As explained in previous posts a Government budget deficit is necessary to fund any country’s trade or external deficit. So are these budget and external deficits an inter-generational burden? That’s what we hear all the time in the debates in Parliament and on TV, but is there any real truth in this? There are obvious contradictions in mainstream thought. Mainstream thought has it pretty much as: exports are virtuous, imports are indulgent. Surpluses are good, deficits are indulgent. The Germans are virtuous – they have a surplus of 7%. The British and Americans are indulgent with deficits of around half that. Lets say 3.5%
German children and grandchildren will have a life of ease, whereas British and American children and grandchildren will be slaves to debt repayment.
The reality is, as usual, is quite different. Possibly the US and UK economies of some future time will have to have a surplus of 3.5% to pay for our deficits of 3.5%. Their economies could be more like the present day German one except not quite so export dependent. Which would of course, be a virtuous state of affairs according to our present mainstream economic thinking.
An alternative way of thinking would be to say that every generation consumes the goods and services which are produced in the economies of their time. Its just not possible for us to steal anything from them. They can’t send anything back in time to previous generations. We can’t leave future generations much that will be directly useful to them except whatever it takes to ensure their future economy is in as good a shape as possible. That is a good education system, a good health system, a good housing stock, a good transport system, and a clean and healthy environment.
There is certainly no point saving up money on a national level and leaving them a pile of Government IOUs. Those IOUs would be just as inflationary, when used, as if they printed their own.
Whether their economy will have a surplus of 3.5% or a deficit of 3.5% is neither here nor there by comparison to the other problems they will have to face such as resource depletion and the adverse effects of climate change.
I would separate these two deficits.
The inter-generational impact is usually invoked by the mainstream with regards to fiscal deficits. It’s silly, as it is based on Ricardian equivalence, and the math behind Ricardian Equivalence does not work.
An external deficit can be a sign of a lack of competitiveness. Although the MMT position that imports are a benefit is correct, there are a problems associated with domestic industries being pushed out of existence by imports. Job losses for example, as well as the risks associated with becoming dependent upon foreign countries that may have divergent foreign policy interests. These problems are manageable, but they do exist, and politicians are sensitive to these issues. However, there is not a whole lot that policymakers can do about external deficits, other than going back towards closing the trade and capital accounts. As a result, I tend to ignore the trade position of a country.
Yes, you are right that fiscal and external deficits are usually considered independently. However I have been lately making the point that the two are much more closely related than is generally appreciated and that the trade position shouldn’t be ignored.
If you look at the two wiki links in the previous but one posting you can see a very strong correlation. They don’t have to be exactly the same of course. If the the private sector are strongly accumulating wealth then, on a three sector model, it is possible for the government surplus to be much smaller than the external surplus. That would be happening in China for example.
But, if the private sector were becoming neither poorer nor wealthier, in aggregate, then the two would be exactly equal.
We are obviously in agreement on the budget deficit being no great issue; its the explanation to the public which is always problematic. The link between the two deficits should be easily understandable, but I think I’d get a few blank looks if I tried to explain the mathematical folly behind Ricardian Equivalence.
From an accounting and realistic operational POV, how can the nominal level of T-bonds ever become a burden for countries that control their own currencies and by extension (and more importantly for this discussion) their own interest rates?
Currently, almost all Govt spending (the 3% of T-bonds bought by banks with reserves notwithstanding) results in a net zero wrt to bank deposits.
So whether the budget is balanced or there is a $1 trillion deficit, the level of BDs in the economy is unchanged on a first order effect, accounting basis.
With a deficit, people voluntarily exchange BDs for CB securities balances. These BDs come mainly from entities with very little propensities to consume in the first place, otherwise they wouldn’t have bought the T-bonds. And once those BDs are initially deposited at the CB, as long there are no surpluses, they are essentially locked at the CB forever. We MMTers like to say that there is no way for reserves to leave the CB balance sheet, well the same is essentially true for securities. Yes, T-bonds can be used for collateral and some types of financial transactions but the types of entities that would used them like this also have very small relative propensities to consume and thus very little effect on the broader real economy
My point is simply, what possible mechanism could there ever be for the nominal level of accounting notations stuck on the CB’s balance sheet to significant;y impact real spending in the economy at a problematic level?
Of course, mainstreamers will bring up how the markets will demand more interest causing the classic debt cycle spiral. Which we of course know is impossible.
Without wishing to disagree with you technically, I just wonder how you would explain the Chinese holding of three trillion dollars worth of US government securities to a non-economist? They are a substantial part of the US National debt. They’ve been accumulated by the Chinese selling stuff to the US and used by the US government to recycle dollars back into their economy via a budget deficit.
If they, and other overseas holders, decide to spend them, rather than save them, as they may well one day do then the my explanation would be that the US trade deficit would have reduce and possibly even turn into a surplus to ‘repay’ them. And of course, just a Germany has to run a budget surplus to counter its trade surplus, the US government would do the same. So it would appear to be repaying its deficit.
How would you explain it? To a non-economist.
There are a couple of things to unwrap here. Lets start with this one:
“If they, and other overseas holders, decide to spend them, rather than save them”
Whenever any individual holder of a T-bond chooses to USE their securities deposits to buy real goods and services, then necessarily someone else’s bank deposits would be taking the place of the now departed Chinese securities accounts. In other words, financial assets would be swapped (just like in QE) but no new financial wealth will be created.
Chinese -1000 securities accounts
Chinese +1000 bank deposits
New T-bond holder +1000 securities accounts
New T-bond holder -1000 bank deposits
So from that perspective, the only difference in economic activity would come from the differing propensities to consume of the Chinese and the new T-bond holders.
The STOCK of CB balances can never change without action coming from the Govt. The private sector cannot change the nominal level of CB balances by themselves. This is the main reason for my claim that a nation’s nominal “debt” level cannot impact the economy very much aside from interest rate impacts.
The deficit is important because its THE meaningful flow. Deficits and most Govt spending (the regressive impact of FICA notwithstanding)redistribute bank deposits from people with low propensities to consume to people with higher propensities to consume. This is why they are stimulative, obviously.
Now, how would I explain to a layperson the impacts of China wanting to become a net importer of American goods by cashing in their savings of securities accounts and then using the new bank deposits to actually buy US$ denominated goods and services?
I would ask them if they’ve previously complained about american manufacturing jobs being shipped to China. And if they did complain about that, then why would the now be complaining about the reversal of that trend?
Yes I certainly agree with this comment and I agree with most of your previous one too.
Except I’d just make the point that the swapping of financial assets isn’t entirely without consequence. The demand for Treasury securities does affect the exchange rate of a currency. If there’s a high demand for UK Treasury securities the £ will rise and this will cause the external deficit to rise too. Imports become cheaper and exports dearer. Conversely if there’s low demand the £ will fall, the external deficit will fall and may even turn into a surplus. In which case, there would be no need for the sale of securities anyway.
In principle the same could happen in the US too. The Chinese do peg their currency to the $, and with $3 trillion in reserve can pretty much choose what that rate should be, so the effect is less noticeable.
Maybe a layman would say the Chinese are buying securities for a reason?
As a surplus run government, trade is essential to the Chinese economy, so maybe this layman thinks the Chinese buy up huge amounts of USA securities to hold their prices of trade down. aka their currency.
Yes. That’s right.