Sunday, November 24, 2013

It matters...

The other day I took a very simple stab at debunking the age-old "the debt doesn't matter because we owe it to ourselves" myth.

Essentially:

With government debt (owed to ourselves): The future U.S. taxpayer pays, the U.S.
investor/bondholder receives. The community, therefore---according to the likes of Paul Krugman---doesn't suffer.

Without government debt: The U.S. taxpayer enjoys more of his future income, the U.S. investor invests in the private sector. The community, therefore, when compared to the with-government-debt scenario---forgetting for the moment the potential community benefits stemming from debt-financed government projects---gains.

Clearly---in the view of one who believes the private sector makes more productive use of resources---without is better.

Note: I know there's a reader out there who reads Paul Krugman, and who would, therefore, argue that during a recession---or even a period of slow-growth---investors are not investing, their money sits idle. It is entirely appropriate, therefore, for government to take that money off their hands (borrow it from them) and put it to use. Fund some projects, create some activity that the marketplace does not presently demand. Let's stimulate the housing and auto sectors, invest in education, buy some beef, pave something. Essentially skipping past the rough patch by getting that money off the shelf and into the hands of beneficent bureaucrats. Let them determine where the growth is to come from.

Well, there are volumes of empirical evidence that, in my view, destroys that argument. But for today I'll simply ask the reader to think in terms of incentives, and seasons. Who indeed would make the most of the finite resources at hand? Private sector actors competing in the marketplace, or politicians competing for the support of special interests. Recessions present golden opportunities for politicians to take care of those who have taken care of them (think Wall Street and auto workers), and to pave the way for new relationships. In terms of seasons: is the contraction phase not essential to the business cycle? Is that not where the excesses created during previous expansions are purged? Is not idleness essential to the pricing of opportunities? Won't idle resources turn active when prices adjust to what the market will bear? Shouldn't prices (even for labor) contract as the economy contracts?

Moving on: As I stated the other day, we do not nearly owe all of the national debt to "ourselves". Some $5+ trillion is owed to folks who happen to live beyond those lines you see on maps creating political boundaries between "us" and "them". So let's look at that:

Again, with government debt owed to "us", the U.S. taxpayer pays, the U.S. citizen/bondholder receives.

With government debt owed to "them", the U.S. taxpayer pays, the non-U.S. citizen/bondholder receives.

It presumably matters because the interest payments leave the U.S., right? Well, yes, they---those U.S. dollars---do. But, being that they're U.S. dollars (claims against U.S. stuff) they find their way home. You see, no foreigner would ever sell us the tiniest trinket, or buy a penny's worth of our government's debt if they had no use for U.S. dollars---for the stuff we produce here.

Note: I know there's a reader out there who would argue that it's much more complicated than what I just described. He/she would explain that China, for example, in the process of manipulating the currency exchange rate, prints its own currency to buy the U.S. dollars it uses to buy the U.S. debt. It goes like this:

  • Let's say during the course of a month, Chinese exporters sell $40 billion worth of stuff to U.S. Citizens.

  • And during the same month, U.S. exporters sell $10 billion worth of stuff to Chinese citizens.

  • That's a trade deficit of $30 billion.


Rather than allowing the exchange rate to adjust (the dollar to weaken) to compensate for the imbalance, the Chinese central bank prints brand new Yuan (roughly ¥180 billion today) and buys up the $30 billion, then goes and buys U.S. treasury bonds.

The end result being a stronger (than otherwise would've been) dollar/cheaper Chinese goods, thus boosting their exports to the U.S.

Okay, but that simply supports my point: In that view, China manipulates its currency for the express purpose of capturing more U.S. business, meaning more U.S. dollars---they simply wouldn't go there if there were no market for U.S. stuff. Oh, and by the way, I have absolutely no problem with other countries going to presumably great lengths to bring me great varieties of affordable stuff!

Clearly, as I've explained to this point, Krugman is dead wrong: The domicile of the lender makes no difference whatsoever. Well, in truth, it does. You see, if foreigners had no use for U.S. government debt---if, therefore, the pool of potential lenders consisted merely of U.S. citizens---imagine the interest rates the government would have to promise as it competed with other debt issuers to entice such a smaller market. All else being equal, interest rates (on all forms of debt) would be a lot (a lot!) higher. Therefore, contrary to the essence of Krugman's argument (not originally his by the way), it would matter, in a hugely bad way, if we only owed it to ourselves.

The problem my fellow Americans is not to whom we presently owe the debt, the problem is the ever-mounting debt itself: The burden it levies onto future taxpayers and the greater command of resources it places in the hands of politicians.

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