Required Reading
February 24th, 2005 - 12:45 pm
I started – twice – to write about the dangers of a disorderly decline in the dollar, and what events might trigger it. Friedman today has said a lot of what I wanted to say, although he’s left out some important bits, too.
Read it anyway, and maybe I’ll get to finishing my little essay.
Is anyone else discouraged that supposedly realist, straight-talking types like Friedman can’t even suggest the possibility of reducing gov’t spending instead of raising taxes?
It’s amazing how often these ‘realists’ on both sides of the debate see impending doom that can only be averted by their political opponents giving in. Let a Friedman see a problem that demands reducing entitlement spending or a Steve Moore see a problem that demands tax increases, and then I’ll believe a crises is on the way.
I don’t have a clue about forex markets (other than knowing the word “forex”), but whenever I try to think about “savings rates”, “trade deficits”, etc – something seems amiss. Countries with big aggregate trade surpluses usually have crappy economies and big state bureaucracies, so a trade surplus doesn’t necessarily seem to be a good thing. (FYI: China has an aggregate trade deficit.) Also, I’m always suspicious of “economic problems” that appear to have remedies that involve massive protectionism and big taxes: trade deficit, meet Kyoto.
As for “savings rates”, I always have wondered how they are computed, and months of googling haven’t revealed a straight answer to some simple questions:
1. Is money in a 401K considered “savings”? Does the “employer match” count? How about trad or Roth IRAs?
2. How about money used to buy real-estate for investment purposes?
3. How about investments in stocks? Partnerships? Gold boullion (sp?) Tax-free municipal bonds?
We have investments in all the above, and I’ve considered all of them “savings”.
The reason I’ve wondered this is that the “1%” savings rate often quoted for the US seems awfully low, even with armies of idiots running up their credit cards. Given that countries with “high savings rates” often seem to be discussed in terms of parking hordes of cash in bank accounts that pay trivial interest rates (a frankly silly way to save unless you have few other choices), I’ve wondered if having more investment options makes the US “savings rate” lower than it would otherwise be?
The reason this is on-topic is that so much of the dollar discussion seems to revolve around high trade deficits and low US domestic savings rates. Since we’ve had “unsustainably” high trade deficits since I was a kid (and I’m 40), I do often wonder if they matter at all? As for the US savings rate, is it “real” or is it an artifact of bad data or wierd economic assumptions?
yeah i liked how cutting spending was unthinkable
also, i love how pundits complain that politicians are about to trigure a crisis.
Duh, that’s the freaking point. It is nearly impossible to fix policies before there is a crisis, especially if there is immediate pain for diffuse and medium to long term gain. See the history on interest rates in countries or situations where one does not have an independent central bank.
Does America need to be concerne about importing capital? Depends, and the current shape that it is importing it looks bad, given that it is hot money in government debt. But importing or exporting capital isn’t bad. Don’t be a mercantilist idiot! US has for most of its history imported capital, as there were many more opportunities than could be financed by the local capital stock (in terms of free cash). Post war there were more opportunities in other countries, notably European ones, for rebuilding and modernisation.
What has changed now? Europe is rebuilt, and has a hostile climate for business. Eastern Europe has some opportunities, but there are ongoing complications from liberalisation and integration with the EU. Emerging markets have some opportunities, but are hampered by anti-investment regulations (including China and India), currency controls, and the purchasing power of a dollar (you they can only absorb so much investment in a non-inflatoinary manner). The US has generally the most opportunity (dollar value, if not average return opportunity) and provides a safe haven for those in emerging markets that are rather uncomfortable with having all their eggs in one basket (i.e. essentially anyone who is remotely successful).
Would a dollar implosion be bad, and cause many nasty effects? yeah. Is it likely? no, but who knows about external shocks. Can we move to a better position… yeah, especially if we moved to the spending preferences that I, Stephen, Will and most of the readers share. These changes are only likley in the near term if we are in a desperate situation (i.e. one that would allow for an immediate reversal of the New Deal and its unconstitutional governmental intrusion into the economy and culture). I don’t think Tommy F. will like our changes either…
re savings rates: yes they are stupid, but they’re the stats we have (measuring investment is harder due to differences in reporting velocities and total % reported, savings rates are relatively easy to account for due to tracking of bank deposits for a variety of economic measures such as the various definitions of the money supply). The savings rate plunged dramatically during the internet boom as people moved out of cash and into equities… Japan has excellent savings rates, but this is the result of vast number of people sticking nearly all their money into postal savings accounts that have government guarantees but pay pitiful returns.
Savings rates are also high in countries where there is very little to spend money on (WWII america had great savings rates, as there were essentially no consumer goods to be purchased). Japan, China, and other countries following mercantilist policies have little (or at least relatively little) to spend money on, especially imports.
and yes the US almost always has trade deficits, and is likely to for the foreseeable future… this is what happens when you have an essentially free trade policy while most other countries are running essentially mercantilist systems. China’s deficit is less sustainable as it is the government’s military spending that creates a large amount of the trade deficit.
Steve, before you write your essay you might want to take a look at this post from macroblog.
Found this via Inside Iberian Notes today:
For all those predicting America’s economic doom due to its trade and / or budget deficits, read this piece from Foreign Affairs called “The Overstretch Myth”.
http://www.foreignaffairs.org/20050301facomment84201/david-h-levey-stuart-s-brown/the-overstretch-myth.html
Hope that doesn’t mess you up.
I started taking trade deficit worries a lot less seriously once it was pointed out to me that it only measured goods, not services or information. Things like intelectual property (movies, TV, music, software licenses…), consulting, or banking fees don’t count into the total. As those things have become a large portion of our exports, the traditional measurement has lost meaning.
He is either dumb or lying. The $ jumped after Ronnie cut taxes 25% in 81. The way to prop up the dollar is to lower taxes not raise them, Look at what happened afte allthe new taxes Bush 1 gave us. The dollar fell, not as much as it rose after the 81 tax cuts.
The fall of the dollar will lead to more inflation as it did from 1961-1981. Cutting fed spending is the way to go if you lact the will to cut taxes.
Don’t be a mercantilist idiot!
Amen.
Economics is one of the fields where common sense will get you in trouble. These days, the economy is truly global, and I’m not at all certain that the statistics we track mean what we think they mean. Seriously, look at the track record- we’ve been running record trade defecits for a long, long time now. That’s supposed to be a bad thing(tm), but the US economy keeps chugging along. The USD has declined significantly relative to other currencies… but the US economy keeps chugging along. And dollars keep flowing out of the country like nobody’s business… but stop and think about this for a minute- trade requires a medium of exchange that is widely accepted and avaliable in large quantities. The U$D fits the criteria, pretty much everything else doesn’t- either there aren’t enough of them circulating globally, or they aren’t widely accepted.
What I’m getting at is that the outflow of dollars that so many people think is a bad thing may actually be a tremendous boon to global trade and economic development, and that attempts to ‘fix’ the ‘problem’ may backfire badly. Furthermore, the more trade and economic development there is on this planet, the more customers the US will have for the expensive stuff we make. This is a good thing.
One thing I’ve always wondered…
The “trade deficit” is supposed to compare the dollar value of stuff leaving our shores to the dollar value of the stuff coming to our shores, right?
Is that the value as measured in the American market? If so, why on Earth would anyone expect us, in the aggregate, to ship out stuff that added up to as much value in our own market (or even more value!) as the stuff coming in? Wouldn’t a “trade deficit” mean that we were trading stuff valued less here for stuff valued more here, which seems to be the whole point of trading in the first place?
So a “trade deficit” means that we’re trading profitably, and a “trade surplus” would mean we’re getting screwed somehow…
Or am I missing something?
That’s how it works!
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