Federal deficit for 2010 is 1,000 billion. It is money mainly spent domestically, but financed mainly from abroad. Since it is money that is never actually going to be paid back it doesn’t count as capital dwindling. Americans aren’t going to one day ship their locomotives to China to pay it all back - they are going to ship paper notes. It is not a liability so much as it is a gift. But it does mean Americans spend 1,000 billion more of world’s wealth than they create. And since this can not go on indefinetely they are one day going to have to do without an annual Keynesian stimulus of 1,000 billion from the ROTW.
“I remember that Schiff has said that said that the Chinese can just buy their own manufactured goods, but won’t that require a huge reallocation of resources which would involve unemployment and societal instability?”
Sure, but those are temporary problems, while ours are deep seated. If you have afactory that makes luxury cars that has to be fiddled with to make economy cars [=China], you are way better off than the guy with no factory at all [=USA].
So you are saying that even though we have to hand over 13 trillion dollars, 94 percent of our GDP, to foreigners, we must be in good shape, producing more than we are consuming? Imagine if you had to hand over 94 percent of everything in your house to someone, in return for nothing.
That is debt. We didn’t hand over anything, yet.
As for the argument that we must be producing, or else how could we be paying wages? We are borrowing to pay wages.
No, private companies are not borrowing to pay wages (some might be, but most are not).
Peter Schiff’s argument about without the Chines buying our treasuries we are ruined is very simple. The US govt plans to spend 2 trillion dollars a year, every year, more than it takes in. Where is the difference coming from? Borrowed from the Chinese. If they stop lending us [=stop buying our treasuries], do you think the govt will stop spending?
China only owns about 1/10th of our treasuries.
So suppose I make $6,000 a year and borrow $94,000 a year [which I spend to the last penny], for a total “income” of $100,000. My wife tells me this can’t go on, we are headed down a cliff.
“Oh, no dear. Were we in trouble, we would be experiencing capital deaccumilation. But look at our lovely house.It is bursting with goodies and capital.”
“It’s bursting with things we can’t afford, and will have to sell off to repay our debtors.”
“Oh, dear wife, you little simpleton. We haven’t handed over anything, yet.”
Is this how you run your finances, Jonathan? Do you think anyone who does can be considered “producing more than he is consuming”?
As for the argument that “We must be producing, how else could we pay wages?” The US govt, which accounts for a full THIRD of the total debt to foreigners [see the wiki in ealier post] is certainly not producing anything. It pays wages by, surprise, money printing or borrowing money from the Chinese and others.
It’s like arguing that the family above must be in great shape because part of that $94,000 they borrowed is given tho the kiddies in allowances, and besides they are counterfieters.
And the private sector, which is the other two thirds, pays wages, BUT THOSE WAGES ARE NOT ENOUGH to pay for all the stuff we are importing. The average household is in debt up to the eyeballs. Meaning, by definition, they are NOT producing enough to pay for all they are consuming. That’s what being in debt means.
Let me quote from the WSJ of March 2010:
Total U.S. household debt, including mortgages and credit-card balances, fell 1.7% in 2009 to $13.5 trillion, the Federal Reserve reported Thursday—the first annual drop since records began in 1945. The debt amounts to $43,874 per U.S. resident.
"China only owns about 1/10th of our treasuries. " According to here it’s double that, a full fifth, but that’s not the point.
If they stop, who do you think will pick up the slack? They buy far far more than anyone else. So if they finally smell a rat, do you think there will be some simpleton country who will step up and say “The Chinese no longer trust you, USA, but I do. And I’m rich enough to lend you what they were.”
I highly doubt it. What will happen is that when the Chinese leave the sinking ship, so will everyone else. Exactly as happened to Greece and Ireland and Iceland and is going to happen to Spain and Portugal and the UK. I think that is Peter Schiff’s argument. If you think it’s absurd, I hope you are right.
Smiling Dave,
Is this how you run your finances, Jonathan? Do you think anyone who does can be considered “producing more than he is consuming”?
You’re making the assumption that this represents most people’s finances. I don’t think this is the case. This certainly isn’t true for my family, or very many families I do know. Is it true for you and your family? I’m sure there are a lot of people in debt, but I’m not sure this makes up the majority of the United States. I think it’s an exaggeration.
As for the argument that “We must be producing, how else could we pay wages?” The US govt, which accounts for a full THIRD of the total debt to foreigners [see the wiki in ealier post] is certainly not producing anything. It pays wages by, surprise, money printing or borrowing money from the Chinese and others.
That’s great, but the U.S. Government is not responsible for paying everybody’s wages. Numbers vary, but I’ve seen figures up to 16% of the work force is employed by some government institution. Of course, this is largely the fruit of recent government expansion; in 2006-2007 it was 8% according to the BLS.
It’s like arguing that the family above must be in great shape because part of that $94,000 they borrowed is given tho the kiddies in allowances, and besides they are counterfieters.
I don’t get your point here. Who has borrowed what? Is it bad that people borrow in general (otherwise, how do industries get access to capital they haven’t accumulated themselves?)? How do you know that all the money borrowed has gone towards consumption? The argument seems rather weak.
In terms of private debt (whether this represents consumption or production is another thing) has been falling, while household savings has been rising in the past two years (the latter has risen largely because of higher debt burdens, but the debt burden is falling). By the way, what does “up to the eyeballs” really mean? These are meaningless figures of speech which offer no tangible analysis on reality.
On the average you quote, that’s great but it’s meaningless aggregation. How much is owed by each income quintile? I’m betting that most of the burden has fallen on higher income families, rather than lower income families.
By the way, what other debt statistics have you looked at? Give me a causal relationship been high private household debt, mediocre savings rates, and a loss in production. Should me how the mass of statistics you’ve gathered proves that we are currently facing capital deaccumulation.
If they stop, who do you think will pick up the slack? They buy far far more than anyone else.
Far far more than Japan? Who needs to “pick up the slack”? Governments cannot go bankrupt. They can only inflate their currency until their currency is worthless, but how long will this process last? I wouldn’t be so quick to take on apocalyptic perspectives of our future.
Exactly as happened to Greece and Ireland and Iceland and is going to happen to Spain and Portugal and the UK.
Neither of these countries have their own currencies. I agree that currency/debt inflation cannot go on forever, but the process can go on for a very long time, and it’s pointless to argue on ends since we don’t know what ends there will ultimately be. Will our government continue to increase spending when the dollar begins to lose value at a much higher pace? Or, will it prefer to cut spending? In any case, if China ceases to buy t-bills (which is already unlikely) the result will be apocalyptic. The process is much longer and requires many more caveats.
Jonathan, TY for your long considered reply. My comments will follow in bold.
Have said this before, and I’m not sure what the exact quotes that are being mentioned here, but in the past I have watched Schiff get a little lazy and say things like we need to make more ‘stuff’ in America. That line of thinking is a bit worrying, because a potectionist would love to jump on board with that and say “amen, brother!” And would call for tariffs on foreign goods and subsidies for manufacturing companies, etc. Now I do think that there ought to be some deregulation and some loosening of labor laws and on immigration laws, but even after all of that, I still wonder how much economic sense it makes to ‘make stuff’ in the US. Obviously more than in the current climate, but I just hope lay folks don’t get held up on the us vs. them, they took r jobs mentality.
I wonder the same thing when Schiff says we need more manufacturing jobs. Who wants an American filled with low-level, heavy industry jobs? Steel mills, cheap Wal-Mart product factories, and cheap car factories do not create affluent middle class jobs. Computer programs, airplane designs, pharmaceutical research, and biotech innovations are the kind of “stuff” I would like to see Americans making. Let the Chinese work long hour in smelly factories while we enjoy a high standard of living (not based on debt).
Note: I’m not calling for any sort of policy to promote this or that industry, I’m just pointing out that most jobs making “stuff” suck.
Joe,
Peter Schiff doesn’t mean we need to make more stuff by imposing tarrifs. He means by making our stuff more competitive. As you say, by deregulation and loosening of labor laws and immigration laws [allowing people in without giving them free welfare and healthcare etc].
The point of making stuff here is that if we buy it from China, how are we going to pay them for it? The way it is now, they lend us the money to buy from them. Which is all well and good, until they wise up and realize we will never pay them back. So they will stop selling to us.
What will we do then? We won’t be able to buy Chinese goods, we don’t make our own, from whence cometh our salvation?
GooPC,
Sure. I would love to have a job as a philosopher, not getting my hands dirty, just paid to think whistful thoughts and maybe read comic books and watch the Twilight Zone.
Sadly, there is no demand for the job I want. Similarly. all the things you mention are great, but the ugly fact is that there is not enough demand for the product such jobs produce. There is great demand, however, for those smelly things the Chinese are doing.
The proof of this fact is that we buy 50 billion dollars a month more of their stuff than they buy of ours. Every month, for years and years.
I am pretty sure that Schiff didn’t mean imposing tariffs, my point was that when he is on tv for just a few minutes, and he only says things like we need to make more stuff, we hardly make anything in this country anymore, OTHER people can take that and run in the opposite direction if you don’t qualify your position. I think that Schiff might have purposefully left it out in order to appeal to more people, because there are plenty of voters out there who would have had a gut reaction like, “hell yea, we need more factories” etc.
Schiff is just talking plane nonsense. Enough with the apologies.
Good luck to you
I am not in the business of reading people’s minds and interpreting between the lines. Schiff is explicitly invoking mercantalist fallacies. Either he does a terrible job of getting his thoughts across, or he needs to pick up a copy of the latest pocket edition of Human Action and polish up on his Austrian economics.
Edit: the same goes for Marc Faber.
AFAIK, Schiff is a free market Austrian. If he isn’t, then the following doesn’t necessarily apply to what Schiff is thinking, but nevertheless something that I think is true.
Schiff is right that the U.S needs to produce more “stuff”, because it is clear that our current economic setup isn’t working. We have regulated and inflated our way to a phony “consumer based” service economy. While it is certaintly economically possible (and feasible for the U.S in the future) to be a real service based economy, since the 70s the U.S tried to jump start that goal without the requisite savings and productivity. Through various regulations such as OSHA and other laws that overprice labor, environmental “protections” like our oil cessations in the west/Alaska, higher taxes and less business friendly rules relative to other nations, America effectively killed its comparative advantage in many areas of production. It is a profound wonder that one of the most naturally endowed nations in the world cannot use its resources to produce goods and jobs, and probably more efficiently than its cheaper/less productive emerging market competitors. The result of these disatrous policies is a heavily indebted nation that relies on foreigners buying debt in order to maintain its veil of artifical prosperity. If foreigners weren’t there to support our burgeoning consumer trade deficits and pecuniary debts, then there would have been no way for the U.S to maintain such a high standard of living. Interest rates would have been much higher domestically due to a smaller supply of loanable funds. The high U.S demand for imports due to the lack of domestic production and weaker foreign dollar confidence would have lead to an even faster depreciating dollar. Without exporting dollars and having foreigners buy our bonds, the Fed would mostly likely have had to monetize more debt, leading to greater price inflation. All of these would have limited U.S growth and made it unable for many Americans to purchase cheap Asian products.
All Schiff is asking for is a return to the free market via less inflation, regulation, and taxes, reopening many once profitable industries, allowing the U.S to produce “stuff”. This would increase savings and productivity, leading to a better standard of living in the long run. And perhaps after enough saving and a longer more capital intensive structure of production, the U.S could fully support itself through a service/high tech economy based on actual comparative advantage. But frankly I don’t think that is possible right now.
Great points, but Schiff doesn’t always make statements in this manner. I can’t cite any direct quotes right now, but in some interviews and in his book Crash Proof, he basically makes the claim that any nation at any time has to have a trade surplus to remain competitive.
When Schiff says that Americans need to make more “stuff” he often doesn’t preface his argument in the way you did. This leads to the implication that all service based economies as inherently not wealth producing and that only by “making stuff” can an economy grow and prosper.
Perhaps its because I read his book Crash Proof long ago (and haven’t really kept up with his recent developments), I’m not 100% sure what he says. I know he spoke positively about trade surpluses, but I don’t know if he said that a country has to have a trade surplus. Nor do I think he said every service based economy is phony, just America’s because it is artifically supported and is not sustainable in a free market environment. If you have some quotes that say otherwise, than its all said and done, but for now I’ll just take his statements as shorter versions of what I wrote.
Even if Schiff made some mistakes such as these, he is vastly better than any other financial analyst/quack that is on T.V these days.
He said a service based economy is fine, IF enough people buy the services and exchange them for the tangibles we need. But it’s not happening. We have a huge trade deficit that increases every day, so obviously our services are not being snapped up by the world, and no one is making the tangibles here in the US. So where will we get them from?
A trade deficit means that you arent making enough to pay for what you are buying. Which means you are getting into debt. Since this debt is not to invest in capital, but to consume, how will you repay?