Thursday, March 31, 2016
On Trump's Claim that Other Countries "Owe" America
Donald Trump thinks that the world owes America and he's promising to collect. He thinks the Europeans owe America for their defence arguing that the US is doing the heavy lifting for NATO. Mexico owes America for trade imbalances. China ditto, ditto, ditto. Everybody owes America.
Sure, the United States runs large deficits. Yes the United States has a hefty balance of trade deficit. If America was Greece or Spain or Ireland, it would probably be in the tank. Yet it's not. There must be a reason.
Put simply, the United States has the printing press. It gets to produce the currency, the greenback, in which the entire world trades. The United States dollar is the world reserve currency. Everybody wants it, everybody buys it - often by delivering goods to America's shores.
Galbraith, in "The End of Normal" offers a complex but compelling explanation of how this all works. He demonstrates how it has become necessary for the benefit of the United States and everyone else that America runs hefty deficits. If that scheme stops it will devastate the world economy.
Why would it stop? Well, if Americans put an idiot in the White House, one who decided he'd make the world pay for Uncle Sam's generosity, it could be the straw that broke the camel's back. The rest of the world, on which America depends more than Trump can possibly realize, might say let's switch to a new reserve currency, a basket of currencies - the Euro, the Yuan, the Yen and, of course, the good old USD - all balanced out, averaged if you will.
That would mean that America's debts might have to be paid in a different currency, one not of its own control and that could put the USA in a mighty economic jam - or, as Trump would say, Yuuuge!
You see the existing racket is a confidence scheme. It lives or dies on the acceptance that the US dollar is the best, most secure currency of them all. A replacement reserve currency would shatter that confidence. So far everyone has been prudently reluctant to call America's bluff. Trump could change all that.