The Economic Consequences of Debt

This post from The Nation is another of those doom and gloom pieces about the huge size of the U.S. debt.

The facts are not secret. Despite ebbs and surges, the gap between US exports and imports has been steadily widening across three decades. The trade deficits of the early 1970s (due mainly to soaring oil prices) were trivial in size, but Americans were shocked in 1978 when the deficit hit $30 billion (TV sets and some cars were now made in Japan). During the 1980s, the trade deficit expanded enormously, as Washington's strong- dollar policy crippled US manufacturers and companies moved jobs and production offshore in swelling volume. After a recession and dollar devaluation, the gap shrank briefly, but soon began expanding again.

For several decades, in fact, the federal government has tolerated and even encouraged the dispersal of American production overseas–first to secure allies during the cold war, later to advance the fortunes of US multinationals. No other major economy in the world accepts perennial trade deficits; some maintain huge surpluses. But American leaders and policy-makers are uniquely dedicated to a faith in "free market" globalization, and they have regularly promised Americans that despite the disruptions, this policy guarantees their long-term prosperity. Present facts make these long-held convictions look like gross illusion. By 1998, the trade deficit was back to a new high and expanding ferociously, despite supposed improvements in US competitiveness. Last year it set another new record: $489 billion.

Yet no one running for President has found the nerve to discuss these facts in a straightforward manner. Nor do the candidates have anything to say about how the country might avoid a potential calamity. A few wise heads in finance, like billionaire investor Warren Buffett, have sounded the alarm–Buffett refers to the United States as "Squanderville" and is shifting billions offshore into foreign currencies for safety. Meanwhile, political leaders remain silent.

I wasn't an economics major, so maybe I am missing something. What is the big deal? Honestly, it so difficult these days to track who owns what and which product is what percent made in which country that we are so intertwined the trade deficit may be meaningless. Why does no one talk about the trade deficit between states? Because it is irrelevant. The trade deficit between countries is too. At some point our growth in standard of living may slow, but I don't think it will decline. If America becomes too indebted, whoever is financing the debt will demand a higher rate of return, which will encourage us to slow down.

Maybe it will help to give you my theory on economics:

Economic systems are extremely complex due to their chaotic nonlinear dynamic nature. We don't understand them as well as we think we do. However, historically millions of individual decisions based on the best information available have lead to very good outcomes, so let's keep trusting that method of decision making.

In other words, if you believe Warren Buffett, then buy foreign currencies. Don't try to change the laws, respond within the given framework the best way you can. I would like to see the U.S. cut back government spending and balance the budget as much as anyone else, and sooner or later it will happen because the market will demand it.

  • Fast forward to a subprime mortgage meltdown, hyper asset deflation, and a major economic recession in 2008, and the author of the above article begins to look like a true believer in a South Pacific Cargo Cult. Apparently the concept of Balanced Trade completely eludes the comprehension of true believers in Free Trade. Like true believers in Free Love & Free Lunch, it never occurs to these folks that Free Anything is beneficial to some at the expense of others. The squandering of our industrial assets via outsourcing benefited a privileged, exploitive slice of American citizenry at the expense of both the middleclass & blue collar class who now live from service sector paycheck to paycheck, drowning in unsustainable debt. Politicians cannot speak of this disastrously self-destructive process because they are now as financially dependent upon these forces of globalization as are any sweatshop worker in any developing nation. Even worse, globalization depends upon fossil fuels to move goods halfway around the world, and so we find ourselves in a $3 trillion dollar war in the middle east to both protect & intimidate the oil producers & their cartels. To finance this debacle, we have, of course, borrowed another $700 billion dollars from the American people and loaned it to the very institutions that helped to create all of this mess. So, you see, Warren Buffett is right: we are living in Squanderville, USA.