Re: The U.S. Trade Deficit


"William F Hummel" <wfhummel@xxxxxxxxxxx> wrote in message
news:as7hg1p72vmoceaaac554troc36aovaafo@xxxxxxxxxx
> 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.
>

But your argument is that it essentially can not happen. Not that it is
possible it will not happen.

>>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
>

Not to the holder of the mortage which is clearly what we were talking about.
You are avoiding the question. The holder of the mortage does not own real
estate.

>>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.

You are missing the point. The amount banks trade back and fourth with each
other is irrelevant. Once businessmen in other countries start pulling out,
that's the problem.

>>
>>>>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.

I don't know the dollar limit. It depends on the pscycology of the lender.
Once they begin they may not get paid back or they will get paid back in
inflated dollars then they will cut back on lending. When that starts, things
start snowballing.

>>
>>> 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.

And I disputed yours below.

>>
>>> 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.
>

How could that happen if it were against the law.

> 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.

Instead of collecting taxes why did they just not borrow? Because no one would
lend to them - is that not true? Why would no one lend to them - because they
did not believe they would be paid back or if the payback were in the home
currency it would be very much reduced in value. Is that not true? Why would
that be true? Because the home country can not collect enough to cover the
debt. Same in the US. If we borrow too much there may be a run on the
currency. Which was my point.

>>
>>> 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.
>

And as I explained above the amount of taxes also determines how much you can
borrow - not whether you can collect taxes.

>>>>
>>>>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.
>

It did raise interest rates a lot. But it also does have the ability to tell
banks the amount of reserves they must keep. However, I agree it was more of
an interest rate effect - though the rate of the increase in M1 did flatten.
However, your claim was that the Regan/Bush borrowing did not cause inflation
supporting your claim that there is no significant correlation between debt
and inflation. In this instance, it was the Fed. which stopped the inflation.
So your example does not support your point.

>>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.


You are putting words in my mouth that were never there. My statement was that
if SS privitization were to come into effect then it is possible that people
would begin to believe that the US Govt. would not be able to pay it debts and
there might be a run on the currency. You are changing that around to
something else and arguing against that.

Here is exactly what I said originally (a day ago):

"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."

Bill


.

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