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.

Exciting times.


Hugh said...

The US can't run deficits indefinitely.
Eventually they won't be able to pay the interest on the debt owed.
This is why interest rates are being held down to near zero.
Yes, the ponzi/confidence game can continue, as long as the economy grows every year, forever. Good luck with that on a finite planet.

The Mound of Sound said...

Actually a number of prominent economists say that the US not only can but must run perpetual deficits provided they keep the debt to GDP ratio in some narrow range balance. That theory is based on the US dollar continuing as the world's reserve currency. Get a copy of Galbraith's book and read his explanation.

Hugh said...

If debt is growing (which it is), keeping the debt to GDP in balance means growing the GDP, every year, forever. Galbraith says slow growth is what's needed. It's still infinite, exponential growth.

The Mound of Sound said...

Yes, Hugh, I understand that. Galbraith, like so many economists, never factors in the finite Earth factor. Why, I don't know. Krugman, for example, doesn't either. They also give the economic dislocative impacts of climate change short shrift, perhaps because they can't reliably anticipate the rate of onset.

Anonymous said...

And that is why the US is not happy about China's setting up of the Asian Infrastructure Investment Bank as an alternative to the World Bank. Payments on loans may be paid back in other than US dollars. Initially a BRICS idea, I see that even Australia and South Korea have signed on. AIIB initial capital equivalent $100 US billion for loans.

Will Canada join against US and Japanese advice? Stay tuned. JT and the Happy Band have urgently wired Dermarais for instructions while making encouraging noises.


Unknown said...

Saddam Hussein changed from the US dollar to the Euro for trade and Ghadaffi wanted to change from the US dollar to the gold dinar, he wanted this for the whole of Africa. We saw what happened to these men and their countries. I forget how much in American Treasury notes China owns, but Trump sounds like a buffoon when he talks about China owing America.