Dance, Grasshopper, dance to the eternal music of Summer!

Seriously now. History may rhyme, but it doesn't repeat. The magnitude of America's debts, consumer, governmental, and financial, as well as the sheer magnitude of the twin deficits far exceed the situation in 1987. But OJ is a perfect example of the "average investor" that Roach is talking about. "If it hasn't collapsed yet, it never will".

Imagine that a blizzard dumps 6 feet of snow on your roof. You hear creaking noises from time to time, but the roof holds. Now, a sensible person would say "6 feet of snow can't be good for the roof. I'd better figure out how to get it off before the roof collapses." But the lazy guy who puts off thinking about the roof lucks out for a week, and his roof doesn't collapse. His neighbor tells him "you'd better take care of that snow" but the longer he puts it off without consequences, the more he believes that nothing bad will happen to him.

So each week, a new storm dumps a foot on the roof. He doesn't care. He's convinced himself that "snow doesn't matter".

Can you write the ending to this fable?

The 6' first landed in Britain while it was fighting Napoleon. The roof is still holding. The reasonable conclusion is that the roof is stronger than the snow, which melts and falls and melts again.

Do a search for a document titled, "A Perspective on US International Capital Flows."

Interesting theory, Econopundit had wondered the same.

I'll ask again: They send us cars and tvs and clothes and all sorts of other stuff, while we send them pieces of paper with pictures of dead white guys on them. What's the problem?

Robert: You seem like a decent guy, but you have to stop paying attention to people who think that the budget deficit and the trade deficit have anything to do with each other because they both include the word "deficit."

I'll ask again: They send us cars and tvs and clothes and all sorts of other stuff, while we send them pieces of paper with pictures of dead white guys on them. What's the problem?

Ray, you are right. But why should they do such a lunatic thing?

It's because there's another element here that doesn't get mentioned. They gladly take our paper, and will gladly continue to do so, because we give them something of immense value along with it. Their prosperity is dependent on us policing the world and not letting them attack each other. (As witness the SIX carrier Strike Groups recently sent to cruise about near Taiwan. We have TWELVE of them, no other country has even one.)

They could stop buying our paper, but then they might have to spend seriously on defense, and would have to take the economic hits that would come from greater insecurity in the world. They are in fact getting a real good deal...

So Robert: what you're saying is that welfare states eventually go bankrupt. What's the downside to that?

I was in Iowa at the time, and thousands of guys lost their farms.

The farms may be worth more now than they were then, but those guys don't own 'em.

In some cases, they're dead, by their own hand.

Yes, I remember how nice it was when the creative destruction looted the life savings of people who had, at the urging of government, put their money in S&Ls.

Talk about exchanging valuables for pieces of paper. How about your house for a CD?

First: The Budget and Trade Deficits are not a twin deficit, they are a double count. Not only does one fund the other, but if it were not for both together, world trade liquidity would be a hard come-by.

Second. The house roof metaphore is highly imperfect. Every year we shore up the roof beams. The house was 160% larger in 2000 than it was in 1980 in constant dollars. That is a very sturdy house. A lot of seed corn has been planted.

The only thing you need to worry about right now is 11/2 and that problem looks like it may solve itself.

We didn't need their farms. If you lost your life savings in an S&L you were gaming the market and lost. Evolution has losers.

David,
They may have nothing to do with each other, any more than a bleeding ulcer has nothing to do with a broken hip. It kinda sucks to have both at the same time, though.

A deficit means that you are living beyond your means. It is as simple as that. It's ok to do for a short time, but not as an ongoing proposition.

Robert: An oldy but a goody - you have a current account deficit with your grocery store. It doesn't mean anything.

Living beyond your means? Do you recommend against buying a house or a college education unless you can pay cash?

Sandy
I've read the speech by Poole. Here are my comments:

First he makes this point "When a company borrows to finance spending on capital, the company may be said to have a deficit on current account�its total spending on goods and services, including new capital, exceeds its revenues."

This is true, as long as the spending on new capital produces future income that is greater than the money spent on it. If it doesn't, then it is just losing money.

To answer Ray's question, TVs and clothes don't produce income. They are not investments. We are trading pieces of paper with picures of dead guys, which they use to build factories which produce income, and we get TVs and cars and patio lounges and 1000 lb stainless steel barbecue grilles, which don't. It's sorta like trading land for shiny beads and shells.

He goes on: "In fact, investors abroad buy U.S. assets not for the purpose of financing the U.S. trade deficit but because they believe these are sound investments promising a good combination of safety and return. Many of these investments have nothing whatsoever to do with borrowing in the conventional meaning of the word, but instead involve purchases of land, businesses and common stock in the United States."

He's making the obvious mistake of assuming that these capital inflows are made as a result of a comparative analysis of investment returns. They are not, for the most part. Dollar assets are beig purchased by Japan and China to maintain a competitive advantage in their currency exchange ratios to subsidize their export trade. It has nothing to do with earning the best return on those dollars.

David,
The deficit with the grocer, as well as the mortgage, insurance, phone and power companies, etc. is more than made up by my surplus with my employer. It is the net that counts.

Robert:

If Chinese securities were worth more than American the Chinese would buy them--they aren't.

OJ,
Borrowing to buy a home is fine, unless you have to put the monthly mortgage payment on your credit card. Then you are just driving down the road to eventual ruin. As we have run deficits in 18 of the last 20 years, and they are only growing larger, the second scenario describes us.

The college education is an asset that will create future income (unless you study philosophy or queer theory or something equally stupid, whereas you are just dumping money down a rat hole). What income producing asset are we funding with our entitlement "investments"?

The big debt is seventy years old. It's much lower today than it has been at various times. Today it's 7/11ths of one year of GDP. If the country were closing tomorrow that would be a big debt. It's not. You can carry a debt like that forever. Indeed, you can carry far higher and the Brits and we usually have while we were waging world wars.

--Yes, I remember how nice it was when the creative destruction looted the life savings of people who had, at the urging of government, put their money in S&Ls.--

And I remember the creative destruction of my portfolio because I was greedy. Your point? Didn't the S&Ls have caps on them so they weren't as nimble?

We're not an ag society anymore. Over 80 milion ag jobs have been lost.

The environazis get their way, however.....

Harry: I was a bit young at the time, but weren't the S&Ls deregulated before stagflation had cooled sufficiently. Didn't the newly-deregulated S&Ls go under because they had to suddenly take on too much risk to keep up w/ 7 -- 8% inflation? I remember a good deal of fraud, but I'm also remembering that that industry was upside-down almost from the get go.

TVs and clothes don't produce income. They are not investments. We are trading pieces of paper with picures of dead guys, which they use to build factories which produce income, and we get TVs and cars and patio lounges and 1000 lb stainless steel barbecue grilles, which don't. It's sorta like trading land for shiny beads and shells.

Robert: If you think about this long enough, I'm confident that you'll understand why you're point is exactly backwards.

You point about the surplus is also not well-taken. You sell services, but buy things. When it comes to things, you are running a huge deficit. So what?

We are trading pieces of paper with picures of dead guys, which they use to build factories which produce income, and we get TVs and cars and patio lounges and 1000 lb stainless steel barbecue grilles

Robert: David's right. Ask yourself: how does a factory produce income?

The S&Ls went to dust because Fernand St. Germain (House Banking Committee chair, D-RI) lifted the insurance restrictions and the competition (investment) restrictions in late 1979 or early 1980. They became speculative for those at the top and for people like Charles Keating, while mom'n'pop continued to use them the way they had for many years. It didn't take long for the S&Ls to get whipsawed by interest rate changes and poor investment. The small investors, the depositors, and most big investors never knew what hit them.

St. Germain was convicted of something (I don't remember what offhand) and was booted from Congress. Except for McCain, the Keating 5 did not survive another term. And who knows how many House members were compromised?

David, services or things is not the issue, it is whether we sell enough whatever to pay for what we buy. The deficit says we are not. Are we creating such a surplus internally so that we can handle this deficit externally and still come out ahead? The growing debt figures say no.

Joe and David, please elucidate your point. The way I see it, you build wealth through production (which is what factories do, they create artifacts of value, or wealth), and you use up wealth through consumption. To increase wealth requires a surplus of production over consumption over time.

When factories move overseas, wealth creation moves with them. Most of the service jobs that are taking the place of the factory jobs are sales & distribution related, enabling the American consumer to consume the output of foreign factories. We've used the rubric of "creative destruction" to passively allow our productive capacity to atrophy away. It won't reverse itself until we start producing more and consuming less.

Here is another take on the implications of capital flows http://www.prudentbear.com/internationalperspective.asp

Robert:

How archaic. An American company has an idea for a product--the folks who generate ideas and run the firms that spin them out tend to get paid pretty well. The product is a few bits of metal and plastic that other Americans design machines to build--the machine guys get paid pretty well too. Any idiot can operate the machines so it doesn't make sense to pay them much--certainly our law would forbid you to pay them as little as their task warrants. So you put the factory you designed overseas and have the product you imagined assembled overseas by folks making squat. Then you bring the very cheap finished good back to America where all the folks getting paid pretty well can afford a lot of them.

It's your view that it would be better for us if we forced the company to pay the unskilled assemblers a whole lot of money and make the good far more expensive so that less are sold at a higher price?

http://www.homeboundauto.com/Mortgage_Info/Mortgage01_22_04/Mortgage9D_Refinancing.htm

In textbook economics, chronic borrowing inevitably fuels rising interest rates, which can reduce economic growth. But, so far, rates remain near historic lows.

"Nothing -- the tax cuts, rising deficits -- that has happened in the last two years has harmed the economy," says Kevin A. Hassett, an economist at the American Enterprise Institute, a Washington think tank that mirrors administration thinking. "Our economy is far less exposed to high debt levels than other countries." For instance, the average national debt level among industrialized countries, at 50 percent, is far higher than America's 35 percent. Japan labors under a debt load equal to 120% of its economy, about the same ratio the US carried in the first few years after World War II.

"It's easy to find periods when debt was heavier to bear than today," says Paul Evans, a professor of economics at Ohio State University.

"Following the Napoleonic wars, British debt was 2 1/2 times the size of its economy, and yet Britain retired that debt and the sun continued to rise over its empire for decades afterward."

"Following the Napoleonic wars, British debt was 2 1/2 times the size of its economy, and yet Britain retired that debt and the sun continued to rise over its empire for decades afterward."

When you're collecting revenues from colonies on every continent, it is a lot easier to do so.

Robert:

Ever seen any cost-benefit analysis on how much it actually took to maintain the colonies? You might be surprised.

The brand value was what mattered. It certainly helped during WWI and (not as much) during WWII.

Robert:

Again your quarrel is with Adam Smith:

http://odur.let.rug.nl/~usa/D/1776-1800/adamsmith/wealth02.htm

Robert: What do you think the point of being wealthy is?

David,
Staying wealthy?

Apparently you do. But to what end?

The S&Ls were a complicated business, but they demonstrated that, when it comes to money, less government is not always desirable.

I haven't the heart to try to tease it all out in a blog -- it'd take a book -- but the bottom line was, I was there, I observed plenty of conservatism but I didn't see any of the compassion.

jim's right about the small investors, but I was talking primarily about the small depositors.

For Orrin to say that placing your money where it returns the most is 'gaming the market' is beside the point. The reason it returned the most (or, in fact, one-quarter point more than other deposits that were supposed to be of equal risk) was that government was trying to manipulate the housing market.

Same with farmers. They were asked to plant fence-row to fence-row by their government. They did, the market turned down and they were hung out to dry. I don't feel as sorry for them. They had had the same treatment from the Coolidge Republicans and ought to have known better.

Harry:

They weren't asked to farm or put money in uninsured S&L deposits.

O yes they were.

David,
To leave it to our children? To conserve what our fathers have endowed us with? Do any of these make sense?

The correct answer is to spend or invest.