Thom riffed on, "are our trade policies, international trade policies, threatening the survival of this nation?" China's holding of American debt. The difference between the budget deficit and the national debt versus the trade deficit.
Are our trade policies destroying America? 5 April 2006 rant
A Reuters story entitled, "China official urges cut in US debt holding" prompted Thom to go off on the following economics rant on April 5th:
Is our trade policy... I raised this question at the beginning of the first hour, and haven't yet had an opportunity to drill down into it. I want to get into it somewhat, at least, today. We can't let this thing slide by. This Reuters story about China talking about our debt. Is our trade policy, or are our trade policies, international trade policies, threatening the survival of this nation? And in my opinion they are, they clearly are. At least threatening the survival of this nation as an independent nation, as the United States of America. You know, we may become the land of the serfs of the multinational corporations, and in fact we are quickly becoming that. And government will become a caricature of itself; it'll become a cartoon. We'll pretend that we have democracy and we'll pretend that we have a middle class, when in fact what we'll have is indentured servitude. I mean, the level of debt now in the United States is higher than it has ever been in the history of this country, both in real numbers and as a percentage on a personal basis.
And there are two kinds of debt that we have at the federal level, at the national level, there's two kinds of debt that the government generates.
The first kind of debt is called the budget deficit, year by year, and then every year you add to it and it's the national debt, OK. And that's the amount of money that is the difference between what we bring in in taxes and what we spend out on everything we spend on, you know, everything that government spends money on. And Bill Clinton actually got us to a point where we were bringing in more in taxes than we were spending out in the cost of government and so we were able to pay down the debt of previous presidents, because it's been pretty stiff ever since the Vietnam War and Ronald Reagan just blew it into the stratosphere when he came into office with his crazed supply side economics, his insane conservative economics. It plain old flat out didn't work and he had to start borrowing from the Social Security trust fund. He didn't actually initiate that; it started back, you know, under LBJ trying to cover up the cost of the Vietnam War. But then when the baby boomers in the early 80s started paying for their own retirement the Social Security trust fund started growing really quickly and Reagan borrowing from that. In any case, that's one kind of debt.
The other kind of debt is the debt that we as a nation have relative to the rest of the world as a consequence of our doing business with them, OK? So the first kind of debt, the national debt, you could think of sort of like as a family debt. Let's say that you're a family and you also have a little family business. Let's say that you run a little convenience store downstairs and you live upstairs, OK. You've got a family, and you've got a family business. And the amount of money that you earn from running that convenience store versus the amount of money that you spend on your cable bill and your electric and your rent and all that kind of stuff as a family, that's like the national deficit and the national debt. And the national debt we just raised the ceiling on, it's pushing 9 trillion dollars now, which is mind-boggling. It's enough, if it was dollar bills it would reach from here to the moon and back and halfway back there again.
But then there's also what's called the trade deficit. And the trade deficit would be the same thing as say you run this family business downstairs in your house and you're buying inventory and you're selling inventory. And let's say that you, you know, and normally you'd want to be selling as much as you're buying, right? So if this year you buy ten thousand dollars worth of stuff, you know, bread and Twinkies and Coke, and whatever, you buy ten thousand dollars worth of stuff, you sell ten thousand dollars worth of stuff, or eleven or twelve thousand dollars worth of stuff and you show a profit. Or at least you break even. But what if you sold ten thousand dollars worth of stuff but you bought twenty thousand dollars worth of stuff? Well now you owe your suppliers ten thousand dollars. What if you sold ten thousand dollars worth of stuff but you bought thirty thousand dollars worth of stuff? Now you owe your suppliers twenty thousand dollars. That's our trade deficit; the difference between what we sell to other countries and what we buy from them.
And if you're that shopkeeper who has bought twenty thousand dollars worth of stuff and only sold ten thousand dollars worth of stuff and your creditors come to you and say, "OK, you owe us ten thousand bucks". What are you going to do? Well, over the short term you can say, "Well, I'll pay you interest on it". And to a large extent that's what been happening with our trade deficit, it is also funding our debt and we're paying interest on it. But at a certain point they're going to say, "You know, we don't want to loan this money to you. You bought stuff from us, now we want stuff from you. So we're going to come and we're going to take all the stuff on aisles 1 and 2 in your little store there and we're going to take all the chairs and tables". And that's the equivalent of the Germans coming over here and saying, "We're going to buy Chrysler". Or Bertlesmann coming over and saying, "We're going to buy Random House". Or the Chinese coming over and saying, you know, "We're going to buy Amoco". Or Dubai coming over, the United Arab Emirates coming over and saying, "We're going to buy the ports of Philadelphia and Baltimore and New Orleans", and so on.
And you can only maintain that trade deficit as long as people are willing to either hold your debt or continue selling you things on credit, and continue accumulating, you know, your debt instruments, whether they be your dollars or your - if you start running the printing presses - or your treasury notes. So it becomes very dangerous when the major holder of your debt says, "You know, we're going to call in your loan".
So here's this story from today's Reuters by Kevin Yao and Benjamin Kang Lim. I'm assuming it's probably datelined out of Hong Kong. The headline, "Senior China official urges cut in US debt holding". "China should trim its holdings of U.S. debt, a senior Chinese official said, rattling markets ... in the run-up to a visit by President Hu Jintao to Washington this month. "As China is a leading financier of the U.S. current account deficit...". Now, the current account deficit is another way of saying basically the trade deficit plus. "As China is a leading financier of the U.S. current account deficit and holds the world's largest foreign exchange reserves, the comments of Cheng Siwei, a vice chief of the national parliament, sent the dollar and U.S. government bonds lower." They go on to note, "Any move by China to sell some of its massive debt holdings could drive up long-term ..."
You say, Well, what does this matter to me? Why should I care about this?" Well, here's why. "Any move by China to sell some of its massive debt holdings" - that's U.S. debt - "could drive up long-term rates, which ultimately could make it costlier for Americans to take out home mortgages." Cos what happens is, when other countries say, "No, we're not going to buy your debt any more", then we have to say, if we're going to continue living in debt, both a trade deficit - keep in mind, we had a trade surplus right up until Reagan came along. Literally from the founding of this country in 1776 until Reagan came along. We had a trade surplus. The rest of the world owed us stuff. We were buying businesses in other countries. And when Reagan declared war on the United States of America and declared war on the working people of this country on behalf of the multinational corporations, that began to turn around. And now we have, we are the number one debtor nation in the world after being the world's largest creditor for most of the twentieth century and one of the world's largest creditors for most of our history.
So if the countries like China, for example, say, "You know, we don't want to buy your debt any more, we're not going to hold your debt, we're going to start selling it", and we're going to continue to borrow money in order to get people to loan us that money, in other words, to buy our treasury bills, because a treasury bill's just an IOU. We sell our IOUs. In order to get people to buy our debt, in other words to loan us money, we have to offer them more; a greater rate of return. And they say, "I'm not going to buy your debt for 3%; I want 4%, I want 5%, I want 6%, I want 8%, I want 10%, I want 12%". And as they hit like 8, 10, 12%, as the treasury rate starts going up, then all the other interest rates in the United States go up as well.
And two things happen. Number one: the cost of your home mortgage, if you have an adjustable rate mortgage you're in deep trouble. The cost of your home mortgage can explode. And the second is that businesses which are operating on debt, as most American businesses are these days, find that the cost of their debt service goes up; they have to pay more and more in interest, and the Federal Government for that matter has to pay more and more in interest. And so government services are cut back because more money is going to debt service and businesses can't expand, they can't grow, and so they start contracting, they start shrinking, and you fall into a recession or a depression.
And the number one Chinese official, the president of China, Hu Jintao, coming to Washington this month. And this is the kind of stuff they're saying in advance with this. "Hu meets U.S. President George W. Bush in Washington on April 20. U.S. officials say Hu's visit will focus on trade issues as the Bush administration seeks to narrow its trade gap with China, which hit a record $202 billion" last year. And China's saying, "You know, we don't want to loan you this any more".