A recent article suggested that the ‘doomsayers’ were wrong to argue that the US trade deficit was not sustainable since there was no evidence that it was not being used to increase the wealth of the recipient country and hence the imported ‘capital’ (arguably the fruits of inflation, not saving) would service itself to the benefit of all involved.
However, a simple, first-level disaggregation of the relevant flows – albeit here presented Download file
as something of a caricature – strongly suggests that this is indeed far from the truth and that capital consumption is writ large here in multi-trillion dollar form.
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would you please elaborate on the graph.
seems interesting.
thanks
olmedo
The title of the graph is “US Sectoral net lending & borrowing.” Does it really surprise anyone that the amount of borrowing equals the amount of lending?
New businesses often start off being financed with 75% debt. Does that mean they have failed before they even start? No. The entrepreneur assumes that the business will generate profits in excess of the cost of the debt. Otherwise, he wouldn’t even try. The main question is what is the debt financing?
The Welfare and Warfare segments are definately something to worry about. That is non-productive borrowing at its worst. But the Household debt is mostly real estate; no big deal.
The balloon labeled “Productive Investment zero” doesn’t make a lot of sense. The graph doesn’t show net productive investment; it shows net borrowing and lending. All that the non-Fin Business section shows is that businesses borrowed as much as they loaned. But that raises a question: if they’re non-Fin businesses, how are they loaning money? Besides, most business financing comes from retained earnings, not borrowing. Some has come through the stock market, too.
The graph shows cumulative net borrowing or lending for each of the broad sectors and combines it with information about other flows and spending data to draw the overview.
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So, by and large, households – typically, the main SOURCE of funds in a developed economy have been a major SINK and we know that much of what they have borrowed has gone on (over)consumption and housing – so little productive capital formation here (especially given the current problems associated with real estate).
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Government has, of course, wasted trillions, as per usual and the two taken together are pretty much arithmetically identical with (though not directly the same as)the current account gap.
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Net-Net, non-financial business has not been the traditional borrower of funds it tends to be(why have debt martkets if not to finance the provision of goods and services), though, in fact, this treatment disguises the fact that it has substituted debt for equity on an unprecedented scale in order to pay off executives and shareholders and to boost EPS artificially. Ergo, it is hard to argue that all this credit has been put to productive use there, either(or that the loans have been taken on by someone who can service and even amortize them from the uses for which they were contracted).
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How has all this been financed? Largely by that catch-all the ‘Rest of the World’ – aided to some extent by the domestic financial sector, returning the fruits of financial speculation, if we can be cynical, for a moment! ———
Intriguingly, however, the foreign component has, in very large part, not been due to the decisions of private entities seeking solid investment prospects in the mighty US economy – as the apologists invariably claim – but has been the result of the non-market driven foreign exchange policies of other governments.
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This is a direct inflationary mechanism on a global scale (Jacques Rueff’s ‘childish game of marbles).
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So, in answer to the question: ‘Is America’s trade gap sustainable’, the answer has to be to expressa great deal of doubt – and not just as a knee-jerk aversion to a trade deficit, as has been elsewhere implied.
“Net-Net, non-financial business has not been the traditional borrower of funds it tends to be(why have debt martkets if not to finance the provision of goods and services), though, in fact, this treatment disguises the fact that it has substituted debt for equity on an unprecedented scale in order to pay off executives and shareholders and to boost EPS artificially.”
I think this is important. Money creation together with easy credit has produced this. And, I will also add, weak regulation of financial intermediaries.( and i say this from a libertarian point of view).
This is a great article on the subject:
http://www.prudentbear.com/articles/show/2075
“But the Household debt is mostly real estate; no big deal.”
Spoken like a true realtor or mortgage broker. Unfortunately, it IS a big deal because housing is not investment capital; it is a consumer durable. People only generate income off their primary residence during monetary policy created booms. And, as with all other perceived benefits of such booms, that income is illusory. So if they owe vast sums of money on their primary residence, that is consumption, not investment.
The issue of household debt is huge.
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