Re: The U.S. Trade Deficit

On Sun, 21 Aug 2005 00:21:22 GMT, "Bill" <xxx@xxxxx> wrote:
>
>"William F Hummel" <wfhummel@xxxxxxxxxxx> wrote in message
>news:539fg1p4llcfshb83esgbjkmhkndg10c8d@xxxxxxxxxx

>> On Sat, 20 Aug 2005 20:55:12 GMT, "Bill" <xxx@xxxxx> wrote:
>>>
>>>You are not saying why it is unlikely you are only saying that it is
>>>unlikely.
>>
>> As long as the US economy remains strong, the US will continue to be
>> an attractive investment for foreigners. And as I explained in the
>> part you clipped out, there is so much foreign investment already in
>> the US due to the past U.S. trade deficits that foreign interests
>> would strongly oppose any significant drop in the forex value of the
>> dollar. For example, the central banks of Japan and hold over a
>> trillion dollars in US government bonds, They are certainly not going
>> to attack the dollar and forfeit the purchasing power of those assets.
>>
>> The US is a major market for the economies of Japan, China, and the
>> Eurozone. Their economies would be seriously hurt if the US dollar
>> plummeted against their own currencies. Thus the likelihood of forex
>> value of the dollar crashing is virtually nil.
>
>The banks may not have control. In the end the markets - including currency
>speculators - have a major role. But it does not have to be a rapid drop off.
>Could be slow.
>
The Bank of Japan has shown that it can keep the dollar/yen exchange
rate under reasonable control by buying huge amounts of dollars in
recent years.
>>>
>>>Here is a possible scenario. Many foreigners now hold US mortgages. These
>>>are
>>>now becoming riskier as people put less down, interest only, etc. Some
>>>suggest
>>>a housing bubble which may collapse in some areas. It is possible that
>>>people
>>>will being walking away from their homes and mortgages in this situation -
>>>leaving the foreigners with losses. They begin to attempt to get away from
>>>this risky business and into other currencies - dropping the value of the
>>>dollar.
>>
>> I don't see much connection between foreclosures on mortgages held by
>> foreigners in the U.S. and a drop in the forex value of the dollar.
>> If a foreigner lost his investment in a failed mortgage, he would have
>> no dollars to spend on other currencies, even if he were so inclined.
>
>They get some money out. Try to sell whatever securities they have left. No
>more new investment in mortages for sure. Not many good places to put the $s
>they are getting from selling goods. $ begins to drop, causing a sell off.
>
There are plenty of good investments for them to put their dollars
aside from real estate.
>>>
>>>Or a simpler one: Soc. Sec. privatization goes into effect and people become
>>>concerned about the ability of the govt. to pay off the large new debt.
>>>
>> I don't think SS privatization will ever happen. But even if it did
>> the government never has a problem covering its debts as long as they
>> are denominated in its own currency.
>
>So your argument is that the govt. can go into as much debt as it wants with
>no consequences.

I never made such an argument. In any case, no one knows how much
debt might create a problem because we have never encountered that
limit -- if indeed it actually exists.

The US debt/GDP ratio is now about 0.37. In 1946 it was about 1.14,
whereupon the economy went on a tear for the next 25 years. The
Japanese debt/GDP is now about 1.35, far higher than it has ever been
in the US, and their long bonds are selling at yields of less than 1%.

>Why collect any taxes at all? Why not just borrow the money?

The government's intrinsically worthless fiat money is valuable to the
private sector because that's what the private sector must surrender
in paying its taxes. Otherwise there would be other forms of money in
general use, such as bank notes. Also if taxes were not collected,
the government wouldn't be able to sell its bonds, so the alternative
you postulate is not realistic. The enforced collection of taxes is
essential to a working fiat money system.
>
>One reason is inflation. That essentially drops the value of the dollar
>relative to other currencies.
>
Yes, a high inflation rate will cause the forex value of the dollar to
gradually drop. However there is no significant correlation between
the debt and inflation. For example, Reagan and Bush quadrupled the
debt during the period 1981 - 1992, but inflation trended downwards
through that 12 year period.
.

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