Tuesday, July 28, 2009

Top US officials seek to reassure Chinese

President Barack Obama put forward his top economic officials on Monday to try to reassure China that the U.S. will not let huge budget deficits or runaway inflation jeopardize the value of Chinese investments here.

Here is an embarrassing example of an Administration that doesn't even understand our own monetary system.

The Treasury is not beholden to China for funds. It spends by crediting bank accounts. It is not borrowing money from China and the portion of China's savings that are held in dollars came about as a result of U.S. deficit spending anyway. That's because, by definition, the deficits of the governmental sector equal surpluses (savings) of the non-governmental sectors, both domestic and foreign.

If the government runs a trillion dollar deficit, the non-governmental sector--domestically and in foreign countries--will have some or all of that trillion dollars added to their income/savings, etc. That's just how it works.

In reality, the best thing the U.S. could do is deficit spend to a far greater degree, in order to ensure that economic output and employment rise to their maximum attainable level, given our available resources and capital. Then we could finally say we were living at our means and China would have absolutely nothing to worry about insofar as its investments in the U.S. were concerned.

However, the Administration looks intent on doing just the opposite. By viewing the deficit is a liability only (and not seeing the other side of the balance sheet, where it is an asset to the non-governmental sector), it will seek ways to reduce spending and thus lower demand and employment. This will put Chinese investments at even greater risk.

What irony!

The very policies the Administration believes will protect China's interests will actually harm them and the very same policies will harm Americans as well.

By acquiescing to China's demands, complaints, whatever, Obama is telling Americans that they must suffer...that they must endure longer periods of sustained, high unemployment and a weak economy, for no good reason.

Simply because he and his advisers do not understand our monetary system.

And the best irony of all is that China itself is deficit spending like mad right now to stimuluate its own economy...and it's working marvelously!!


The Joker said...

Mike, why is it that our government officials, both Democrats and Republicans, don't understand that more deficit spending is needed to lift the country out of this economic decline?

You'd think they, above all people, would get it.

It just frustrates me to no end!!

mike norman said...

Yes, it is incredibly frustrating and I don't know the answer. There are readers of this blog, such as yourself, who could run this economy far better than any of our current policymakers. I can only ascribe it to a belief system, similar to some sort of religious belief system that forbids you to take medicine--even aspirin. That's dangerous because even illnesses that are easy to remedy can sometimes cause death because they are left untreated.