Arnold Kling  

The Balance of Saving

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Should we worry about what I call the Balance of Saving (our trade deficit)? Don Boudreaux says no.

Why should I care if new enterprises are financed out of the savings of a stranger from South Dakota rather than out of the savings of a stranger from South Korea?

For Discussion. Try the same sentence, but substitute "government spending is" for "new enterprises are" -- does it still feel good?

COMMENTS (6 to date)
Don Boudreaux writes:

The sentence constructed with "government spending is" feels no less good, and no more fine, to me than does the sentence constructed with "new enterprises are."

I am not indifferent to government spending; in my opinion, the less the better. And I understand that easy access to credit makes deficit financing more likely and, hence, makes the number of $$$s that Uncle Sam spends greater than it would be if foreigners were less willing to spend their $$$s on government debt.

But given some level of government indebtedness, what do I care if the holder of any piece of that debt is an Alabamian or an Albanian?

Walker writes:

But given some level of government indebtedness, what do I care if the holder of any piece of that debt is an Alabamian or an Albanian?

This question is framed in an abstract context, so I'll give an abstract concern. The issue is economic sovereignty. The lender generally holds a position of power over the lendee, and this power can be used to advance the lender's economic or political interests in ways that may hurt the lendee (whether intentional or not). Of course, the extent to which this is a real concern or not depends upon the extent of indebtedness and a lot of other factors including geopolitics.

Lawrance George Lux writes:

Whether the term 'government spending' is substituted for 'new enterprises' holds little value, as stated above. The problem comes when the sources of funding dry up. Both cases assure a lack of native replacement income, while the lack of native productivity assures that such funding will dry up. lgl

DSpears writes:

What power does the lender have over the lendee?

In a lot of situations the lender is in a more precarious situation than the lendee. With government debt in particular the lendee has some power to manipulate the price of the asset, a power which the lender may not have. China and Japan buying up lots of American debt is not a power play to control our markets, it's a desperate move to try to keep their currencies from rising with respect to ours which would make their exports more expensive in America. When this stops the exchange rate will adjust and our trade deficit will come down due to realtive currency exchange movements.

The bottom line is that lenders can't have any control of lendees unless they are willing to take a huge loss to exert that power. The vast majority of lendees are in the business solely to make as much money as possible so it's a non-sensical to expect that lenders would do anything to jeopardize getting their principle back at a tidy profit. All the doomsday scenarios of foreigners owning government debt require the lender to lose a lot of money.

People have loaned and borrowed money from each other over thousands of years because it puts neither the lender nor the lendee in a position of power but into an agreement where both sides benefit and both sides interests are best served by the lender getting his principle back. The bank may be able to take your house if you default on your mortgage but that doesn't mean they have any power over you. If the bank wanted your house it would have taken the money it used to lend to you and bought it themselves, instead of getting their money back in little dribbles over the next 30 years. Even the most ruthless loan shark won't kill you as long as there is a chance he'll get his money back, because dead men can't pay their debts which is what the loan shark really wants.

The idea that people loan money to others in order to hold some power over them is a superstition that misunderstands economics. The fact is that most lenders are debtors to somebody else (banks for instance) and can't risk their precious capital in order to exert some arbitrary power over people.

This scenario seems to envision a sort super-villain from a James Bond movie buying up all of the government's debt so he can rule the world. It's not a real scenario.

Walker writes:

It is not in the lender's interest to lend to the point that the lendee cannot pay it back, but it may be in its interest to keep lending as close to the lendee's breaking point as possible without going over. If the lendee needs every spare asset to meet interest payments, what does the lender care as long as the payments come in. If the lendee is in this sort of debt spiral, the lender(s) may also place conditions on further loans and through these conditions exert power over the lendee. For nation states, these conditions may be strictly economic such as when the IMF helps nations meet their obligations through "restructuring", or manifest themselves in other realms of politics.

Mike writes:

I would think that in the case of nation-states, the lender holds some power over the lendee only in regards to the extension of additional credit, or in the ability of the nation-state to make the agreed interest payments. Even so, the meeting of interest payments is only necessary in that it impacts the nation-state's perceived credit worthyness.

In the particular case of the United States, there is no shortage of lenders (currently) and the interest payments are (again currently) manageable. While these factors may change in the future as debt accumulates, or as China and Japan reduce their willingness to lend to the US, I still cannot envision a scenario where the US becomes so reliant on foreign debt as to cede any power over economic decisions. In fact, the opposite may be the case should the US fail to borrow enough money to artificially inflate the dollar versus the yen and yuan.

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