake up and realize the emperor has no clothes.
In some cases, it is because they trust their own or other countries even less.
In others cases, it is because the US economy is large enough to absorb hits that would completely wipe a smaller economy, while having one unbrella of monetary policy governing the underlying currency. You could buy securities denominated in euros and have a similarly sized economic zone backing your investment, but you would not have consistent monetary policty behind that currency.
Of course tax revenues are plummeting--there will always be a correlation between tax revenues and the economy. The past two decades of "tax reform," which always made the code more progressive, only increases this effect. People at the top of hte income scale tend to have more income (e.g., bonuses, capital gains) that are tied to the economy. The more the government depands on income from this group to finance spending, the greater the boom/bust swings will be. For a preview of where this leads, look at California's budget woes.
Yup. And, as much as people hate hearing it, you can only "soak" the rich once. Once you take their things, they aren't rich anymore.
And yet Leviathan's appetite continues to grow. Funny how that story ends...
Yep. And to feed Leviathan, they'll need new taxes. Right on schedule Washington is talking about a 10% VAT.
The finance people in Obama's administration are generally smart people -- they see the same trends we do. Budget Director Orsag is on record calling the deficits "unsustainable" - yet offers no solution (as an aside -- its one of the WTF?!? statements that the press has totally passed on).
This has led me to wonder what the next shoe to drop is. Clearly they have something in mind that they arent ready to unveil -- and its something that wont be popular.
I suspect it is something like a national VAT --- and its probably a second term (if he gets that far) surprise. It will be marketed as a replacement for the income tax for most taxpayers, but I suspect that in reality it will be in addition to the income tax for most.
So on top of a cap and trade energy tax, they’re proposing a 25 percent VAT as well? Boy I’m sure glad I got that extra thirteen bucks a week in a “tax cut” so that I and 95 percent of the rest of Americans won’t have our taxes raised.
/sarcasm
Yeah, I'll be pulling the eject lever and heading to Switzerland when that happens.
Thus the beauty of our Founding Fathers having the Congress elected every 2 years. A 10% VAT on top of the income tax changes would flip the house almost for sure.
The members know this, and I'm betting that it would make the 90-6 Gitmo "NIMBY" vote look like a horse-race by comparison. Pelosi's wounds would come back to haunt her if she tried to force a party-line vote for a VAT.
Chauncey's up against it. He's dug a hole unlike anything we've ever seen, and the only thing he can do without asking the Congress is print money - presuming Ben continues to go along.
Thank God somebody is acting responsibly. Posner is right: Americans are undertaxed. Anyway, the US public sector is hardly a "Leviathan" by rich world standards.
I don't think that particular feature (and let's not forget a third of the Senate, too, is up for grabs every other year) is looking like such a "beauty" right now. Sometimes it's better to give a bit of insulation to politicians from the wants/needs of their constituents, to the extent that those constituents aren't always rational or reasonable. I make no secret of my policy preference with regard to deficit reduction (tax increases) but spending cuts, too, are likely to be none too popular. Indeed to a substantial degree we're in the predicament we're now in because the constituency for government services is vastly more powerful than the constituency for the taxes to pay for them. In a Westminster-style system, an administration can force voters to submit to unpopular but necessary policies (such as, oh, tax increases or spending cuts), safe in the knowledge that it will enjoy four or five years -- enough time for those policies to bear fruit -- of power before facing the voters again.
So, Jasper, you're a socialist - with perhaps some dictatorial tendencies tossed in (it's hard to be one without the other, since people amazingly don't gravitate to the "we're all in this together thing" once they realize that this means that they actually have to forfeit so much).
Got it.
You can't even soak the rich one time. The rich will stay rich for the same reason they got rich in the first place: They know money. They are a lot smarter at keeping their wealth than the government is at taking it away.
Efforts to soak the rich will hurt the poor, because efforts to soak the rich will hurt the economy, and any damage to the economy is felt disproportionately by the poor.
RobM1981: Er, no. I'm a big fan of private enterprise and rigorously free markets. I just happen to prefer a robust and effective rather than crappy and ineffective safety net. I also prefer funding government via taxation instead of borrowing? You?
Not sure what you mean. Pretty much every other rich country has a more comprehensive safety net than the US -- and nearly everyone of these has a larger public sector and a higher overall tax burden than the US. It seems to me plenty of people have gravitated to the "we're all in this together thing." For some reason in the country whose constitution was written by merchants and slave-holding planters, it's been more of a challenge to build said comprehensive safety net. Funny, that.
Nelson,
"I don't understand why other countries would rather buy our shady securities rather than invest in their own countries."
What large econonmy has better long term investment prospects than the US? Europe, China, India, Japan, Latin America, Africa, Russia?
If I were in charge of making China better, I'd invest in China. If I were in charge of making India better, I'd invest in India. Same goes with the rest. I believe there is no country that can't be made better with good leadership and prudent use of its resources. At the very least, I'd open up the economy so that my people could improve their real standard of living. The value of money isn't what is written in some ledger, it's what you do with it.
Didn't countries used to try to make themselves better off? I could have sworn I read that somewhere.
The Chinese are worried about getting their money back-
http://www.telegraph.co.uk/finance/financetopics/financialcrisis/5379285/China-warns-Federal-Reserve-over-printing-money.html
When the debt goes to AAa (or whatever the downgrade is) and lower, maybe Keith Olbermann will shut up about "teabagging." But I doubt it.
Obama administration has failed to address in any serious way: the exploding deficits, and the resulting need to borrow heavily.
I can only assume that by "failed to address in any serious way" you mean "made his first priority to create".
Of course Bush left Obama no choice.
Full stop. End of argument. Abandon all hope ye who contradict!
We didn't borrow a bunch of money to pay off budget shortfalls or cover spending during Bush. We borrowed bunch of money for banks to hold onto incase they stop paying eachother back.
Oh, you were being sarcastic. Sorry.
Everybody seems to assume historically large but relatively steady inflation will be the result of all this. What if the dollar/Treasury bubble ends like most bubbles..... really quick and ugly. Not heavy inflation for a decade but a 50% dollar sell off in, say, the space of a week. I can't make up my mind about which would be worse. But since the American people have absolutely no willingness to pay for the government they want I would bet we get one of the two.
If you want $1.2T to be 4% of the GDP - still a larger deficit than anyone says is "sustainable," you need to get the GDP up to about $30T.
That math illustrates that it's going to be critical to get at least some of the TARP money repaid, and to make sure that we apply the repayment toward deficit reduction.
I'm not expecting to get all of it back, particularly from GM, Chrysler or AIG, but we may be able to get large chunks of it back from the banks.
If we get absolutely nothing repaid from TARP, then we are going to have a problem. That's the crucial piece to watch here. Let's hope that the Beltway gang act like a bunch of hardasses and work overtime to get our money back.
It would also help if we have a viable plan to convert US GDP from an inflation exporter built on the back of cheap imports into an economy that can produce tangible internal growth, preferably some of which can be exported. If it's all spending and no real growth, then yes, you're right, we could have some issues here.
RW,
What you get back from the repayments is surely going to be spent somewhere else to prop up the system- one way or another (see PBGC, FDIC, state governments, GM, Chrysler, Ford, etc). And even if you got the entire 700 billion back, that is approximately 1/2 of the deficit for a single year, but the deficits in excess of 1.2 trillion/year are projected to continue over the next ten.
Do you really think that any TARP funds repaid will go to deficit reduction - how about a shiny, new national healthcare system? Another union bailout? Maybe a California bailout?
Please - that money is gone and spent, we just don't know where.
Nelson,
"If I were in charge of making China better, I'd invest in China."
What do you think they are doing?
By investing in US Treasuries they are keeping the value of the Renmimbi low to stimulate exports. If they converted their USD to Renmimdi to invest in domestic items the value of the Renmimbi would soar and their exports would collapse.
Why do you think they bought all those Treasuries to begin with?
By investing in US Treasuries they are keeping the value of the Renmimbi low to stimulate exports. If they converted their USD to Renmimdi to invest in domestic items the value of the Renmimbi would soar and their exports would collapse.
Subsidizing exports doesn't improve China, it improves the countries China exports to. You don't get rich by merely exporting goods for paper assets. You get rich by creating value. China could focus its efforts on cleaning up it's water supply and air quality, it could allow its currency to appreciate and import all kinds of good things, like food, technology, concrete, energy, etc... Basically it could use its wealth to build up its infrastructure rather than ours.
I'm not disagreeing with the suggestion that China should clean up its water supply. But I'm pretty sure your more likely to get rich building machined industrial parts or injection molded parts rather than cleaning up the water and air supply like you suggest.
I'm not suggesting that we should pollute our way to prosperity, but you seem to be suggesting that they can clean their way to prosperity.
Here's a test. Clean up your yard. Make it look perfect. Clean up your house, make it look perfect. Are you any wealthier?
Now try this. Build a factory in your backyard. Sell parts in your factory. Are you any wealthier?
But I'm pretty sure your more likely to get rich building machined industrial parts or injection molded parts rather than cleaning up the water and air supply like you suggest.
I'm trying to say, that clean air and clean water are "riches" in their own right. In this sense I really mean rich as in quality of life rather than how much paper one has accumulated. A bajillion dollars is worth less than clean water, clean air and a doubling of life span. It's about knowing the difference between price and value.
Here's a test. Clean up your yard. Make it look perfect. Clean up your house, make it look perfect. Are you any wealthier?Assuming I value those things more than leisure time my quality of life just increased and I am therefore richer.
Now try this. Build a factory in your backyard. Sell parts in your factory. Are you any wealthier?Depends what I get out of it. Running a factory takes a lot of time and effort and there's no guarantee I'll make a profit. What about pollution, does this mean I won't be able to breathe well in my own house? Taxes? Regulation? Possible bankruptcy? Seems like quite a hassle to me.
Nelson,
"I'm trying to say, that clean air and clean water are "riches" in their own right. "
This is true and entirely baloney at the same time. Go seek out that tribe in the Amazon with clean water and air and forests and live with them if you think they are so rich or well off.
China very much has an air pollution problem. But you only care about the air pollution problem when you have a good job and food on the table.
This is true and entirely baloney at the same time. Go seek out that tribe in the Amazon with clean water and air and forests and live with them if you think they are so rich or well off.
Why? We have reasonably clean air and water here along with many things the Amazonians don't have. My quality of life is higher here. If you gave me a choice of living in the most polluted place in China or living with the tribe, I'd consider the tribe.
I only wish that we'd used all that Chinese currency to invest in our infrastructure instead of multimillion dollar salaries/bonuses for jackasses and absurdly expensive condos for dummies.
Largely, we did. Take a look around you and see it instead of whining about imagined slights.
"Subsidizing exports doesn't improve China, it improves the countries China exports to."
Clearly you are mistaken. Subsidized exporting has been instrumental in getting China from zero to now in such a short span of time, and they obviously intend to keep riding that horse as long as it produces more urban and industrial infrastructure. They will worry about spending all of their accumulated savings once they have a self-sustaining consumer class within their own borders.
Talking about clean air and water may give rich westerners the warm fuzzies, but that's because a majority of their citizens are wealthy enough to have met all their primary needs indefinitely, and can therefore afford to spend money improving the beauty and cleanliness of their processes and living environment. Present US environmental policy is the fruit of 40 years of having a viable environmentalist movement operating in tandem with a maturing, diversified economy. China has been in a high-growth phase for only about 30 years, mostly industrial, and still has about 130 million citizens to raise out of absolute poverty.
If they free up their foreign currency reserves too quickly, export viability is reduced (with India being quite happy to take up the slack), and internal demand will not sustain the level of industrialization they have achieved. That would result in a severe recession and public unrest, exactly the last thing a loosely-knit totalitarian government needs when confronting a billion people who have tasted money.
Clearly you are mistaken.
You think buying US bonds is the best possible use of their money. Why should entrepreneurs even start businesses? Clearly they're wasting their time and money when they could just sit back and buy government bonds instead.
China can build up its own economy with or without exports. They have the largest market in the world. Exports are only useful for the imports one can get from them, otherwise we could base our entire economy on creating stuff then sending it off to outer space.
Nelson,
I was not aware that the Chinese consumer has an insatiable lust for: flat screens, new computers every year, a huge mess of kitchen gadgets, after market car parts, surf apparel, snow board gear bags, roller blades, and the list goes on and on...
Eventually they will have as diverse a demand as western economies. But right now we demand and consume a whole lot more than they do.
Sam X,
They could have invested in things other than flat screens. To the extent that they have invested in flat screens for export, that doesn't mean they can't allow their currency to rise and import things they really do want/need.
Certainly whatever they invest in, it shouldn't have been US bonds. Those things are going to be worth less soon and the Chinese won't have any gain to show for all of their hard work.
You think buying US bonds is the best possible use of their money.
No, rather it is clear that they think so.
Why should entrepreneurs even start businesses? Clearly they're wasting their time and money when they could just sit back and buy government bonds instead.
Why should the Chinese government be starting businesses when their current practice of buying US treasuries, and refusing to let the renminbi float on the open market, is permitting entreupreneurs to open new industrial businesses at a prodigious rate?
China can build up its own economy with or without exports.
You are missing the point entirely. China has concluded that an export-lead industrilization is the most efficient policy at the present time. As evidence for this, in 30 years they have gone from ~64% poverty to ~10%.
They have the largest market in the world.
Only when that market is wealthy enough to buy the products it can make. Before the late 1970s, the majority of Chinese were living somewhere in the range of subsistence farming. A subsistence farmer does not even have a concept of retail consumer goods.
Exports are only useful for the imports one can get from them, otherwise we could base our entire economy on creating stuff then sending it off to outer space.
Outer Space doesn't pay money for the goods it receives. International trade is not exclusively a barter system, and you don't seem to understand that there are both short-term and long-term goals at work here. The export advantage they gain now by investing in US treasuries is enabling rapid economic growth, which will then produce a maturing middle class, which will then provide enough domestic demand to sustain the country's own industrial output. And it appears they're going to pull off this complete economic transformation, for 1.3B people, in a total of about 60-75 years.
"Not heavy inflation for a decade but a 50% dollar sell off in, say, the space of a week."
It would be party time at Boeing, CAT, McDonalds, Coke, Pepsi, on all the farms and ranches, a real boost for our exports. We are the worlds 3rd largest exporter - imagine our market share with a 50% cost advantage.
Uh huh. Seems to me there might be a few downsides too.
Like? Oil goign from 60 to 90 a barrel - that's really not the end of the world. Fewer F-150's and more Civics and we've solved 90% of the problem.
You need to remember that the US is self sufficient in nearly all raw materials with the exception of Oil. Indeed we are the Saudi Arabia of both Coal and Food.
The problematic math in this thread continues! In a 50% dollar sell off situation oil would go from 60 to 120/barrel. But I ride a bike. So, meh.
Massive inflation at home would result, whether we are producing the raw materials or not.
And God help everyone trying to get along on a fixed income.
Which coal could be converted into oil, not to mention shale oil, offshore, ANWAR etc. I guess the only way to make exploiting those palatable is to have $100+ oil. Except here's the rub - that price is painful for the US, but it is crippling for many other countries - especially poor ones. If the US dollar really tanks, what will that do for high-cost countries like Japan and Germany that sell a lot into the US? Sure you have Bubba-Benzs built here, but what about the parts?
Where did they become educated in these economic matters and who is their therapist. Does it even matter?
China could focus its efforts on cleaning up it's water supply and air quality, it could allow its currency to appreciate and import all kinds of good things, like food, technology, concrete, energy, etc... Basically it could use its wealth to build up its infrastructure rather than ours.
You are 100% correct. I just wonder why they didn't do that.
Does anyone have any thoughts? Is it just bad neo-mercantilist policies?
They could certainly do better, but I China's industrial growth must be leading to infrastructure growth. You can't move raw materials and finished goods around without infrastructure.
Obviously there are a lot of places that have poor infrastructure (but the same can be said of the US, China is just on a large scale, it won't happen over night in China).
China has a very fast growth rate and it's not 100% focused on growing its own demand. Too much growth would be bad for China, and I think they realize this (they've hired quite a few top economists to advise them).
I sometimes wonder if China has a strategy to grow its economy supplying ours, and once we are completely indebted to them they can easily switch from supplying our demand to supplying their own internal demand. They won't need us anymore and will be their own customers. We won't have anyone to supply us and we'll owe them a bunch of money.
That last paragraph pretty well captures it IMO. They're going to use Western exports, the US primarily, to build industrial and urban infrastructure until a functional middle class has emerged within their own borders. Once that middle class is able to sustain internal demand for industrial and consumer goods, they'll start spending their enormous foreign currency horde to fund rapid economic diversification and military build-out, and everyone else can simply deal with whatever consequences result.
I sometimes wonder if China has a strategy to grow its economy supplying ours, and once we are completely indebted to them they can easily switch from supplying our demand to supplying their own internal demand.
It's wasted effort to oversupply our economy though. They could have used all that time and effort to grow their own economy more directly. You only need to export to gain those things that are more easily made by others. I could understand if they were importing industrial machinery with their profits, but buying US bonds was a complete waste.
You keep saying things that suggest you are thinking through this topic by good intentions rather than a working knowledge of how these things take place. Example:
"They could have used all that time and effort to grow their own economy more directly."
What does that even mean? Have you read any of the literature on economic development, and seen how the most rapid developers progressed? Export-lead industrialization has been an important factor in development for Japan, Singapore, and Korea, each of which went from rice paddies to information technology in about 50-60 years' time, and did so under semi-authoritarian governments.
China is simply a large-scale experiment in the same philosophy, although at a slightly slower pace since Mao sort of trashed the place before things got turned around in the late 1970s. Balanced trade in a diversified economy is a luxury of mature economies; it is not the path by which they arise. The entire western world got rich by industrializing first, then diversifying later, and some of them spent a couple or hundred years or three in the doing of it because global trade wasn't as efficient as it is now, and there weren't ridiculously wealthy markets available to absorb an indefinite quantity of industrial production.
David Brooks hit on something the other day that I had found jarring, those odd press conferences when powerful people in their organizations are brought out on to the White House lawn and promises from them reported that you have a feeling they would rather not be involved in, 'promises to become part of the nonprofit sector without changing jobs.' That may work for government regulated industries, and what isn't, but the Chinese premier has already declined his RSVP and so may other investors.
Nelson,
"They could have used all that time and effort to grow their own economy more directly."
How would you propose they do that?
China circa 1975 was basically at 0. It's a chicken and egg problem. Without consumers there are no factories, without factories there are no consumers. The best bet for them is to produce items for export thus providing the demand essential to jump-starting their economy. Even to this day their just isn't the domestic demand to support all those factory jobs. Thus they have no choice but to continue to buy our bonds.
How would you propose they do that?
Decide what they want, then do that. Need more food? Grow food. Need houses? Build houses. Want phones? Manufacture phones. Clothes? Easy. Need external resources? Export goods and buy resources (but not bonds!).
Basically, they have more man power than any other nation on Earth. They can acquire resources through trade. Combine manpower and resources and you can create anything you want or need. But wasting money on bonds gives them no usable resources.
I never said factories or trade were bad in and of themselves, but I did say they're only valuable for what you get from them. I can completely see them making low cost goods for us in return for things they can use. But I can not see them making low cost goods for us in return for useless pieces of treasury obligations.
An analogy would be making things your whole life for The Man in return for IOUs. 50 years later The Man dies penniless and the IOUs become worthless. What have you gained?
That analogy doesn't work. You are setting the Chinese government as an absolute proxy for the entire Chinese population and economy, which it is not. The United States could default on its entire scope of treasury obligations tomorrow morning and although it would be a tremendous shock to the entire global economy, it won't make all of the new Chinese economic and urban infrastructure, or the emerging middle class within its population, just vanish.
They can have even more/better infrastructure if they don't squander their extra money on useless bonds and instead invested directly in their own country. When we were building up our economy, we didn't purchase Brittish bonds. We invested in ourselves through a combination of government programs such as the Rural Electrification Administration and Eisenhower Highway System as well as privately though free trade and a relatively welcoming business environment. It is just a waste of resources to prop up other countries if our goal is a growing domestic economy.
Nelson,
You are wrong. During the 1950's our federal government often had a surplus. Where was it? In cash, sort of like bonds. China is stuck with a couple of problems. First parts of it are growing just about as fast as it is humanly possible to grow, second, they have about 25 million new people moving to the cities EVERY YEAR and they need jobs. So, they have to find even more ways to expand. Still they have surplus money, where do they put it? They decided bonds are the place to put it so they have that money later.
"Decide what they want, then do that. Need more food? Grow food. Need houses? Build houses. Want phones? Manufacture phones. Clothes? Easy. Need external resources? Export goods and buy resources (but not bonds!)."
Isn't that what Mao tried?
How, as the leader of the Chinese Communist Party circa 1975, do you: "grow more food", "build houses", "manufacture phones"?
I become capitalist and institute a system of private property rights. My people can then choose for themselves what they want and how to go about acquiring it. I can supply currency and taxation, a justice system and land. The rest is up to them.
Megan,
Thank you for doing great work bringing mainstream attention to these issues.
Keep it up!
W.C. Varones
Someone upstream wondered why China was buying U.S. Treasuries rather than investing in their own infrastructure. The answer is that they ARE investing in their own infrastructure as much as possible, with the remainder monies being invested.
For example, there is a world-wide shortage of concrete because of Chinese building. Same for other materials. These things don't happen instantaneously, you know. Remember the shovel-ready projects of the stimulus bill? Even the most ready projects weren't starting for 2 months. Shovel-ready usually means all the paperwork and planning is in place, but the raw materials aren't. Finding, buying, and shipping all take finite time and resources.
Mouse,
What does that even mean? Have you read any of the literature on economic development, and seen how the most rapid developers progressed? Export-lead industrialization has been an important factor in development for Japan, Singapore, and Korea, each of which went from rice paddies to information technology in about 50-60 years' time, and did so under semi-authoritarian governments.
China is simply a large-scale experiment in the same philosophy, although at a slightly slower pace since Mao sort of trashed the place before things got turned around in the late 1970s. Balanced trade in a diversified economy is a luxury of mature economies; it is not the path by which they arise. The entire western world got rich by industrializing first, then diversifying later, and some of them spent a couple or hundred years or three in the doing of it because global trade wasn't as efficient as it is now, and there weren't ridiculously wealthy markets available to absorb an indefinite quantity of industrial production.
Mouse...You, sir, are a genius! That was one of the most brilliant and concise things I've seen written by anyone in quite some time.
the deficits in excess of 1.2 trillion/year are projected to continue over the next ten.
If you use the administration forecast, that is not correct. They are forecasting deficits in the several hundred billion range, not the trillions.
There may be a misunderstanding here of what a "deficit" is. A deficit is an annual shortfall between annual outlays and annual receipts. A one-time payment such as TARP does not carry forward into the calculation of subsequent years' deficits.
Every year's calculation starts from zero, and if there are repayments to TARP, those will belong in the receipts category, necessarily offsetting the outlays that are part of the deficit calculation. If you spend $100 on TARP in 2009 and never see it again, that amount is not repeated in the 2010 number, it's just gone.
Yes, and almost no one believes the administration's projections, not even the CBO. No one has included multiple TARPs or stimulus in the projections of future deficits. As I tried to point out, TARP is only 700 billion dollars, and its repayment, even if you got all of it back (which you won't), would not significantly affect the accumulated debt totals projected over the next 10 years. Why is this so hard to understand? TARP is a rounding error in the coming debt flood (and that fact alone is a scary thought).
I hope you'll continue to keep the focus on this. I have to believe, for instance, that if voters had known in November 2008 that the new administration was going to plunge so much money into so many private companies, or that the price of universal healthcare was going to be a massive tax hike, the debates would have been very different. Especially, we owe it to young people who will bear more of the debt burden than older ones.