Re: The U.S. Trade Deficit

On Sun, 21 Aug 2005 04:08:37 GMT, "Bill" <xxx@xxxxx> wrote:
>
>"William F Hummel" <wfhummel@xxxxxxxxxxx> wrote in message
>news:coofg1t793f0umfvf52macrk6nit20it57@xxxxxxxxxx
>> 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.
>
>That's essentially circular. Because there has not been a run there will not
>be one.

I simply presented a counterfactual example.

>Also, if you look at other currencies, such as the euro, there is
>really not a strong enough bank there.
>
That is, in your opinion, I assume. The ECB is a strong bank, but it
has a different policy in monetary matters than the BOJ.

>>>> 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.
>
>Mortages are not real estate.

Really ? "A mortgage (Law French for "dead pledge") is a device used
to create a lien on real estate by contract. It is used as a method
by which individuals or businesses can buy residential or commercial
property without paying the full value up front."
http://en.wikipedia.org/wiki/Mortgage

>But what examples are you thinking of? It
>appears these people got into this because they were looking for a higher
>return with little risk. Once you see risk in the US is it not possible that
>people will start to look to other countries?

Yes, it's possible, but that's lost in the noise in terms of its
effect on the huge currency market which trade US$ of over one
trillion per day.
>
>>>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.
>>
>You have just said that there may be no limit to how much debt the US may take
>on.

Indeed I did, though I remain agnostic on the issue. However if you
believe there is such a limit, then please give us your rationale and
the approximate dollar amount of the limit.
>
>> 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.
>
>I don't think that is true.

We are all free to state our beliefs, but they are not a substitute
for rationale argument.
>
>> Otherwise there would be other forms of money in
>> general use, such as bank notes.
>
>First, it is against the law to start your own form of money. Second because
>two things happen does not prove cause and effect.

At present, bank notes are not allowed. However if U.S. taxes were no
longer collected, it is highly likely that the dollar would lose value
to the point where other forms of money, perhaps including something
like banknotes, would become widely used.

There are many examples of governments whose currencies became almost
worthless because they failed to, or were unable to, enforce tax
collection. In most of those cases, the citizenry adopted a strong
foreign currency as its de facto money. The US paper dollar is now
used in many countries for that very reason.
>
>> 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.
>
>Well that's my whole point. There is a limit to how much you can borrow. If it
>perceived that you may approach that limit the value of the dollar goes down.
>
You started by stating a premise as a fact. You then followed that
with a hypothetical to draw a conclusion. Is that what you mean by a
circular argument?

My statement above was in response to your question:
>>Why collect any taxes at all? Why not just borrow the money?
I explained why borrowing money is not an option if the government
doesn't collect taxes. A currency will soon lose its value in the
eyes of the public when the government cannot or does not collect
taxes. When a currency becomes weak, inflation in that currency runs
high, and no one is going to buy the governments's bonds. That's why
many governments in the past have had to borrow in a foreign currency
-- Mexico and Argentina are fairly recent examples.

>>>
>>>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.
>
>In that instance yes, becuase the Fed. was significantly cutting back on the
>money supply and put us into recession.
>
The Fed doesn't really cut back on the money supply because it doesn't
have that degree of control. In fact it can't even control the issue
of its own liabilities, including bank reserves. The money supply
varies as a function of the demand for bank loans and the willingness
of banks to lend. In that episode, the Fed raised interest rates high
enough to dry up the demand for bank loans, and thus tanked the
economy, which was its real objective.

>But if people begin to believe you
>will be unable to pay your debts or must print money to do so then your
>currency becomes of less value.

The value of the currency in terms of its purchasing power in goods
and services is virtually unrelated to the views of people on the
ability of the government to pay its debts. There are a lot of
people, apparently yourself included, who fear the Treasury cannot
repay its growing debt under Bush. Yet the inflation rate has
remained low, well within the target range of the Fed.
.

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