President Trump’s erratic and contradictory ‘negotiation’ behaviour over NATO, EU and the UK sends British officials off in a frenzy of textual analysis.
It might be more productive for UK policymaking however, to assess the underlying motives of, and domestic pressures on, Trump.
Trump’s core aim is to address US government debt, and close off a series of related economic vulnerabilities; potentially catastrophic for general US global negotiating strength.
Why?
US aggregate debt is likely to exceed 106% of GDP in 2018 according to the Congressional Budget Office (CBO). A level not seen since WW2. This will be an eye-watering $167,000 per household. Whilst this is 46% of GDP above pre-2008-crisis norms, it is not the largest in the world, and the negatives are suppressed by the US dollar being the world reserve currency; the world need dollars especially to pay for oil, diluting US inflation.
However there are three alarming reasons why it is an even more threatening problem.
First, spending is rising; a 6% deficit this year. US debt is headed for 150% of GDP at the end of a prospective 2nd Trump term. Debt as a % of tax take is more telling, and the US has the highest of any OECD country, as a lower tax economy. Also, if unfunded pension, social security and Medicare liability shortfalls are included, US debt would be 450% of GDP.
Second, the US government has been propping up its financial system by buying dollar securities with printed money for a decade. This kept interest rates down but has resulted in too much investment money sloshing around, leading to absurd valuations of US corporations; 70 to 100 times annual dividends has become quite normal. The average used to be 14. All this must end, and a soft or hard crash is as certain as death or taxes. US growth has been propped up by money printing, and future tax revenue plans are dependant on this growth. Ouch.
Third, China is pulling back from lending the US the money it needs; and slowly trying to replace the dollar as the global ‘petro-currency’. They don’t hold the US over a barrel yet, but they are on their way.
Trump knows that the major expansion of discretionary spending over the last 15 years is related to broader military and security costs, now in excess of 5% of GDP and still rising fast. The special interests in DC make reductions in equipment programs or war spending near-impossible, so for initial ‘wins’ Trump has turned to static defence spending overseas. His deal with N Korea is designed to allow reduced spending in East Asia, and his ‘shaking the tree’ in Europe and NATO is designed to reduce US spending there.
Shaking the tree on trade policy has the same core aim.
With China the aim is to keep them buying US securities, and more importantly stifle global competition from the Renminbi. In the EU, the Euro remains a threat since it provides a globally-traded relative safe haven, and petro-currency, if and when the dollar wobbles. To destroy the Euro, Germany and the EU first need to be weakened (Brexit first). Washington is split on this but Trump has common cause with Putin to help him. The importance of this for the US is hard to understate.
* Paul Reynolds works with multilateral organisations as an independent adviser on international relations, economics, and senior governance. He is an elected member of FIRC and an Executive member of Liberal International (British Group).
Follow @LibDemVoice on Twitter
Like us on Facebook
Subscribe to our feed
Sign-up for our daily email digest
Was austerity a horrible mistake? Three challenges to the left's narrative
My tweets
We have to wean ourselves off the status quo
What's going on within the Labour Party – The Merseyside Bellwether
Discovering Discovery Walk
Loughborough Derby Road station from above (1947)
Housing association makes final push to fell a Maple and destroy a green in Ludlow
Chequers deal, Norway deal, Canada +? Why I don't care.
Some answers on the smart M4 work
Martin
David Evans
Darren Marin
Michael 1
Paul Walter
35 Comments
I can’t see how Trump’s actions will reduce the deficit; quite the opposite…His February budget is estimated to have added at least $7 trillion to the deficit, he has increased military spending at home and his tax breaks are estimated to add another $1 to $2 trillion to the deficit.
Donald Trump is in Helsinki giving a live press conference with Vladimir Putin after a meeting with only interpreters present.
The Finnish Prime Minister was surprised to hear that Trump seemed to believe that Finland is a member of NATO.
It is, of course, a member of the EU and therefore of “the West”.
The Liberal International (British Group) visited Finland before it applied to join the EU. On the home front Chancellor John Major persuaded PM Margaret Thatcher that the UK should join the Exchange Rate Mechanism.
Lib Dem leader Paddy Ashdown was in our delegation and needed to fax London to comment.
Finland is well aware that in 1939 the former Soviet Union invaded militarily, but not entirely successfully.
A Finnish joke is about the north coast of Finland, Russia now abuts Norway in the north.
When the Scandinavian countries decided to hold referendums on their accession to the EU Finland voted first, then Swede, then Norway (again). (Denmark had joined at the same time as the UK and the Republic of Ireland, 1973.)
There is a lot of in-depth analysis in your article, Paul. You begin by stating “Trump’s core aim is to address US government debt.”
I wrote a piece on this just before the presidential elections in November 2016 https://www.libdemvoice.org/donald-trumps-very-liberal-plan-to-pay-off-the-us-national-debt-52379.html.
Both China and Russia have been stockpiling gold reserves for several years now. China’s establishment of the Asian development bank as a competitor to the world bank and the inclusion of the Yuan as a component of IMF special drawing rights are part and parcel of the unfolding process of de-dollarization that is seeing the BRICS-led “resistance bloc” breaking away from the financial stranglehold of the US-led “Washington Consensus.”
China’s alterative to the Swift system is another essential piece of this process. SWIFT stands for the Society for Worldwide Interbank Financial Telecommunication and is shorthand for the SWIFTNet Network that is used by over 10,500 financial institutions in 215 countries and territories to transmit financial transaction data around the world. SWIFT does not do any of the clearing or processing for these transactions itself, but instead sends the payment orders that are then settled by correspondent banks of the member institutions. Still, given the system’s near universality in the financial system, it means that virtually every international transaction between banking institutions goes through the SWIFT network.
This is why de-listing from the SWIFT network remains one of the primary financial weapons wielded by the US and its allies in their increasingly important financial sanctions campaigns.
Military capability is underpinned by economic strength. In the modern era of asymmetric warfare – Cyber and economic disruption are of equal importance with technology and military hardware.
Thank you for comments, Richard Joseph and ‘expats’. Trumps core aim is obscured by two things. One is his all-things-are-a-negotiation business philosophy, relying on a disruptive ‘shake the tree and see what happens’ style. The other is the immense entrenched power of the special interests in Washington DC, who have been slow to find a uni-linear voice in their battle for the ear of an inexperienced, perhaps over-confidant, politician. Like many of Trump’s post-election aims, his desire to address US debt and related vulnerabilities, has been at least partly reversed, especially by the special interests, (most notably military equipment and war budgets). His desire to exit Afghanistan and Syria has been scuppered although he still tweets about his earlier aims. It looks likely that it will take someone far more astute than Trump to tackle the US debt problem and address all the related vulnerabilities. The article above aims to explain the apparently inexplicable negotiation behaviour with the EU, NATO and N Korea. The budget outurns for this fiscal year and the figures in the article about rapidly rising spending and debt, make the point. It is a picture of a president in pursuit of aims which, one by one, fall by the wayside. So much so that Trump is probably desperate for some kind of ‘win’. Hence the bizarre behaviour over N Korea, the EU, Germany, Brexit and NATO. Thank you Joseph for your point about gold reserves. One sign of a weakening dollar would be the rising price of gold. However the US has been selling paper gold to keep the price down as fast as China and Russia have been purchasing physical gold, betting on the fact that the US will have to pull back from these sales at some point. Only time will tell if the US will ultimately have access to the physical gold to meet its committments.
In The Wealth of Nations Adam Smith said that by favoring domestic goods and exports, “nations have been taught that their interest consisted in beggaring all their neighbors. Each nation has been made to look with an invidious eye upon the prosperity of all the nations with which it trades, and to consider their gain as its own loss.”
By running large trade surpluses, China is subsidizing American consumption while limiting their own. For a poor nation (and China remains an underdeveloped country) to reduce domestic consumption so that they can loan money to the US so that Americans and others can consume more than they produce is not a long-term strategy.
The only rationale for this in the short-term (from China’s persepective) is to gain market dominance in a number of key industrial sectors and/or to build a portfolio of overaseas investments.
This strategy is not sustainable for the global economy. It was one thing for countries like Taiwan and Singapore, to grow this way, for they were quite small. It’s quite another when the largest nation on earth (and many others, like India, Russia and Brazil), see rising trade surpluses as their growth engine.
Trump’s reaction appears to be to adopt a similiar neo-mercantilist policy for the United
States, when what is needed is a new global consensus that domestic productivity growth should be the key focus on economic policy in every nation.
This means means stronger enforcement by global bodies like the the World Trade Organization and the World Intellectual Property Organization against beggar-thy-neighbor mercantilist strategies. It means that development organizations like the World Bank and the IMF will have not only to stop promoting export-led growth as a key solution to development, they will have to tie their assistance to steps taken by developing nations to move away from such negative-sum mercantilist policies, thereby rewarding countries whose policies are focused on spurring domestic productivity, not on protecting the status quo. Doing this will result in the kind of win-win strategy that we can all support without the need for the leader of the free world to go about shaking the tree to see what happens.
Aggregate debt is basically immaterial – the only thing to be worried about – possibly – is whether the interest is affordable and with very low interests rates – actually negative for British debt – the bankers paying us – and i suspect negative or near-zero for the US – it is.
Dividends are also really immaterial to share valuation – it is money the shareholders already own. More relevant is profits and future profits/growth.
“US debt is headed for 150% of GDP at the end of a prospective 2nd Trump term.”
So what? The US Government debt is just everyone else’s assets in US$. It’s good sign, from an American POV that people want to save their money in dollars.
The dollar is just an IOU of the US government. So if we add up all the dollars in circulation and all the US Treasury bonds etc denominated in dollars we get the US National Debt.
It’s not a debt in the way we understand debt. The US government hasn’t gone to the IMF to ask for a loan. There’s just quite a lot of people in the world who want to own US debt. It’s not a problem.
It is a pity that the German Conservatives don’t understand the basics of all this. They are so debt averse they are killing the EU. If people want to save Govts have to be ready to assume the debt. There’s no need for austerity unless there’s an inflation problem.
https://www.independent.co.uk/news/world/europe/german-conservatives-are-destroying-europe-with-austerity-says-economist-thomas-piketty-10368040.html
@ Paul Reynolds,
Not to put too fine a point on it, this article is total nonsense!
There’s lots of things wrong with it. But let’s have a think about this:
“With China the aim is to keep them buying US securities……”
First of all we need to ask why China has bought so many US $ securities in the past. And the answer is because it has sold a lot more stuff to the USA than it has bought from the USA. It has built up a store of about $3 trillion of US dollars in its central bank coffers. So it’s pretty much immune from attacks by speculators. Even George Soros wouldn’t take on the Chinese Govt.
But Donald Trump has said he wants trade with China to be more balanced. Say China’s surplus against the USA is reduced, China will then have fewer dollars to spend on US $ securities.
So Donald Trump can’t have both a reduced trade deficit and increased spending on US Treasury bonds. One is essentially the inverse of the other!
This is an interesting debate, intended as exoteric but veering towards esoteric ! Some comments reflect quite a popular view in the Lib Dems, which one might call ‘hyper-Keynesian’. This is the view, which is perfectly arguable, that outside debt service, there should never be any reductions in government expenditure, only increases. Since there are diminishing marginal returns in tax increases, this implies monetisation (QE or printing money), or ever increasing debt, or both, to fund ever igher spending. The model would support the view that high aggregate government debt is non-problematic as long as repayments are affordable and do not crowd out more productive or poverty-allieviating spending. So if interest rates are low as they are now, a country like the USA if it had aggregate debt at 300% of GDP or 1000% of tax revenues, would not be problematic. These arguments one way or another are difficult to test in a lab, so they remain partially theoretical, which can be exasperating for non-economists. The balancing argument for the ‘high aggregate debt is not a problem’ model, is that a level of debt which can be serviced now might not be sericeable in the future, if interest rates rise (for a host of reasons), or if the demand for debt changes. In addition, purchasers of US debt have to take a view of the ability of the US to service the debt, and such views can change quickly. Economic shocks can come from unexpected sources. In the US case the key reason for low interest rates is their asset purchase programme using ‘printed’ money. When this finally comes to an end interest rates will start to rise, and these rises will only be moderate if external purchasers of US debt like China choose to continue buying US debt at current levels, and continue to have a need to purchase large quantities of securities (their purchases of debt generally have been falling). Thus the affordability of 150% of GDP aggregate debt is at serious risk for a number of reasons. A further significant risk is a rapid rise in gold prices. The US may not be able to meet committments. Bluntly, rapid rise in the price of gold is often taken as a loss of faith in the US dollar, and higher interest rates demanded would be a consequence. There are good quality arguments that aggregate debt doesn’t matter but in the case of the US economy today it would take a very brave person to say the US economy has nothing to worry about. Some of the risks look existential.
@ Paul Reynolds,
Oh dear! I was going to say I don’t know where to start but let me start at the beginning and work my way down:
“which one might call ‘hyper-Keynesian’”
It’s either right or it’s wrong. No matter who said it or whatever prefix is applied.
“This is the view……….that outside debt service, there should never be any reductions in government expenditure, only increases.”
No. We can have whatever size of Government we desire or whatever is decided through the democratic process. More expenditure naturally produces a larger Govt. So this can be varied according to the politics of the Government of the day. More expenditure requires more taxation. Not because the Govt needs the money, which it has created in the first instance, but because it needs to regulate the economy and avoid high inflation. The two don’t need to balance. In fact, they don’t but we can’t quite seem to get used to that!
“QE or printing money”
All money, except for loose change, has been printed or created in a computer for many years now. QE is a relatively much more recent phenomenon which involves the central bank buying up Govt securities on the open market.
Continued
“So if interest rates are low as they are now, a country like the USA if it had aggregate debt at 300% of GDP or 1000% of tax revenues, would not be problematic”
Interest rates are low because the Govts of the western world want them to be low. Short term rates are set by the decision of a committee of ‘experts’ as with our own MPC in the BoE. Longer term rates are low because many governments have instructed their central banks to buy up bonds. ie QE. This is the real purpose of QE. So rates, both in the shorter and longer term, will only rise if the Govt wants them to.
Japan has a National Debt of 253% of GDP. It just means there is a high demand, worldwide, for saving in Japanese Yen. The savers own the debt. If we are saying the debt is too high we are saying savings are too high also. Is it a problem? Well it could be if the savers wanted to withdraw all their money and spend it too quickly. But any bank has to consider the same possibility too. The Japanese and US Governments are essentially huge banks and there’s a desire on the part of savers to put their money in a safe bank.
“Thus the affordability of 150% of GDP aggregate debt is at serious risk for a number of reasons”
The US Govt can always “afford” its financial commitments. The risk is more on the part of the savers. If inflation is too high they won’t be getting a good deal if interest rates are low. But we’ve had higher inflation and higher debt levels in the recent past (ie after WW2) and the US government has always looked to be in control of the situation.
Continued
“…… if external purchasers of US debt like China choose to continue buying US debt at current levels”
The Chinese, or Germans, don’t buy US debt out of the goodness of their hearts or because they consider the yields to be particularly attractive. They buy it because they want to sell to the USA more than they want to buy from it. They have to do something with their surplus dollars so they buy US Treasury stock to give them some small return. President Trump needs to decide whether he wants the Germans and Chinese to reduce their trade surpluses. If they do they will naturally buy fewer bonds. So he can’t have both more bond sales and more balanced trade.
“Bluntly, rapid rise in the price of gold is often taken as a loss of faith in the US dollar”
There’s some truth in this. When the US embarked on its initial round of QE the right wing blogosphere was alive with stories of impending hyperinflation as a consequence. So there was a panic by those who were taken in by all this and they bought gold in large quantities. The price spiked close to $2000 per oz. It was essentially the result of a lack of economic understanding. Some would have made money and others would have lost. That’s always the way when bubbles form and later burst. It wasn’t a threat to the US dollar any more than a speculative bubble in the price of any other metal.
…..it would take a very brave person to say the US economy has nothing to worry about.
That’s true! It’s even more true of the EU economy. The problem is that the PTB, more in the EU and not so much in the USA, worry about entirely the wrong things!
I have been continually amazed at the strength of the US dollar, all it indicates in terms of long term business trends/cycles is that when it crashes it will crash even harder than normal. It was Gordon Brown who boasted that he had abolished the boom/bust business cycle – just before the 2008 crash. So the more people say that the debt does not matter the more likely there will be a huge crash, especially in places where they did not have a proper crash in 2008.
Whilst a week is a long time in politics it’s becoming apparent that Trump is now beginning to be seen in the US as Putin’s useful fool. Let’s hope this is the beginning of the end for his bungling Mussolini-like career.
Donald Trump is hugely interesting because he is not a politician and yet holds the most powerful political office in the world. Let me state, I am not a fan of Trump or his protectionist economic policies nor most of the other things that enter his head.
I knew a person who was similar to Trump many years ago (but he a decent person and not a misogynist like trump) all he was interested in doing business deals and making money. He set his own company up at 19 and did very well. The thing is he wasn’t actually interested in anything else, just doing the ‘best’ deal in whatever he was involved in.
Look at Trump he is the same. No interest in politics, philosophy, the greater good, culture or anything else except ‘how do I get the best deal from this situation?’ He doesn’t care what he says or how he acts as long as it gets him and advantage for himself. Look at his book ‘art of the deal’. Plus he has a long history of self-publicity.
Oddly I don’t even think cosy up to Putin will harm his support base, as he draw his support from all those who rate politicians as less trustworthy than car salespeople and estate agents. He is an anti-politician. He support base are proud patriots though…
I think you do Mussolini an injustice (repulsive though many of his beliefs and practices were). He was in power for nearly 20 years; it was only in the last four of those that things really went wrong for him.
“Look at Trump he is the same. No interest in politics, philosophy, the greater good, culture or anything else except ‘how do I get the best deal from this situation?’ He doesn’t care what he says or how he acts as long as it gets him and advantage for himself. Look at his book ‘art of the deal’. Plus he has a long history of self-publicity.”
Not entirely true, he tries to play golf and loves beautiful women, in fact it could be said he loves beauty in general and tries to incorporate it into life. The flipside is he has no time for ugly things or people. He has talked about good genetics in the past so that might give a hint where he wants to go.
@Paul Reynolds
Your comment seems to contradict – virtually completely – the argument in your original article – if i can be so bold. i would suggest your comment is nearer the truth.
Current nominal US GDP growth is around 5% – 2% inflation and 3% real growth – a 6% deficit therefore only adds to aggregate debt by 1%. A business facing low or negative real interest rates would be rational to borrow. Actually Governments normally have pretty low real interest rates – MAY be short term high inflation can be a problem short term (although it means that aggregate debt comes tumbling down) but inflation seems over the past 30 years to be well controlled by central banks and obviously in the 70s and early 80s was mainly due to the massive increase in the oil price.
As you say in economics we can never do controlled experiments – just changing one parameter. i would suggest that the worries about high total debt and high deficits from the 70s and 80s has not really panned out in recent years.
There MIGHT be worries about massive annual deficits but this is not the case here.
Seeing Messrs Reynolds and Martin bandying stats and facts reminds me of an old saying that experts use statistics rather like a drunkard uses a lamppost – for support rather than for illumination.
Watching the going’s on yesterday in Helsinki with Putin clearly pulling the strings was a bit like a guy who thinks chess is really checkers with fancier pieces playing a Grand Master.
As far as comparing Trump with Mussolini, as David Raw appears to want to do, let’s see if he can make the trains run on time.
I would be grateful, in order to understand the argument better, for an explanation from the exponents of the ‘high debt and QE is not a problem’ view, of the hyperinflation that occurred in the German Weimar Republic which led to WW2, after it ran out of creditors, or the hyperinflation in Zimbabwe more recently.
There were no minutes of the Trump – Putin meeting, but Putin had a notepad on the table beside him. Trump only had his own recollections, perceptions and forecasts.
Putin did not deny interfering in the US elections, he merely hinted at the practical difficulties. Putin asserted that both the USA and the Russian Federation are democracies.
The USA has a form of indirect election called the electoral college, which does not meet and has not met for decades. It should be reformed or abolished.
The USA has a limit on the re-election of a president which the Russian Federation has copied and then changed. Putin was Prime Minister under President Yeltsin and deputy President, then President, then Prime Minister, then President again. Those who tried to negotiate with President Medvedev found that he had little real power while Putin was Prime Minister.
https://www.bing.com/search?q=Dmitry+Medvedev&filters=ufn%3a%22Dmitry+Medvedev%22+sid%3a%22b76b9337-d252-e886-1548-4df450fb0df0%22&form=WNSGPH&qs=MB&cvid=5e22a0c0350041dfb2b943a6fcfc5663&pq=medvedev&cc=GB&setlang=en-US&nclid=D19A84F13F0AA22DEE7AE50DDCF460A0&ts=1531823107144
@ Paul Reynolds,
Ah yes! The Zimbabwe and Weimar Republic hyperinflation arguments. They usually do crop up.
Those who know their history will be aware that these both occurred in the immediate aftermath of wars. Inflation occurs when, as we all know, “we have too much money chasing too few goods”. So even if the amount of money remains the same we can have inflation, even very high inflation, if there’s nothing much to buy because the productive base of the economy has been destroyed in the war and/or what follows. Add in the factor of a total loss of confidence in the German economy after WW1 due to the demand for reparations from the Allies and we can easily understand what occurred.
In Zimbabwe, an economy dependent on its agricultural sector, taking farms off those who knew how to farm and handing them over to those who didn’t simply wasn’t a good idea!
But modern day Japan, the USA, and most importantly of the countries of the EU are not the Weimar Republic and Zimbabwe. The productive base is in good shape. Sure, if economies are overheating then we can have some sensible cooling imposed by Governments to regulate them in a sensible way.
Generally speaking Republicans play the “sound money” game when the Democrats are running the government. Any suggestions of extra Government money for social purposes will always be met with an “And how do you propose to pay for that?” argument.
But when they are in government their world view seems to alter. They’ll happily invade somewhere in the world without consulting their bean counters. As Dick Cheney famously said “Reagan proved that deficits don’t matter”. I’d disagree with that. They do matter but not quite in the way that most people think and not in the way that both of them claimed they did before they were in positions of power.
In this respect I think Americans are different from the Europeans and particularly the Germans. Their debt aversion is a matter of sincere belief rather than a political ploy. It would be inconceivable that any German conservative, and incidentally the SPD are just as bad as the Christian Democrats, would say anything along similar lines.
And that’s the problem for the EU. The German conservatives insist on everyone running surpluses. It’s like insisting that all the terms have to be positive in the equation:
a+b+c+d+e =0
Sure some of them can be positive but at least one has to be negative! But being negative is against the rules!
I think Trump is probably smart enough to know that too. But he’s also has to be smart enough to not interfere in everything and delegate to others. Reagan was good at that. He knew his limitations. We’ve yet to see if Trump does too.
@Richard Underhill
i understand that every American President has met with the Russian President since the second world war.
Putin may not be particularly nice and Russia may have a poor human rights record but there are many countries and regimes that we deal with and indeed consider “friends” e..g. Saudi Arabia who do not have good human rights – in line with what we consider “Western” standards, many African countries who are members of the Commonwealth etc. etc.
On interfering with the US election – Britain and the US seek to influence public opinion in Russia and elsewhere through the World Service etc. and no doubt through more underhand means. The Russian facebook ads amounted to a few $100k where the Republicans and Democrats spent a $1 billion. Probably Comey had more effect on the US election than the Russians. And we had two flawed candidates.
On the electoral college – well its up to the US – obviously we have a somewhat similar system with FPTP constituencies where a party can lose the popular vote and win the election. The founding fathers of the US were conflicted as to whether it was a federation of individual states coming together or one country – in the end it ending up as something of a hybrid with each state getting two senators in the Senate regardless of size and the House of Representatives elected by individual constituencies – and the electoral college reflects that plus the effect that you win all a state’s electoral college votes (mostly) even if you win by 1 vote. But as a country with FPTP if not a party we are not ones to throw stones.
Paul,
at the end of the article you state “Washington is split on this but Trump has common cause with Putin to help him.”
After yesterday’s meeting with Putin when we saw the spectacle of a US President taking the side of a former KGB officer against his own intelligence community, Washington may no longer be split. There seems to be virtual universal condemnation of Trump’s handling of Russia from leading Republicans.
How questioning the evidence of his own intelligence community while accepting the denials of President Putin fits in with Trump’s core aim of addressing US government debt, and closing off a series of related economic vulnerabilities is somewhat unclear.
Peter Martin,
you might find this article on the twin budget and trade deficits by Brad Sester interesting https://www.cfr.org/blog/trumps-tax-success-expense-his-trade-agenda in which he argues that Trumps tax cut stimulus may exacerbate the US current account deficit. He writes:
“The closer the economy is to operating at capacity, the more the demand created by the stimulus may bleed out to the rest of the world. That is arguably what happened in q4 of 2017. Domestic demand growth accelerated, with the contribution from demand to GDP growth rising from around 2.5 percent to above 3.5 percent. But an unusually big chunk of that was spent on imports—over 50 percent.
If that pattern continues, The U.S. would get stuck with the debt while the United States’ big trading partners would get the stimulus. A poorly timed fiscal expansion thus could end up making China, Korea, Japan, Germany, and the other big exporting economies great.
Aside from trade there is an “income” channel. Or more specifically, a “higher interest rate on a big stock of external debt” channel.
The U.S. now has a large stock of external debt, so a higher nominal interest rate in the U.S. mechanically leads to higher interest payments on that external debt (interest payments are big part of the income balance in the current account, along with the dividend income on foreign direct investment). The United States’ external debt has quietly increased to about 50 percent of GDP, so a 1 percentage point increase in the nominal interest rate translates into half a percentage point of GDP increase in the amount of interest the U.S. will need to pay to the world.”
@Paul Reynolds
Thank you for a thought-provoking article. (And as always to excellent comments from @Joseph Bourke)
You are right that, putting asside Trump’s appalling politics and his protectionism, there are serious underlying issues with the the US trade deficit, and with the government deficit. If other countries follow neo-mercantilist policy, ultimately, the imbalances will become unsustainable. Eventually, these imbalances will be corrected, if not by deliberate policy, then, in the future, by some crisis.
Joe is right: what is needed is a new global consensus that domestic productivity growth should be the key focus, espcially in countries with substanital trade surpluses.
With the rise of nationalism across the world, and the terrible state of public debate, I am not optimistic that deliberate policy will tackle these imbalances, and I shudder to think what kind of crisis we will end up with. But we must continue to make the case for deliberate policy and international cooperation.
Trump’s response to these problems might have made sense when he was only a businessman, but in politics, he is throwing petrol onto the fire of nationalism. But then multilateral action is anathema to his style of politics, stirring up hatred between countries is much more his way of doing things.
My one nitpick with your comments is when you suggest that what you call ‘hyper-Keynesian’ is popular in the Lib Dems. I don’t think it is. But it has several enthusiastic proponents who regularly comment on this website.
@ JoeB,
Yes I’ve heard this argument before. Essentially it is that any time a country stimulates its economy it will suck in more imports and worsen the current account deficit. Yes it is possible.
But no one, not even the USA, can force Germany or China to swap more for less and take the USA’s IOU (ie dollars) in return. It has to be China’s and Germany’s call to run a trade surplus of any particular magnitude. If they don’t want to do it just spend more dollars instead of buying bonds!
That’s the way it would work between you and I if we were exchanging goods. If you wanted to give me more than I was giving you, you would have decide whether to accept my IOUs and run a surplus or decline and balance our trade.
the US dollar being the world reserve currency; the world need dollars especially to pay for oil…
Third, China is … slowly trying to replace the dollar as the global ‘petro-currency’.
I seem to remember that one of the common themes to many of the countries that the US objected to (eg. Iran) was that they traded their oil in Euro’s and not USD. Trump’s recent comments regarding Europe’s consumption of Russia oil/gas, which I would assume would be brokered in Euro’s or some other non-USD currency, is probably also an arrangement that doesn’t benefit the USA – and given Trump is USA first, second and third, he would object to any arrangement that could avoid using the USD. I suspect this is also a reason for disliking the EU, potentially it has the potential to disrupt US influence/control of international trade…
I suspect that China, with its long-term stance will be more successful in deflating the US ego…
@ George Kendall, @ JoeB
“Joe is right: what is needed is a new global consensus that domestic productivity growth should be the key focus, espcially in countries with substanital trade surpluses.”
I’m not sure JoeB is saying that. He’s saying that productivity growth should be the priority for everyone. But there’s always going to be the problem that if everyone does produce more stuff then there has to be the buying power in the economy to get it out of the warehouses and off the shelves. Otherwise, inventories will rise and workers will be laid off.
A general pact against mercantilism would work. IF everyone agreed to balance their trade, the world would be a better place. Keynes got as close as anyone to making it happen 75 years ago, but we don’t have anyone with his stature pushing for that now. We have to accept that it is very unlikely to happen any time soon.
So what else is there? Well we can say to Germany and China “Look guys, you are quite welcome to always send us more things than we send to to you. We’ll give you our IOUs (££ and $$) and you can then buy our bonds. But we want your agreement that you’re going to keep doing that! Or failing that we don’t want any sudden changes whereby you suddenly decide to spend all you’ve saved at once. That won’t do anyone any good. We won’t be able to deliver the goods and you’ll end up with worthless IOUs which you can’t spend.
It might even make the Germans think about the desirability of always wanting to exchange more for less.
They should understand the sense in doing the opposite of that. For our part we, the Americans and anyone else who genuinely lets their currency float, have to learn to accept that if Germany, China and other net exporters want to put money in our bank we have to let them get on and do that and not worry too much about being “in debt”.
@George Kendall
I think that Trump is misunderstood. There is always a tension between increasing your share of the pie and increasing the whole pie. Either may be good domestically. Obviously the theory of free trade is that it gets goods produced where it is most efficient – thus increasing the pie and so even a smaller percentage is actually bigger than a bigger percentage of a smaller pie.
Trump is facing mid-terms and immediately following that his re-election campaign. His argument will be that he talked tough and got a better deal from China etc. who were screwing America – and there is a (some) justification for that. He will say he did the deal and MAGA – but he needs his current rhetoric to justify that.
I am not sure what “hyper Keynesianism” is. But let’s assume it means Government borrowing. There is justification to borrow to build infrastructure to make the economy more productive that is paid back by a better economy. Just as a farmer borrows to buy a tractor to produce more.
I have argued on LDV for borrowing for a “human infrastructure fund” as we will need within 20 years to be sending 70% to university as our competitors such as South Korea do today to earn our way in the world. That means big increases in the pupil premium and the schools budget.
There is also an argument that if the economy is not at full capacity then there is a market failure and the Government should step in and generate economic activity. There is a debate over how near the British economy – on the one hand unemployment is quite low by historic stands and employment high. On the other unemployment is still at the level where the Conservatives accused Labour in 79 of “not working”.
Peter,
1. The current account and the capital account must balance to zero.
Every dollar that enters a country, either in payment for that country’s exports, in the form of royalty or services receipts, or in the form of foreign investment in domestic assets, must leave that country, either in payment for imports, in the form of royalty or services expenditures, or in the form of outward investment.
2. The difference between total domestic savings and total domestic investment is equal to the net amount of capital imported or exported, and so is also equal to the current account surplus or deficit. If in any country domestic savings exceed domestic investment, the excess must be invested abroad.
This means the excess savings must be exported. By exporting capital abroad, that country must “import” it back in the form of a current account surplus. There is effectively no difference between exporting capital and importing demand given that a country that exports capital abroad on a net basis must run a current account surplus.
3. Everything that a country produces must be either consumed or saved. Because the total of goods and services that a country produces is generally defined as its GDP, then a country’s savings can be defined simply as its GDP less total household and other consumption.
If everything a country produces it either consumes or it saves, and if the excess of domestic savings over domestic investment is equal to a country’s current account surplus, then it also follows that everything a country produces it must consume domestically, invest domestically, or export.
There are three sources of demand for domestic producers—domestic consumption, domestic investment, and net consumption and investment from abroad, that is, the current account surplus. These three sources of demand are what generate domestic growth. They are inextricably linked.
The savings rates of different countries are linked through the trade account. If any country takes steps to change the gap between its total domestic savings and its total domestic investment, then those steps must also affect its trade balance. Because a change in one country’s trade balance must be matched with an opposite change in the trade balance of all other countries, there must also be an opposite and equal change in the gap between the total domestic savings of the rest of the world and the total domestic investment of the rest of the world.
@ JoeB,
“The current account and the capital account must balance to zero….”
Yes I do understand this. Plus the other points you’ve made. I’m not sure George Kendall and Paul Reynolds do though. I suspect they think the Govt deliberately goes out to borrow the money, like you or I might to buy a car, just to be able to “afford” to run a current account and their own budget deficit!
Out of interest, I have sheltered savings (SIPP and ISA) invested in Indian ETFs so if Sterling crashes and the indian stock market booms, I cash in and move the money back into cash (sterling), say doubling my money in the process, what effect does this have on the above. I know what effect it has on my personal spending power but it will just stay invested nevertheless.
@ William Fowler,
Probably the macroeconomic effect of your actions is going to be tiny. Unless you’ve got lots of money that is! So I’d just enjoy whatever you do make , if you do make it.
Theoretically, if sterling crashes we’ll all suffer because we haven’t got the same international spending power. But, having said that if sterling is too high, our exporters aren’t competitive, so a lower pound does have some advantages.