On Government Debt and Trade Deficits
Posing perceptibly counterintuitive economic analyses that put superficially negative phenomena like government debt and trade deficits in a light of neutrality, or even positivity, will leave my critics barking at me dumbfounded rejoinder. It is not their fault - any principled person will understand the necessity for an individual to have some skin in the game and not be utterly reliant on others. It’s something deep within us that understands that being a net debtor is bad, and we experience immense shame when we do not provide our due amount in return to be members of a society.
However, today, I am not here to talk on moral quandaries of government spending as we can all agree it never leads to anything good. What I am here to do is strike down two myths that conceal the mechanical importance and reality of United States debt:
The US is on some imminent brink of defaulting on its debt.
The US would be the sole victim, or only major sufferer, in the event of a default.
I’ve spoken on Schelling Points. A Schelling Point, simply put, is where we all can agree and meet an understanding on something regardless of what happens; a failsafe. The Dollar is the World’s financial Schelling Point. This is why, even past the legal framework that makes a debt default impossible, the US Dollar is where everyone goes to when they need to make a trade. Don’t agree?
Why is it that Russia will cancel the flow of its natural gas and crude oil pipelines to Europe if the US cuts Russia out of SWIFT (the payment system that props up the dollar hegemony)? Because they won’t even be able to get the dollars they need (btw, which is what everyone uses in the transaction of oil, which is known as the Petrodollar System), and therefore, literally cannot engage in the transaction. It’s like Russia is making a threat that’s already implied in the event of sanctioning them from the Dollar Funding System.
Dollars are needed. They are what fund the global economy, and what allow all nations, regardless of their martial or resource dominance, to trade. Without access to the Dollar, you are relegated to functioning like a backwater nation like Cuba, Iran, or North Korea, that would otherwise do fine if allowed into this system. Not saying that the system is good or bad - remember this isn’t a moral lesson - it just is how it works, regardless of how much you want to nitpick about Taiwan manufacturing 70% of the world’s semiconductors or China being what makes all of our “Proud To Be An American” t-shirts. Sure, they have the stuff, but we have the thing that allows them to make the stuff.
If you’re still wondering, “Well why don’t they just utilize their own productive capacities for themselves?” and you’d be a keen cookie for pointing that out, but still again, you are skipping over the Schelling Point! To the rest of the world, anything other than a dollar is not as well-trusted. All you have are Euros, Swiss Francs, and Yen, but they don’t have the historical background of being a global superpower like the US, they all don’t have cool treaties that say people have to trade in their currency, but above all, none of them have a psychological dictatorship over world finance and trade.
So when the US Debt climbs above some arbitrary number (like $30T), why is it we all like to have a little celebratory freakout about “grr I remember when we didn’t spend all this money on transgender sculpting classes, but pulled ourselves up by our bootstraps!” for a couple days? Well, because the average fiscal responsibilitarian (new term I made just now) wants to look smart and righteously indignant, unfortunately, this number doesn’t mean imminent default, but points to a greater problem - the US gov’t continues to spend more and more, but there is less and less economic expansion, job opportunities, and wealth.
We can look no further than Japan (and soon China) who have been building highways to nowhere for thirty years in desperate, Neo-Keynesian attempts to save their economy. Unfortunately, as we know, this is just communism, and creates useless makework and a plethora of infrastructure that will just deteriorate the minute we have to focus on more important issues at hand.
Albeit the more debt the US amasses, the more treasuries we can issue to a market of demand that seeks these treasuries in place of risky assets, because no one is interested in risk these days. These treasuries, in turn, are always going to be bought by Primary Dealers because they are legally obligated to do so. There is a framework that disallows for any default funny business. Faith in the dollar cannot be broken past the inability for the banking system to transact with counterparties, and without that, it will be maintained, albeit it has been choppy since 2008, and not because of US debt. No one cares about that. What global finance and trade care about is having more dollar produced (AKA, more wealth). It isn’t the embarassing attempts the US gov’t makes at pumping out economic productivity - it’s the fact the US, and the world itself, is in this anomalous elongated economic recession and dollar shortage in the first place.
Now that number one has been settled to some satisfactory extent, we must knock out number two - that the US will be the sole loser if it were to “default.” People have this odd belief that global finance is just full of frustrated banksters wanting to cut away from this outdated dollar system that has been a thorn in their side. I think people’s biases have seeped into their analyses so badly that analyzing faith becomes something hard for them to do.
The Dollar is not something that is hated or disdained, other than by idealistic tyrants of third world countries. Most nations are happy to have a tool to transact with other nations to get all sorts of cool items or financial instruments. This world trade thing really benefitted your boomer grandparents quite a bit. It’s just the shortage of dollars, the expansion of debt, and the diminishing returns have all posed a massive problem with faith post-2008 where that faith was trampled on by bad collateral.
It’s not like everyone in finance is just ready to hop onto the Bitcoin bandwagon that dumb money seems to love, or something similar, and this damn Dollar just holds them back. No, and the only reason El Salvador adopted Bitcoin as “legal tender” is because they literally cannot print money. They have no national currency, and guess what, they use the US Dollar instead. They rely on borrowing and foreign investment, and with that coming in less and less (due to a dollar shortage), their (not so) keen, millenial president decided to hop on the bandwagon mania with crypto right at the top to hopefully make a quick buck. He’s not a visionary, he’s like any other politician - stupid and impulsive, and made a vie to save his government from economic turmoil so he can look like a technocrat hero. Ironic, the one thing Bitcoiners have to be excited about actually happens to prove that the Dollar is what nations, corporations, and banks want, and not esoteric meme coins.
The Dollar World Reserve Status, and Eurodollar System (should be called Rogue-Dollar System) has allowed for a global economy to function, and with the death of this system, the global economy dies. Why? Faith. What faith!? Schelling Point. When you take away the one thing people trust, they are not eager to jump to spurious speculative attempts at money, or inferior monies. They want the money.
That’s why when the US gov’t decides to spend a bunch of money and pay for it by issuing Treasuries, it doesn’t do anything except help the global economy function a little longer. It gives liquidity to a system that is barren and dry. That is why when we have a record trade deficit, it just means there are a bunch of dollars leaving the US to a demand that desperately needs it outside. Sure, we can make the legitimate argument that this is terrible for our culture, our long-term wealth, the spiritual health of our people, our own productive capacity as all manufacturing gets outsourced, and inevitably has led to decadence and low native birth rates. Sure, but that is not the argument I am making, and nor should you be making economic arguments for something that you do not understand. Stop being morally indignant about everything - it makes you look stupid half the time, and the other half of the time you just look like you like the smell of your own farts.
Ricardian Equivalence will reign supreme, and thinking our ailing economy can be saved with either more or less government doesn’t touch on the problem at hand of diminishing returns, lowering economic expansion, and upward economic mobility. The debt, will instead, act as an ailing reminder of how nothing ever got better after 2008, and how building a useless wall, expanding shoddy public infrastructure, or whatever makework the government wants to do to feign “progress” will do nothing to improve our lives. It isn’t an imminent disaster, but a reminder of a broader dollar shortage problem across the entire world,. And, if you just print dollars to pay off all of this debt, we will simply get ourselves in the same rut we have before, or the system will break under the amount of distrust sewn from this amount of debt forgiveness.
Moldbug’s solution is the best one I’ve come across, and even then, it doesn’t take into account the dollar shortage/Eurodollar Crisis.
“No extension of foreign trade will immediately increase the amount of value in a country, although it will very powerfully contribute to increase the mass of commodities and therefore the sum of enjoyments.”
David Ricardo