Economics

Consumed

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Consumerism is as American as cherry pie. Plasma TVs, iPods, granite countertops: you name it, we'll buy it. To finance the national pastime, Americans have been borrowing from abroad on an increasingly stunning scale. In 2006, the infusion of foreign cash required to close the gap between American incomes and consumption reached nearly 7 percent of gross domestic product (GDP), leaving the United States with a deficit in its current account (an annual measure of capital flows to and from the rest of the world) of more than $850 billion. In other words, the quantity of goods and services that Americans consumed last year in excess of what we produced was close to the entire annual output of Brazil.

Should we be worried? Some say yes, there's a "possibility that political considerations could trump shared economic interests, causing nations to use their international financial positions as weapons." A cautionary tale and interesting potential American "empire" as British Empire parallel:

When President Dwight D. Eisenhower learned in 1956 that Britain, in collusion with France and Israel, had invaded Egypt without U.S. knowledge, he was infuriated. "Many people remember Suez," notes Jeffrey Frankel, Harpel professor of capital formation and growth at the Kennedy School of Government (KSG), but few recall "the specific way that Eisenhower forced the British to back down." At the time, there was a run on the pound sterling and he blocked the International Monetary Fund (IMF) from stabilizing the currency. With sterling on the verge of collapse, says Frankel, "Eisenhower told them, 'We are not going to bail out the pound unless you pull out of Suez.'" Facing bankruptcy, the British withdrew. This incident, notes Frankel, "marked the end of Great Britain's ability to conduct an independent foreign policy."

Via A&L Daily, one of the many oddly excellent articles in the Harvard alumni magazine.

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  1. If there were a country today whose economy exceeded ours by a margin similar to the margin by which the U.S. exceeded the UK in 1956, we might be in trouble. But as things stand, the analogy is pretty feeble.

    Anyway, if people are willing to lend us the money, doesn’t that prove that we’re good for it? Because markets are always efficient, right? I mean, they don’t make mistakes, do they?

  2. China has been making identical threats against us. We threatened the Yuan, they reminded us that they could collapse the Dollar by selling their immense holdings in US Treasuries. The Yuan remains artificially inflated.

  3. We should switch to one world currency and finish this inflation and exchange rate nonsense.

  4. Some would say that in return for lending us a ton of money, Saudi Arabia requires us to fight wars on their behalf.

  5. The “end of Great Britain’s ability to conduct an independent foreign policy.” ?

    Ermm . . . I don’t think they waited for anyone’s approval to recover the Falklands by military force.

  6. They’er not lending money,they’er investing it.Apparently it’s the safest place to be.

  7. > We should switch to one world currency and finish this inflation and exchange rate nonsense.

    You’re either advocating a return to a de factor worldwide gold standard or trying to bait some sovereign libertarian type into excoriating you for suggesting we should all be under a one-world government…

    Anyway, Americans do consume too much. Maybe if our consumption was taxed instead of our productivity, we’d consume less and produce more…

  8. Or GDP is 25% of the worlds.I really don’t see how we can produce much more.

  9. I mean gold, not NWO. But we should have one world language too. English.

  10. Was Reagan really likely to get pissed off at them for the Falkands? It didn’t exactly seem like a risky foreign-policy move. Except for the sort of embarrassing loss of the Sheffield

  11. “Ermm . . . I don’t think they waited for anyone’s approval to recover the Falklands by military force.”

    You’re kidding yourself if you don’t think they needed Reagan’s (behind-the-scenes) go-ahead for the Falklands invasion, since Argentina was technically a U.S. ally at the time.

  12. Some would say that in return for lending us a ton of money, Saudi Arabia requires us to fight wars on their behalf.

    Nonsense! We would never, ever get into a quagmire on behalf of some group of monarchs, even if they are buddy-buddy with our elite families in…

    Oh, shit!

  13. Britain et al. were the aggressors during the Suez Crisis. They were attacked and invaded in the Falklands.

  14. I don’t think they waited for anyone’s approval to recover the Falklands by military force.

    They had to use US facilities for refueling etc. They would have been stopped in there tracks if Reagan had said no. But as lunchstealer says, that was unlikely.

    But it was complicated by the fact, as Nate notes above, that the US had a treaty obligation to Argentina as well.

  15. Dan T.’s comment is not a troll! *applause*

    Actually, Saudi Arabia is the closest America comes to a colony or protectorate. The 1990 Kuwait crisis proves that. It’s an interesting thing to look at for comparative political scientists.

  16. It would be an interesting experiment to replace capital gains taxes with a federal sales tax…

    But ultimately, I believe the dollar is overvalued against the yuan and will have to come into balance eventually.

  17. Or GDP is 25% of the worlds.I really don’t see how we can produce much more.

    Considering that we are net consumers, it appears that we’re outspending what we’re earning. If I earn $1 billion a year, but I spend $1.001 billion a year, I’m still going to end up in the poorhouse, while the guy making a paltry $100K that spends $90K annually won’t.

  18. We should switch to one world currency and finish this inflation and exchange rate nonsense.

    One hundred quatloos on the newcomer!

  19. Every time I read about our current account deficit, I ask myself, what do those foreigners know that I don’t? Are they suckers or are we (americans)?

  20. Hmmm

    So letting other nations invest in the US may prevent us from engaging in foreign adventures?

    I can see why democrats hate the idea.

  21. If I earn $1 billion a year, but I spend $1.001 billion a year, I’m still going to end up in the poorhouse

    Not if that $0.001 billion comes back into your economy as investment — as it must if you are the US economy and you are dealing in dollars — and that capital infusion allows you to make $1.0003 billion the next year.

    Granted, if it comes back as nothing but a loan — e.g., because the government runs a deficit — your point holds better.

  22. Granted, if it comes back as nothing but a loan — e.g., because the government runs a deficit — your point holds better.

    Emphasis mine. We do have a double deficit.

  23. Nonsense! We would never, ever get into a quagmire on behalf of some group of monarchs, even if they are buddy-buddy with our elite families in…

    Oh, shit!

    Cool use leftists conspiracies and we can get all the other garbage with it. Please Thoreau tell us more about how great it would be if energy markets were nationalized…

    Or how about we increase taxes so we can subsidize alternative energy…that way the government can “choose” which is the best rather then the market.

    Oh yeah oil is to expensive as well and we use government to lower prices also.

  24. We do have a double deficit.

    Yes. But conflating the two as though they are both the same problem, or as though the trade deficit is a problem at all, is hazardous.

    As for whether China buys US equities exclusively and only US citizens buy treasury notes or whether China buys both, I don’t know that this is a very interesting difference. The US government deficit is its own problem. And only the US government can solve it.

  25. Please Thoreau tell us more about how great it would be if energy markets were nationalized…

    Huh?

  26. Nonsense! We would never, ever get into a quagmire on behalf of some group of monarchs, even if they are buddy-buddy with our elite families in…

    Oh, shit!

    Huh?

  27. Yes. But conflating the two as though they are both the same problem, or as though the trade deficit is a problem at all, is hazardous.

    As for whether China buys US equities exclusively and only US citizens buy treasury notes or whether China buys both, I don’t know that this is a very interesting difference. The US government deficit is its own problem. And only the US government can solve it.

    Your point is absolutely correct and, right now, is completely hypothetical. The current situation is that we have a large debt with a large spending deficit. Being in debt is fine if you have a surplus and say f it. China, if they were willing to risk the financial hit, could start selling their T-bills, raising the cost of capital here. It would be worse than the current credit crunch. To say that they don’t have significant leverage over us is untrue.

  28. Funny you mention Britain, they (along with Holland and Japan) own far more of our national debt than the scary mainland Chinese.

  29. Are Trade Deficits a Drag on Economic Growth?: http://www.freetrade.org/pubs/FTBs/FTB-027.html

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