December 1, 2004

BORROW LOW, HIGH RETURN:

GOING DOWN (John Cassidy, 2004-11-29, The New Yorker)

Running a trade deficit and borrowing from abroad, even borrowing heavily, aren’t necessarily bad things. Many developing nations do so because they don’t have enough capital to invest in industrial equipment, education, and infrastructure. But the United States isn’t a developing nation, and it isn’t borrowing to finance investment: it is taking on debt to finance the government’s day-to-day expenses, and to pay for imported consumer goods, such as autos, toys, and electronics.

The dollar’s fall, along with the trade and budget deficits, is a classic symptom of a country living beyond its means. Twenty years ago, American households saved about nine cents of every dollar they earned; today, they save less than a penny.


That would be a shocking statistic, if true. Luckily, to get such numbers you have to exclude home ownership--which is at record levels--and retirement savings--401k's, IRA's, etc. David Remnick has reduced The New Yorker to little more than a water-carrier for the Left, but someone with some pretense to economic knowledge, like Mr. Cassidy, ought not to cook the books. The reality is that we borrow money from these folks and repay it at a very low rate, but a better (and safer) one than they can get at home, so that we can invest our own money and get a much higher rate of return.

Posted by Orrin Judd at December 1, 2004 12:44 PM
Comments

I disagree. A lot of this debt is going to consumption - not investment. The debt burden is especially high among young Americans.

Posted by: Chris Durnell at December 1, 2004 3:36 PM

Chris:

You have that a bit backwards, we're consuming more because we're so much wealthier.

http://www.brothersjudd.com/blog/archives/010341.html

Posted by: oj at December 1, 2004 3:42 PM

Chris: Which is exactly where we'd expect it to be.

Posted by: David Cohen at December 1, 2004 4:17 PM

OJ's tag line is right on the money.

As just one example, one would think, by now, that people would get suspicious when capital gains are taxed as income, but not spending them doesn't count as saving.

One would think.

Posted by: Jeff Guinn at December 1, 2004 7:43 PM

Don't count real estate as savings. Or at least, discount it.

I am old enough to remember when the alleged assessed value of real estate in Tokyo was supposed to be greater than the value of all the real estate in No. America.

Something bad happens, and all those savings will evaporate like mist on a sunny morning.

Posted by: Harry Eagar at December 1, 2004 8:17 PM

Ever have a landlord give you your rent back?

Posted by: oj at December 1, 2004 8:30 PM

The Savings number is one of the worst. They take two high level agregates subtract them and come up with a meaningless number.

Another example of worthlessness. American Corporations are sitting on mountains of cash. Why? no one seems sure. Maybe they are waiting for the complete abolition of dividend taxation. Is that cash considered in the savings rate? no.

Posted by: Robert Schwartz at December 2, 2004 12:48 AM

They just foreclose.

'Savings' in real estate are unstable and almost completely illiquid.

If real estate savings were worth anything, Japanese banks wouldn't be insolvent. They have lots and lots of real estate.

Posted by: Harry Eagar at December 4, 2004 12:12 AM
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