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| The Budget Deficit, the Debt and the Dollar |  |
Dean Baker
Truthout, February 22, 2010
The Wall Street-financed crew that is pushing to gut Social Security and Medicare is used to playing fast and loose with facts and logic to advance their agenda. Unfortunately, many of the reporters who cover these issues have little knowledge of economics so they are often suckered.
One of the favorite themes in the deficit hysteria is that foreigners hold close to half of the government’s debt, with the evil Chinese looming especially large in this story. Holding up the foreign menace to advance a political agenda is a well-tested tactic in American politics, but its proven success doesn’t make it any less reprehensible.
The reality is that insofar as we are concerned about foreign ownership of U.S. debt, then we should be talking about the trade deficit. This in turn brings us to a discussion of the value of the dollar, not the budget deficit. These topics get featured rarely, if ever, in the deficit hawks’ rants.
The logic here is very simple and should be familiar to those with any training in economics. The extent to which foreigners are able to acquire ownership of U.S. assets, regardless of whether it is government debt or private assets like stock and bonds, depends on the U.S. trade deficit. The trade deficit gives them the dollars they need to buy these assets. A trade deficit means that United States is sending more dollars abroad each year than are being used to buy U.S. exports. This difference allows foreigners to buy up U.S. assets.
This point is simple, but central. If the U.S. government were running a $2 trillion budget deficit, but its trade was balanced, then foreigners could not be increasing their ownership of the government’s debt, unless they were selling off holdings in U.S. stocks, bonds or other dollar denominated assets.
Conversely, if the country were running a $2 trillion trade deficit, but the budget was balanced, so we had no annual budget deficit, foreigners could increase their share of ownership of the debt. They could use the $2 trillion that they were acquiring each year as a result of the trade deficit to buy up the government bonds that had been issued to finance the debt in prior years.
One of the favorite themes in the deficit hysteria is that foreigners hold close to half of the government’s debt, with the evil Chinese looming especially large in this story. Holding up the foreign menace to advance a political agenda is a well-tested tactic in American politics, but its proven success doesn’t make it any less reprehensible.
The reality is that insofar as we are concerned about foreign ownership of U.S. debt, then we should be talking about the trade deficit. This in turn brings us to a discussion of the value of the dollar, not the budget deficit. These topics get featured rarely, if ever, in the deficit hawks’ rants.
The logic here is very simple and should be familiar to those with any training in economics. The extent to which foreigners are able to acquire ownership of U.S. assets, regardless of whether it is government debt or private assets like stock and bonds, depends on the U.S. trade deficit. The trade deficit gives them the dollars they need to buy these assets. A trade deficit means that United States is sending more dollars abroad each year than are being used to buy U.S. exports. This difference allows foreigners to buy up U.S. assets.
This point is simple, but central. If the U.S. government were running a $2 trillion budget deficit, but its trade was balanced, then foreigners could not be increasing their ownership of the government’s debt, unless they were selling off holdings in U.S. stocks, bonds or other dollar denominated assets.
Conversely, if the country were running a $2 trillion trade deficit, but the budget was balanced, so we had no annual budget deficit, foreigners could increase their share of ownership of the debt. They could use the $2 trillion that they were acquiring each year as a result of the trade deficit to buy up the government bonds that had been issued to finance the debt in prior years.
Even if there is some particular reason to worry about the share of the government debt owned by foreigners, then the focus should still be US assets, more generally. Our financial markets are hugely liquid. If a foreign investor or government owned $1 trillion of US stock, corporate bonds or short-term dollar deposits, they could sell these assets tomorrow and buy $1 trillion in government bonds. There is zero reason that any serious person would ever be concerned specifically about the share of the government debt held by foreigners.
http://www.truthout.org/the-budget-d...nd-dollar57083
An often cited comparison between Japanese and US debt is that Japanese govt. debt was financed by their citizens, whereas ours is financed by foreigners and according to the Itulip thesis(IIRC), this could lead to a sudden stop. This seems to put Itulip at loggerheads with Dean Baker, who is generally seen as a credible economist and saw this disaster coming a mile away. He puts the blame squarely on the trade deficit and the "overvalued" dollar and seems to say that it does not make a difference whether the debt is domestic or foreign owned. I guess I am confused as to whether Itulip's positions and Baker's opinions are complementary or contradictory.
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