Asymmetrical Information

But haven't we been hearing this for years ... and still no disaster?

what would be a "sustainable" borrowing rate for a country like the US then?

It seems like the only way to reduce the borrowing is to reduce the size of the government's spending, which is not likely to happen.

"It seems like the only way to reduce the borrowing is to reduce the size of the government's spending, which is not likely to happen."

Well, there's the obvious "raise taxes" instead. I have been a deficit hawk for as long as I can remember, which is beginning to have been a long time). I see no reason why so much of our current spending (eg, subsidizing agriculture or fighting foreign wars) should be paid for by our children. If it's a worthwhile program, we ought to be willing to pay for it now. Raise taxes far enough to balance the budget, and at that point the voters can have a meaningful debate on whether we're paying too much for what we get. Right now that debate is not possible, as the voters (for the most part) do not know what the costs actually are.

A tizzy is a considerable understatement. China has many, many problems most of which have nothing whatsoever to do with us. The oligarchs who run China are keeping peace at home by allowing relative prosperity (and, as we've seen recently, latent racism boiling over) to keep a lid on things at home. Will the lid stay on if the growth slows? Now what I really think needs to happen is for China to use the dollars they're raking in to start fixing things up in China. But that would involve a level of interdependency with the rest of the world that the Chinese oligarchy is allergic to at this point.

*blink*

Maybe I missed something, guys, but wasn't Jane talking about the current accounts deficit, that is to say, the trade deficit with the rest of the world?

NOT, mind you, the budget deficit.

Raising taxes to close the trade deficit seems rather counterproductive, in that I imagine that to make Chinese imports too expensive via manipulating the general tax rate (rather than with duties) would demolish the overall economy.

Raising taxes to close the deficit would probably close the current account deficit by something close to the extra taxes raised. I say "probably" because if the Asian central banks pour money into Fannie Mae instead, that might just offset the capital account surplus into consumer borrowing.

Any consumption tax would also probably close the current accounts deficit some. If the PBOC would float the RMB that would help to solve the problem, too. They won't do that without some encouragement. That's why there's been talk of a tariff lately (which I suspect would throw the world into depression).

And, of course, our largest import continues to be oil IIRC.

Kpt Kapital -- yes, and you can smoke for years with no sign of lung cancer. But that does not mean it is a good idea to smoke.

Jane, why on earth would reducing the budget deficit reduce the current account deficit? That's the disproven "twin deficits" argument we hear from disingenuous European central bankers. I would think imports are a function of consumption, not government spending. To the extent government spending decreases consumption, imports, will decrease, but that is all. The Fed happens to concur: it recently released a study concluding that a reduction of the budget deficit by 1% of GDP would reduce net imports by 0.2% of GDP. In other words, it would barely do anything.

" You can think of it like this: a country is like a person. If it wants to consume more than it produces (run a current account deficit) it has to either borrow money from someone, or sell some of its assets (run a capital account surplus).

Deficits these sizes aren't really sustainable, any more than you can borrow 6% of your income every year (unless your income is growing really, really fast)."

This is just wrong. (I thought you were an economist)

The current account (trade) deficit is just a number with no negative meaning.

Every one of us has a current account deficit with any business we spend money with. You are forgetting the other side of the ledger -- which is that we receive goods and services when we spend the money. There is no deficit only two offsetting ledger columns -- Money OUT -- Goods/Services IN (of the same or greater value)

The Chinese and the Japanese can't pull their investments out of the US economy. That's because when they do that they will end up with dollars which they will have to convert to their own or some other currency which will likely cause the value of the dollar to plumet which will cause them to lose big time.

They are in too deep to get out now.

Don't worry it will all be OK as long as the politicians don't try to "Fix" it.

Here's how I see the imbalance coming to a head:

Hewoah is this Condi?

Yes it is - who is this?

HU

Who?

HU!

I said who am I speaking to?

I know! I said HU! HU Jintao - you know the pwesident of China!

Oh - that HU! It's wonderful to speak to you again. Is there any problem? Do you need me to transfer you to the Treasury Department? Do you have a question about any of your maturities?

No! No! It's someting compwetely diffwent. I wanted to give you a heads up on our pwans.

Your pwans?

Yes - our pwans! You know - a scheme, pwogwam, or method worked out beforehand for the accomplishment of an objective!

Oh! a PLAN!

Yes a PWAN! We're taking Taiwan tomorrow and we don't want you to do anything about it.

Need I remind you Mr. HU that Taiwan is of vital strategic importance to us!

Need I wemind you Miss Wice that we can stop buying your dowars tomorrow!

Well now - that would be quite detrimental to your economy.

Oh not too bad - our people and government have been saving for long time now. We can weather the storm. We feel that your economy in fact has much more to wose. Wight?

Let me get back to you Mr. HU.

Okay - say hewoah to Dubya.

"Normally, the currencies would adjust; as people bought more Asian currencies to buy their goods, the value of their currencies would rise, and ours would fall, and the deficits would gradually move back towards balance. But the Asian central banks, which keep their currencies low in order to make their exports more attractive, have been stopping that from happening."

So Asian central banks are distorting the currency market clearing mechanism.

Oh not too bad - our people and government have been saving for long time now. We can weather the storm. We feel that your economy in fact has much more to wose. Wight?

Saving what? dollars? Certainly not rimibi.

If the chinese stopped selling to only Wal-Mart their economy would collapse overnight. They have no weapons in this one except their mouths and of course their guns.. But we and a number of our friends (Japan, Australia, India, S Korea have a dog in this fight) have guns too.

China ain't going nowwhere.

thedaddy.

I tend not to worry about the current account deficit. Don Boudreaux in Cafe Hyak has some good posts on this:

My Nonchalance About the Trade Deficit

I Am Not Us. We Are Not Me.

On Foreign Holders of U.S. Debt

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