Monday, April 04, 2005

Excessive Spending

There are some economists who continue to argue that it is not the trade deficit (current account) that is the problem; it is the government spending that is the problem.

Let's take a look at the idea that it is the government's fault:

  • U.S. imports more than it exports so there is a large net outflow of U.S. dollars
  • Dollars held by foreigners are used as local currency or invested in the U.S. in some form
  • Dollars not used as local currency or invested in the U.S. private sector are invested in government notes to cover excessive government spending
  • This allows the government to go further into debt... and since we are all the government, we go further into debt
  • U.S. currency declines relative to foreign currency making imports more expensive and fixing the trade imbalance... and fueling inflation??? which the government tries to fix by increasing interest rates which slows the economy which leads to business slow down and increased unemployment which is ... wait that's a recession.
Now, what happens if the government doesn't spend too much and doesn't need money from foreigners who hold U.S. dollars:
  • U.S. businesses are caught in a bind that they are losing sales in the private sector to imported goods while government purchases of their products and services decrease because the government only takes in what it spends
  • U.S. government revenues fall as businesses and those employed by those businesses pay less taxes; businesses earn less and more people are laid off
  • The U.S. dollar gradually strengthens against foreign currency as total U.S. purchases of imported goods decrease thereby making domestic products more expensive relative to imports
  • U.S. businesses continue to decline or increase use of foreign-made components in their products leading to fewer Americans being employed... wait that's a recession!
Well, maybe it doesn't work that way. Perhaps sound fiscal management by the government leads to massive investment in the U.S. private sector by foreign holders of U.S. dollars. Perhaps the economy becomes robust as China, Japan and India gradually buy up the U.S. private sector keeping Americans employed by those foreign companies... wait, is that desirable... and do they actually have anything to do... and will they be paid a living wage for doing it?

I guess I will continue to hold the position that a huge, negative current account is a bad thing for the U.S. ... one way or another. Either the government becomes an even bigger debtor to foreign interests or the private sector becomes controlled by foreign interests ... whose interests may not necessarily be those of the American populous.

Perhaps a more balanced current account through management of imports might be desirable. We don't have to have import fees, but perhaps a retail surcharge on imported products might help blunt Americans appetite for all things imported... you can bring it in without hassle... you can wholesale it without hassle... but if your customers want to buy it, they have to help offset the economic problems caused by the massive trade imbalance those products bring... and concomitantly reduce the need for government borrowing.

Or... the government can repeal minimum wage, health and safety requirements, social security and associated programs and let wages and benefits fall to be competitive with the poorest workers of the world so that we can become the new China.


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There is always an easy solution to every human problem—neat, plausible, and wrong.
Henry Louis Mencken (1880–1956)
“The Divine Afflatus,” A Mencken Chrestomathy, chapter 25, p. 443 (1949)
... and one could add "not all human problems really are."
It was beautiful and simple, as truly great swindles are.
- O. Henry
... The Government is on course for an embarrassing showdown with the European Union, business groups and environmental charities after refusing to guarantee that billions of pounds of revenue it stands to earn from carbon-permit trading will be spent on combating climate change.
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Tracking Interest Rates

Tracking Interest Rates


SEARCH BLOG: FEDERAL RESERVE for full versions... or use the Blog Archive pulldown menu.

February 3, 2006
Go back to 1999-2000 and see what the Fed did. They are following the same pattern for 2005-06. If it ain't broke, the Fed will fix it... and good!
August 29, 2006 The Federal Reserve always acts on old information... and is the only cause of U.S. recessions.
December 5, 2006 Last spring I wrote about what I saw to be a sharp downturn in the economy in the "rustbelt" states, particularly Michigan.
March 28, 2007
The Federal Reserve sees no need to cut interest rates in the light of adverse recent economic data, Ben Bernanke said on Wednesday.
The Fed chairman said ”to date, the incoming data have supported the view that the current stance of policy is likely to foster sustainable economic growth and a gradual ebbing in core inflation”.

July 21, 2007 My guess is that if there is an interest rate change, a cut is more likely than an increase. The key variables to be watching at this point are real estate prices and the inventory of unsold homes.
August 11, 2007 I suspect that within 6 months the Federal Reserve will be forced to lower interest rates before housing becomes a black hole.
September 11, 2007 It only means that the overall process has flaws guaranteeing it will be slow in responding to changes in the economy... and tend to over-react as a result.
September 18, 2007 I think a 4% rate is really what is needed to turn the economy back on the right course. The rate may not get there, but more cuts will be needed with employment rates down and foreclosure rates up.
October 25, 2007 How long will it be before I will be able to write: "The Federal Reserve lowered its lending rate to 4% in response to the collapse of the U.S. housing market and massive numbers of foreclosures that threaten the banking and mortgage sectors."
"Should the elevated turbulence persist, it would increase the possibility of further tightening in financial conditions for households and businesses," he said.

"Uncertainties about the economic outlook are unusually high right now," he said. "These uncertainties require flexible and pragmatic policymaking -- nimble is the adjective I used a few weeks ago."

December 11, 2007 Somehow the Fed misses the obvious.
[Image from:]
December 13, 2007 [from The Christian Science Monitor]
"The odds of a recession are now above 50 percent," says Mark Zandi, chief economist at Moody's "We are right on the edge of a recession in part because of the Fed's reluctance to reduce interest rates more aggressively." [see my comments of September 11]
January 7, 2008 The real problem now is that consumers can't rescue the economy and manufacturing, which is already weakening, will continue to weaken. We've gutted the forces that could avoid a downturn. The question is not whether there will be a recession, but can it be dampened sufficiently so that it is very short.
January 11, 2008 This is death by a thousand cuts.
January 13, 2008 [N.Y. Times]
“The question is not whether we will have a recession, but how deep and prolonged it will be,” said David Rosenberg, the chief North American economist at Merrill Lynch. “Even if the Fed’s moves are going to work, it will not show up until the later part of 2008 or 2009.
January 17, 2008 A few days ago, Anna Schwartz, nonagenarian economist, implicated the Federal Reserve as the cause of the present lending crisis [from the Telegraph - UK]:
The high priestess of US monetarism - a revered figure at the Fed - says the central bank is itself the chief cause of the credit bubble, and now seems stunned as the consequences of its own actions engulf the financial system. "The new group at the Fed is not equal to the problem that faces it," she says, daring to utter a thought that fellow critics mostly utter sotto voce.
January 22, 2008 The cut has become infected and a limb is in danger. Ben Bernanke is panicking and the Fed has its emergency triage team cutting rates... this time by 3/4%. ...

What should the Federal Reserve do now? Step back... and don't be so anxious to raise rates at the first sign of economic improvement.
Individuals and businesses need stability in their financial cost structures so that they can plan effectively and keep their ships afloat. Wildly fluctuating rates... regardless of what the absolute levels are... create problems. Either too much spending or too much fear. It's just not that difficult to comprehend. Why has it been so difficult for the Fed?

About Me

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Michigan, United States
Air Force (SAC) captain 1968-72. Retired after 35 years of business and logistical planning, including running a small business. Two sons with advanced degrees; one with a business and pre-law degree. Beautiful wife who has put up with me for 4 decades. Education: B.A. (Sociology major; minors in philosopy, English literature, and German) M.S. Operations Management (like a mixture of an MBA with logistical planning)