A few days ago I mentioned the risk that comes from regulatory regimes that encourage (or require) all institutions to manage risks in the same way. You mention the Basel II standards that funneled US assets into home mortgages. I think the same standards caused even worse behavior among European banks - Basel II standards defined sovereign debt from Euro zone countries as risk-free, so banks were relieved of responsibility for any sort of due diligence in lending to such countries. The Greeks did things that would be considered fraud if committed by individuals, but the banks (and through them, European governments) encouraged the fraud.
I don't go in for bogus demonization of either the "predatory lending" or Chinese varieties and view these characterization of frankly quite impressive and smart Chinese behaviors as mostly cynical propaganda for consumption by domestic audiences (politically) and courts (legally) because the judges will allow the exercise of exceptional authorities, but only when the claimed excuses are made both consistently and in the most brazenly and aggressively exaggerated manner possible (see, e.g., Racial Preference Regimes, any one of the two dozen always-annually-renewed - and literally Orwellian - "permanent emergencies".)
Weaning the US economy off of reliance on perpetually huge trade deficits and fiscal deficits and reconstituting completely atrophied domestic production capabilities in the face of crippling regulatory burdens is like the set "Shock Therapy" recommendations to quickly liberalize recently-communist states and move so far in the direction of "mixed economy" capitalism that, while painful, it would prevent the socialist backsliding that was thought to be a Latin-American style political certainty for any more gradual transition to market economies. Both the methods chosen and the apologia trying to rationalize them are quite rightfully ridiculed and lamented. But the outcome is the right one to pursue, and, let's face it, no one has proposed any more likely way to get to that destination.
It's sad that the patient was allowed to get to this decrepit point and the intervention didn't happen earlier when things could have been done better and for better stated reasons. But here we are, and there we need to go, and apparently we're going to have to rely on Gollum to lead us through the dumb-and-dishonest marshes to get there.
We’re now at that point in our national life when all of our problems are someone else’s fault. China must now play that role for all the poor choices we’ve made for decades. This is not to deny that China, and its quasi mercantile trading system is blameless. But we should look much closer to home for the causes and the solutions to our economic woes.
You can argue whose fault anything is. I’d say it’s 50/50 as China’s express policy is to subsidize domestic production and buying foreign and US financial assets is a necessary part of that strategy. Sure we don’t have to take the loan but it’s hard to turn down cheap money. It’s like donuts sitting on the table. Strikes me that if you want less government spending, you have to deal with the China issue. Why not tax inflows to financial assets? Anyway condemning people for taking cheap debt feels a bit like libertarian moralism. Cheap money creates credit bubbles. It has ever been thus. Of course the rational response was to take China’s cheap money to put it into productive research and infrastructure. There was a limit to what the private sector was going to do as we saw in the 2010s. To me it’s inevitable that the government will borrow in that situation and even more inevitable that it will go to non productive activities at some point.
Yes, then the rest of your post goes on to say it is not the government’s fault for borrowing because China wants to loan them money cheap. Condemning people for taking cheap debt feels like libertarian moralism? Is it just libertarians that say “don’t take on debt you can’t pay back” these days? No one else is expected to be responsible?
That's true, but that doesn't mean we give up on the incentive of expecting responsible behavior and punishing those who fail to be responsible when it is their job. Otherwise, what bad behavior is not acceptable? There are always incentives to do the wrong thing.
That’s a good line from Tyler Cowen, but surely I’ve heard that the roots of the borrowing lay with the Clinton administration and the pursuit of “equity” in home ownership? (And sprawl - the real, permanent, salient outcome.) A curious government goal in a free country.
Yet this obsession with who sleeps where, persists in another guise.
One can make a reasonable centrist case for policies that favor (e.g. partly subsidize) homeownership for non-expensive homes. Owners take better care of things than renters. Owners have more of a stake in the community and society.
This is not to defend 85%+ of what went on, nor all current policy, but partly subsidizing mortgages with 20% down payments up to the median nationwide home value by making the interest tax-deductible, and even implicitly insuring Fannie/Freddy for purchases of those mortgages *only*, is perfectly reasonable and arguably a good thing.
But that said, even if one agrees with my above paragraph - and lucia clearly does not - this core concept has been taken way too far and stretched far beyond the breaking point of anything good.
Sorry- Ben’s “helicopter” money phase in 2004 drove down yields and major exporting countries intervened massively to prevent their currencies from appreciating- not just China but most of Asia, Brazil, even the Gulf countries. The Euro area also exported lots of capital to the US (fed by trade deficits) as well as the PIIGS (target 2)
Commercial banks were shocked by the compression of net interest margin (falling US rates and falling PIIGs sovereign spreads post Euro) and had to reach for yield or risk to improve returns. You are right that Basel 2 and its preferential capital treatment of “AAA” securities was a factor - European banks jumped into CDOs and mortgage paper….but where did they get the dollars to do that (in part from $ sloshing around from trade deficits and currency manipulation)
Capital flows are a mirror image of trade flows (and either one can be the driver of the other depending upon circumstances) .
A reason large trade balances are destabilizing is that capital flows can be destabilizing (and much quicker to change). The Asian crisis, Russian crisis. GFC, PIIGs crisis, etc were all driven by capital flows in large part. You can’t borrow unless someone has cash to lend and of the lender is willing to part with cash on easy terms one borrows more.
Yes- it would be good if the US consumed less and borrowed less while Germany and China consumed more and exported less excess savings. This would also necessitate the US importing less.
So much of the criticism of Trump and his Administration is off base, overblown, disingenuous or outright dishonest, and makes claims with a certitude that is absurd
Since my comments are getting Likes and "advertisement" posts from this entity, I'm assuming it isn't you. Either way, it's a bit annoying and I hope something can be done about it.
I had 4 or 5 of them in my inbox this morning as well. Apart from the 'likes,' there was some seemingly bogus investment opportunity. Maybe it's the Chinese?
I do not think the Basil rules were intentionally make to favor home mortgages over other assets. It was just the failure to realize that there IS no "recourse" for the system as a whole except a Fed that will "do what it takes" to keep inflation (or NGDG dot) on target.
It was to some extent reactive to the S&L crisis of the 1980s. For various reasons the mortgage market became a favored method of guaranteeing a certain level of welfare in reaction to the Great Depression. The US and its junior partners have been rolling over these interventions continuously for policy reasons. The regular crises are features and not bugs from the perspective of the managers of the system.
I write mainly about US monetary policy, US fiscal policy, trade/industrial policy, and climate change policy.
I have my opinions about which US political party is by far the least bad and they are not hard to figure out, but I try to keep my analysis of the issues non-partisan.
Keynes said, “Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back.”
Which policy are you referring to? No down payment mortgages are probably never a good idea, but were they “policy”? The use of a fixed-rate mortgage as the primary vehicle for real estate finance is probably a mistake, too.
I wasn’t speaking of “policy” any more than MAGA is actual “policy”.
George W. Bush emphasized homeownership as a key part of the “American Dream” during his presidency. One notable statement came in a 2002 speech promoting his administration’s “Ownership Society” initiative, where he said:
“We want everybody in America to own their own home.”
This reflected his administration’s goal of increasing homeownership, particularly among minority and low-income Americans. Bush believed that homeownership fostered stronger communities, financial independence, and personal responsibility. To support this, policies were introduced to loosen lending restrictions, expand access to mortgage credit, and encourage private sector lending to underserved communities.
Critics later argued that these policies contributed to risky lending practices and played a role in the subprime mortgage crisis that led to the 2008 financial collapse. Still, Bush’s intention was rooted in a vision of broad economic inclusion through property ownership.
I DO want to focus on the policies. Maybe “wanting” everyone to own a home is OK, but the specific policies that resulted from that desire were bad of just went too far. It’s like wanting less net emissions of CO2, but instead of taxing CO2 net emissions we tried to shut down fossil fuel production projects.
I’m all for Making America Great [the “again” strikes me as anti-patriotic] But all the policies that Trump favors — tax-cutting deficits, restrictions on legal immigration, increased import barriers, less investment in science and technology — all go in the wrong direction and will Make America Poor Again [“again here being appropriate].
I appreciate focusing on policies (not unlike academic people always wanting others to “show their data”), but the reality (yes, reality) is that inspiration moves the madness — not so much policy.
So please, focus on policy but understand that my response to you was how things actually happened in 2008, policy or not.
Policy did not elect GWB or Trump and it did not start and stop the last several wars or, economic catastrophes. Policy be damned.
Everything that lives between policy is what does the dirty work.
Why should it be a "fault" to run a big trade deficit? I wouldn't even blame the government. When the government deficit declined in the late 1990s, the trade deficit didn't. If foreigners want to park their money here, interest rates will adjust in ways that make it beneficial for people, companies, and the government to borrow. If someone wants to lend you money very cheaply, and you have a good use for it, why say no?
Sometimes the foreigners have even been lending us money at negative real interest rates! What a steal!
Foreigners lend US dollars, which have never been at negative interest rates. Foreigners negative interest rates helped keep their currencies weak and exports strong
The fiscal deficit in America only represents a small portion of total capital flows.
But low yield capital inflows bid up the value of the dollar and make US exports less competitive. Nothing wrong with that, you just orient your production more to domestic rather than foreign demand.
Exports less competitive, imports more attractive, investment more attractive, etc. The point is there is noting inherently good or bad about an inflow/outflow of short term capital. It is bad if it result from otherwise bad policies and good if from good policies.
"Miranomics says that the United States is doing the world a favor by running trade deficits, and this has to stop."
This is far more likely true than it is a "misleading characterization of global finance." Most elite economists, like Arnold & Greg Mankiw are, rationalize their theories rather than face the reality that globalization & deindustrialization, as economic policies in reality, has immiserated millions of US workers, especially the large majority w/o college credentials. OK, failed to fulfill the American Dreams for millions, leaving them not-poor but not comfy; not really immiserated.
Thanks for great link.
Miran also, strongly, emphasizes the other Global Public Good that the US has been providing, since WW II -- the Pax Americana regime of fewer and more limited wars, with a vast expansion of trade & investment & human rights. Civilization.
Which is being provided significantly by American middle class.
Neither in this post above nor in Arnold's (fine) Principles, is there any discussion of ...
the barbarians. The violent looters & destroyers of civilization for whom the civilized provide a Common Defense against. That Civilization vs Barbarian axis in a great book I've read.
The rest of the world HAS been Free Riding on US defense expenditure, as the semi-World Policeman. Where is the "rich" EU ability to support Ukraine, w/o the US military?
It ain't there, despite Putin's army being shown to be far less capable than most elites had previously pontificated about.
For decades Arnold has argued against the huge US budget deficits, which I have and do agree with as sub-optimal, but I no longer think they are existential threats to the US. Losing a major war to a Chine which has calculated that Chinese military superiority over the US is sufficient to allow an invasion of Taiwan seems to be far more likely than a global financial problem due to the US debt/gnp ratio going up from 100% to 150% to 200% ... Japan has 255%.
The US needs to reindustrialize, and it might already be too late -- but probably not.
It looks like most of the world is "happy" that Trump is going to add a 10% tariff, only, and not for the Shoot The Moon tariffs from the flawed formula which were his opening public negotiation offer. Arnold's been wanting a lower deficit -- but only thru the unpopular cutting govt spending. He's given no credit to Trump & DOGE for cutting real waste & fraud, & publicizing it, despite it cutting more govt than Biden, Trump 45, Obama, or Bush43. Quite a lack of honesty & fair evaluation by Arnold, sadly.
I'm still very glad to be here reading Arnold's always thoughtful thoughts.
Quick thought on tariffs vs VAT -- while the unpopular VAT is a tax on consumption as economists say they want, tariffs are also a tax on consumption of consumer products, tho only those imported. So some 10-50% of a VAT, yet usually more popular with voters than other taxes, all of which reduce the deficit, tho mostly not spending.
Trump fanboy Don Surber writes about Trump pretty positively, yet truthfully:
Arnold writes "A big cut in U.S. government spending probably would do a great deal to reduce our trade deficit by reducing our borrowing from abroad."
The corollary to the above fact - the result of an accounting identity - is that increasing tariffs will do virtually nothing (except perhaps at the margin) to reduce our trade or current account deficit. For that matter, neither would reducing tariffs to zero, except the latter would render our private sector to be much more efficient.
Thanks Arnold. I would argue that the "predatory" lending was creating crazy loans & then securitizing & dumping them. Yes borrowers were predatory in a clueless way. The real predators were originators/ packagers who knew exactly what was going on.
Oh my God, no. The originators and packagers had convinced themselves that they really were getting rid of risk. They were, of course, wrong.
It would be nice (in a literature sort of way) if bad results were caused by bad guys doing things they knew were bad. The tragedy of life is that basically good people, not trying to do evil, can do things that have very bad consequences.
Thanks. Agree with the "good people" principle. We are too hasty to identify villains. However the people I knew back in the day who were making NINJA loans, selling houses financed by NINJA loans & securitizing & dumping NINJA loans had an inkling this was not going to go great.
The actual evil was bailing out Wall St. at 100 cents on the dollar (I actually subscribe to the idea that to have done nothing at all might have been worse and was too big a risk).
Also Obama stealing from GM bondholders to give to his union buddies - and SCOTUS not stopping him.
This is like blaming random restaurant guests on a random Tuesday night for their waiters drug addiction that caused his head-on collision that killed the family dog.
You got a problem with it?
American voters are not getting problem solvers but rather, they are getting problem makers. Looking at the data, that’s what they want.
Well, they want problem solvers, but they don't like what would be required to solve the problems. So they get people who promise problem-solving and promise none of the icky things. Which means they ain't gonna solve the problems and may actually make them worse.
"That we are a huge borrower is on us. The deficits that our Federal government runs have to be funded somehow. If foreigners were not willing to lend, then we would have to use domestic capital. Our interest rates would be higher and businesses would have to cut back on investment."
Yes, it is on us. And I agree that government deficits make it worse. But I don't agree that borrowing is what drives the flow of money or that it causes us to have a trade deficit. Here is my alternate explanation, for all to critique.
It is said that countries exporting to us have to accrue dollars. That is not quite true. If we were Venezuela or any of many other countries, we wouldn't be able to pay for foreign goods with our own currency. Exporters would demand another currency and we'd have to buy that one, driving down the value of ours. (Yes, someone still has to buy dollars, or we print them, but the key points is that people are willing to accrue dollars) Why doesn't the dollar depreciate? The conventional wisdom is the the dollar is the safe store of value internationally. That is true but it's the smaller part of what's happening. Foreigners are willing to accrue dollars because for a very long time, the US has been one of the best places to invest money. Relatively safe but more importantly, relatively high returns.
Because the US is a good place to invest, the dollar is strong, we have a trade imbalance, and are a net borrower.
A few days ago I mentioned the risk that comes from regulatory regimes that encourage (or require) all institutions to manage risks in the same way. You mention the Basel II standards that funneled US assets into home mortgages. I think the same standards caused even worse behavior among European banks - Basel II standards defined sovereign debt from Euro zone countries as risk-free, so banks were relieved of responsibility for any sort of due diligence in lending to such countries. The Greeks did things that would be considered fraud if committed by individuals, but the banks (and through them, European governments) encouraged the fraud.
Great.
This is more than allegory.
I don't go in for bogus demonization of either the "predatory lending" or Chinese varieties and view these characterization of frankly quite impressive and smart Chinese behaviors as mostly cynical propaganda for consumption by domestic audiences (politically) and courts (legally) because the judges will allow the exercise of exceptional authorities, but only when the claimed excuses are made both consistently and in the most brazenly and aggressively exaggerated manner possible (see, e.g., Racial Preference Regimes, any one of the two dozen always-annually-renewed - and literally Orwellian - "permanent emergencies".)
Weaning the US economy off of reliance on perpetually huge trade deficits and fiscal deficits and reconstituting completely atrophied domestic production capabilities in the face of crippling regulatory burdens is like the set "Shock Therapy" recommendations to quickly liberalize recently-communist states and move so far in the direction of "mixed economy" capitalism that, while painful, it would prevent the socialist backsliding that was thought to be a Latin-American style political certainty for any more gradual transition to market economies. Both the methods chosen and the apologia trying to rationalize them are quite rightfully ridiculed and lamented. But the outcome is the right one to pursue, and, let's face it, no one has proposed any more likely way to get to that destination.
It's sad that the patient was allowed to get to this decrepit point and the intervention didn't happen earlier when things could have been done better and for better stated reasons. But here we are, and there we need to go, and apparently we're going to have to rely on Gollum to lead us through the dumb-and-dishonest marshes to get there.
We’re now at that point in our national life when all of our problems are someone else’s fault. China must now play that role for all the poor choices we’ve made for decades. This is not to deny that China, and its quasi mercantile trading system is blameless. But we should look much closer to home for the causes and the solutions to our economic woes.
Absolutely.
You can argue whose fault anything is. I’d say it’s 50/50 as China’s express policy is to subsidize domestic production and buying foreign and US financial assets is a necessary part of that strategy. Sure we don’t have to take the loan but it’s hard to turn down cheap money. It’s like donuts sitting on the table. Strikes me that if you want less government spending, you have to deal with the China issue. Why not tax inflows to financial assets? Anyway condemning people for taking cheap debt feels a bit like libertarian moralism. Cheap money creates credit bubbles. It has ever been thus. Of course the rational response was to take China’s cheap money to put it into productive research and infrastructure. There was a limit to what the private sector was going to do as we saw in the 2010s. To me it’s inevitable that the government will borrow in that situation and even more inevitable that it will go to non productive activities at some point.
Why are you treating our government like it is a baby with no agency while treating China’s government as having full agency?
I started the post saying the agency for this was 50/50.
Yes, then the rest of your post goes on to say it is not the government’s fault for borrowing because China wants to loan them money cheap. Condemning people for taking cheap debt feels like libertarian moralism? Is it just libertarians that say “don’t take on debt you can’t pay back” these days? No one else is expected to be responsible?
I understand your position but it isn’t realistic. People respond to incentives not moral lectures. Isn’t that the point of most economics?
That's true, but that doesn't mean we give up on the incentive of expecting responsible behavior and punishing those who fail to be responsible when it is their job. Otherwise, what bad behavior is not acceptable? There are always incentives to do the wrong thing.
There’s the moralism
“Strikes me that if you want less government spending, you have to deal with the China issue.”
Sorry, this is just inane illogic. Period.
Of course you’re right. I’m an idiot. Thanks for letting me know.
You’re welcome!
If you want less government spending, just pass budgets with lower government spending.
Zero change to China’s behavior required.
You’re welcome again (in advance).
That’s a good line from Tyler Cowen, but surely I’ve heard that the roots of the borrowing lay with the Clinton administration and the pursuit of “equity” in home ownership? (And sprawl - the real, permanent, salient outcome.) A curious government goal in a free country.
Yet this obsession with who sleeps where, persists in another guise.
One can make a reasonable centrist case for policies that favor (e.g. partly subsidize) homeownership for non-expensive homes. Owners take better care of things than renters. Owners have more of a stake in the community and society.
This is not to defend 85%+ of what went on, nor all current policy, but partly subsidizing mortgages with 20% down payments up to the median nationwide home value by making the interest tax-deductible, and even implicitly insuring Fannie/Freddy for purchases of those mortgages *only*, is perfectly reasonable and arguably a good thing.
But that said, even if one agrees with my above paragraph - and lucia clearly does not - this core concept has been taken way too far and stretched far beyond the breaking point of anything good.
Sorry- Ben’s “helicopter” money phase in 2004 drove down yields and major exporting countries intervened massively to prevent their currencies from appreciating- not just China but most of Asia, Brazil, even the Gulf countries. The Euro area also exported lots of capital to the US (fed by trade deficits) as well as the PIIGS (target 2)
Commercial banks were shocked by the compression of net interest margin (falling US rates and falling PIIGs sovereign spreads post Euro) and had to reach for yield or risk to improve returns. You are right that Basel 2 and its preferential capital treatment of “AAA” securities was a factor - European banks jumped into CDOs and mortgage paper….but where did they get the dollars to do that (in part from $ sloshing around from trade deficits and currency manipulation)
Capital flows are a mirror image of trade flows (and either one can be the driver of the other depending upon circumstances) .
A reason large trade balances are destabilizing is that capital flows can be destabilizing (and much quicker to change). The Asian crisis, Russian crisis. GFC, PIIGs crisis, etc were all driven by capital flows in large part. You can’t borrow unless someone has cash to lend and of the lender is willing to part with cash on easy terms one borrows more.
Yes- it would be good if the US consumed less and borrowed less while Germany and China consumed more and exported less excess savings. This would also necessitate the US importing less.
So much of the criticism of Trump and his Administration is off base, overblown, disingenuous or outright dishonest, and makes claims with a certitude that is absurd
AK’s critique here, however, is spot on.
https://substack.com/@inmytribe2
Since my comments are getting Likes and "advertisement" posts from this entity, I'm assuming it isn't you. Either way, it's a bit annoying and I hope something can be done about it.
I had 4 or 5 of them in my inbox this morning as well. Apart from the 'likes,' there was some seemingly bogus investment opportunity. Maybe it's the Chinese?
I do not think the Basil rules were intentionally make to favor home mortgages over other assets. It was just the failure to realize that there IS no "recourse" for the system as a whole except a Fed that will "do what it takes" to keep inflation (or NGDG dot) on target.
It was to some extent reactive to the S&L crisis of the 1980s. For various reasons the mortgage market became a favored method of guaranteeing a certain level of welfare in reaction to the Great Depression. The US and its junior partners have been rolling over these interventions continuously for policy reasons. The regular crises are features and not bugs from the perspective of the managers of the system.
What became neoliberal gospel of making all Americans “invested” homeowners was not helpful.
Hi
As you are not already a subscriber, may I invite you to subscribe (for free) to my substack, "Radical Centrist?"
https://thomaslhutcheson.substack.com/
I write mainly about US monetary policy, US fiscal policy, trade/industrial policy, and climate change policy.
I have my opinions about which US political party is by far the least bad and they are not hard to figure out, but I try to keep my analysis of the issues non-partisan.
Keynes said, “Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back.”
I want to be that scribbler.
Thanks,
Which policy are you referring to? No down payment mortgages are probably never a good idea, but were they “policy”? The use of a fixed-rate mortgage as the primary vehicle for real estate finance is probably a mistake, too.
I wasn’t speaking of “policy” any more than MAGA is actual “policy”.
George W. Bush emphasized homeownership as a key part of the “American Dream” during his presidency. One notable statement came in a 2002 speech promoting his administration’s “Ownership Society” initiative, where he said:
“We want everybody in America to own their own home.”
This reflected his administration’s goal of increasing homeownership, particularly among minority and low-income Americans. Bush believed that homeownership fostered stronger communities, financial independence, and personal responsibility. To support this, policies were introduced to loosen lending restrictions, expand access to mortgage credit, and encourage private sector lending to underserved communities.
Critics later argued that these policies contributed to risky lending practices and played a role in the subprime mortgage crisis that led to the 2008 financial collapse. Still, Bush’s intention was rooted in a vision of broad economic inclusion through property ownership.
I DO want to focus on the policies. Maybe “wanting” everyone to own a home is OK, but the specific policies that resulted from that desire were bad of just went too far. It’s like wanting less net emissions of CO2, but instead of taxing CO2 net emissions we tried to shut down fossil fuel production projects.
I’m all for Making America Great [the “again” strikes me as anti-patriotic] But all the policies that Trump favors — tax-cutting deficits, restrictions on legal immigration, increased import barriers, less investment in science and technology — all go in the wrong direction and will Make America Poor Again [“again here being appropriate].
I appreciate focusing on policies (not unlike academic people always wanting others to “show their data”), but the reality (yes, reality) is that inspiration moves the madness — not so much policy.
So please, focus on policy but understand that my response to you was how things actually happened in 2008, policy or not.
Policy did not elect GWB or Trump and it did not start and stop the last several wars or, economic catastrophes. Policy be damned.
Everything that lives between policy is what does the dirty work.
Fair enough. But there were plenty of ways to have avoided a financial crisis in 2008 than not electing GWB.
Why should it be a "fault" to run a big trade deficit? I wouldn't even blame the government. When the government deficit declined in the late 1990s, the trade deficit didn't. If foreigners want to park their money here, interest rates will adjust in ways that make it beneficial for people, companies, and the government to borrow. If someone wants to lend you money very cheaply, and you have a good use for it, why say no?
Sometimes the foreigners have even been lending us money at negative real interest rates! What a steal!
"If someone wants to lend you money very cheaply, and you have a good use for it, why say no?"
What if you don't have a good use for it?
"Sometimes the foreigners have even been lending us money at negative real interest rates! What a steal!"
The USG average maturity is six years. That rate can change at the whim of the Chinese, as we learned this week.
It's like an 0% intro APR on a credit card.
We can borrow from foreigners at lower rates and still pay down debt. It need not be one or the other.
AK is exactly right. China is guilty of many things, but this ain’t one of them.
Foreigners lend US dollars, which have never been at negative interest rates. Foreigners negative interest rates helped keep their currencies weak and exports strong
The fiscal deficit in America only represents a small portion of total capital flows.
Negative *real* interest rates. That's when the nominal interest rate is below the inflation rate.
None at all. We could have an export surplus and net outward investment and still get lots of yummy low yield inflow of capital looking for "safety."
But low yield capital inflows bid up the value of the dollar and make US exports less competitive. Nothing wrong with that, you just orient your production more to domestic rather than foreign demand.
Exports less competitive, imports more attractive, investment more attractive, etc. The point is there is noting inherently good or bad about an inflow/outflow of short term capital. It is bad if it result from otherwise bad policies and good if from good policies.
"Miranomics says that the United States is doing the world a favor by running trade deficits, and this has to stop."
This is far more likely true than it is a "misleading characterization of global finance." Most elite economists, like Arnold & Greg Mankiw are, rationalize their theories rather than face the reality that globalization & deindustrialization, as economic policies in reality, has immiserated millions of US workers, especially the large majority w/o college credentials. OK, failed to fulfill the American Dreams for millions, leaving them not-poor but not comfy; not really immiserated.
Thanks for great link.
Miran also, strongly, emphasizes the other Global Public Good that the US has been providing, since WW II -- the Pax Americana regime of fewer and more limited wars, with a vast expansion of trade & investment & human rights. Civilization.
Which is being provided significantly by American middle class.
Neither in this post above nor in Arnold's (fine) Principles, is there any discussion of ...
the barbarians. The violent looters & destroyers of civilization for whom the civilized provide a Common Defense against. That Civilization vs Barbarian axis in a great book I've read.
The rest of the world HAS been Free Riding on US defense expenditure, as the semi-World Policeman. Where is the "rich" EU ability to support Ukraine, w/o the US military?
It ain't there, despite Putin's army being shown to be far less capable than most elites had previously pontificated about.
For decades Arnold has argued against the huge US budget deficits, which I have and do agree with as sub-optimal, but I no longer think they are existential threats to the US. Losing a major war to a Chine which has calculated that Chinese military superiority over the US is sufficient to allow an invasion of Taiwan seems to be far more likely than a global financial problem due to the US debt/gnp ratio going up from 100% to 150% to 200% ... Japan has 255%.
The US needs to reindustrialize, and it might already be too late -- but probably not.
It looks like most of the world is "happy" that Trump is going to add a 10% tariff, only, and not for the Shoot The Moon tariffs from the flawed formula which were his opening public negotiation offer. Arnold's been wanting a lower deficit -- but only thru the unpopular cutting govt spending. He's given no credit to Trump & DOGE for cutting real waste & fraud, & publicizing it, despite it cutting more govt than Biden, Trump 45, Obama, or Bush43. Quite a lack of honesty & fair evaluation by Arnold, sadly.
I'm still very glad to be here reading Arnold's always thoughtful thoughts.
Quick thought on tariffs vs VAT -- while the unpopular VAT is a tax on consumption as economists say they want, tariffs are also a tax on consumption of consumer products, tho only those imported. So some 10-50% of a VAT, yet usually more popular with voters than other taxes, all of which reduce the deficit, tho mostly not spending.
Trump fanboy Don Surber writes about Trump pretty positively, yet truthfully:
https://donsurber.substack.com/p/world-cheers-trumps-10-tariff
Arnold writes "A big cut in U.S. government spending probably would do a great deal to reduce our trade deficit by reducing our borrowing from abroad."
The corollary to the above fact - the result of an accounting identity - is that increasing tariffs will do virtually nothing (except perhaps at the margin) to reduce our trade or current account deficit. For that matter, neither would reducing tariffs to zero, except the latter would render our private sector to be much more efficient.
Thanks Arnold. I would argue that the "predatory" lending was creating crazy loans & then securitizing & dumping them. Yes borrowers were predatory in a clueless way. The real predators were originators/ packagers who knew exactly what was going on.
Oh my God, no. The originators and packagers had convinced themselves that they really were getting rid of risk. They were, of course, wrong.
It would be nice (in a literature sort of way) if bad results were caused by bad guys doing things they knew were bad. The tragedy of life is that basically good people, not trying to do evil, can do things that have very bad consequences.
Thanks. Agree with the "good people" principle. We are too hasty to identify villains. However the people I knew back in the day who were making NINJA loans, selling houses financed by NINJA loans & securitizing & dumping NINJA loans had an inkling this was not going to go great.
Agreed.
The actual evil was bailing out Wall St. at 100 cents on the dollar (I actually subscribe to the idea that to have done nothing at all might have been worse and was too big a risk).
Also Obama stealing from GM bondholders to give to his union buddies - and SCOTUS not stopping him.
This is like blaming random restaurant guests on a random Tuesday night for their waiters drug addiction that caused his head-on collision that killed the family dog.
You got a problem with it?
American voters are not getting problem solvers but rather, they are getting problem makers. Looking at the data, that’s what they want.
Well, they want problem solvers, but they don't like what would be required to solve the problems. So they get people who promise problem-solving and promise none of the icky things. Which means they ain't gonna solve the problems and may actually make them worse.
"That we are a huge borrower is on us. The deficits that our Federal government runs have to be funded somehow. If foreigners were not willing to lend, then we would have to use domestic capital. Our interest rates would be higher and businesses would have to cut back on investment."
Yes, it is on us. And I agree that government deficits make it worse. But I don't agree that borrowing is what drives the flow of money or that it causes us to have a trade deficit. Here is my alternate explanation, for all to critique.
It is said that countries exporting to us have to accrue dollars. That is not quite true. If we were Venezuela or any of many other countries, we wouldn't be able to pay for foreign goods with our own currency. Exporters would demand another currency and we'd have to buy that one, driving down the value of ours. (Yes, someone still has to buy dollars, or we print them, but the key points is that people are willing to accrue dollars) Why doesn't the dollar depreciate? The conventional wisdom is the the dollar is the safe store of value internationally. That is true but it's the smaller part of what's happening. Foreigners are willing to accrue dollars because for a very long time, the US has been one of the best places to invest money. Relatively safe but more importantly, relatively high returns.
Because the US is a good place to invest, the dollar is strong, we have a trade imbalance, and are a net borrower.
Just so. Bravo!