We, the USA, have a huge trade imbalance with most of Asia. Probably other countries, too, but the China, Japan, etc. are mostly in the news.
(interesting side question: Does anybody country buy more from the US than we do from them?)
Anyway, so billions of dollars flow out but how do they get back in? If they didn’t come back in some way, we’d be out of money here, right? That’s the thing that makes money work, that there’s a finite amount of it.
I know that the Chinese aren’t sitting around on large piles of cash cleaning their toes. I suppose some of it is sent to other countries to purchase their products so some returns indirectly. Still, I’m sure it’s not working out that purchases alone balance the money flow.
Do you mean money, as in green pieces of paper with pictures of dead presidents? Or do you mean real money, as in entries in financial databases, such as bank accounts?
With the latter, a lot comes back to the US as loans to the federal government, popularly known as T bills.
Money is not the same thing as currency. We’re not out of currency because most of the money in the economy is not represented by a cunningly printed piece of paper, it’s represented electronically.
Some people really do have bales of $100 bills sitting in a safe. But most of the money owed to the chinese is just a ledger entry in a bank’s computer. It’s exactly the same as if I wrote a little note that says “IOU $1,000,000”. I can write as many of those IOUs as I want, the only trouble is that I have to convince other people to accept them in return for goods and services. If I write a $1,000,000 IOU to some Chinese company for $1,000,000 worth of goods and services, all that means is that at some point the guy with the IOU will expect $1,000,000 of goods and services back. If the Chinese don’t buy US products they accumulate IOUs. Eventually we’re going to have to come up with goods and services to exchange for those IOUs.
One way around this problem is to simply declare that you were kidding, and that those IOUs are meaningless, and tell the IOU holders to go screw. But that has some rather severe side effects, like the problem that all the other IOU holders in the world are now screwed, and now no one in the world will accept your IOUs in the future, and so on.
That is not exactly true. I’m sure someone else will come along to explain it better, but money is created any time a bank issues a loan. Banks issue loans for many times more money that they have deposites for.
Google “where does money come from”.
Right, money, the financial kind, not currency, the paper stuff. “Sitting around on piles of cash” was intended to be a figurative statement, not a literal one.
So, the T-Bills, thing. I buy a 100 dollar chinese gizmo. China now has $100. They then spend it buying a T-Bill from the US Gov’t for $100.
Now we’ve got the cash back, but I owe China $110 tomorrow, which sends the money back out again. It’s still gone, it’s just gone tomorrow and not today.
A sizable portion of the trade deficit also comes back via foreign investments, either in the form of setting up new industries in a deficit country or by buying companies (or shares in them, previously held by American investors). Takeovers of American companies by foreign investors are partially a result of the American trade deficit.
If the trade balance never evens out, then, yes, it is. At some point, if the US does not start making goods to sell to the Chinese (not just them, but anyone who holds our debt, or might buy it) and providing services to them, then the US dollars will drop in value (because there’s too many of them out there, and not enough stuff worth buying with it.
But, unless the United States economy and government completely collapse, we’re always going to be making some products of value to the outside world, so the dollar will stabilize at a new equilibrium value dependent on that production.
It might or might not be a house of cards. Yes, eventually we’ve got to pay back that $110. But it’s only a house of cards if paying back that $110 is impossible. As of today, government debt is large, but it’s not large compared to the national debts other countries have run up, and it’s not hideously large compared to our GDP.
If the US keeps racking up more and more debt at a higher rate than GDP growth, that’s worrisome. If we rack up more debt, but at a rate lower than GDP growth, that’s not so bad, because our ability to pay back the debt has grown faster than the amount of the debt.
Eventually this has to balance out though. One way it could balance out is through rampant inflation or currency devaluation. Sure, we’ll owe the Chinese the same amount, but a 2038 dollar might be worth a fraction of a 2008 dollar. And this is one of the reasons the dollar is so weak right now. We’ve been buying lots of goods from other countries, which means that the supply of dollars is high, which means the value is lower. So it’s more expensive for Americans to import, but cheaper for us to export. So all those people holding t-bills could be screwed because those t-bills won’t be worth as much in the future as they are today.
Or we could raise taxes and slash spending to pay for the problem. Except no one wants to do that, because, duh.
So the hope is that we’ll just grow our way out of the problem, like a college student who takes out a massive college loan that he has no hope of paying back today, except 10 years later he’ll have a high-paying job and will be able to pay it back easily. The only trouble comes if 10 years later he’s still working in a video store instead of that hypothetical high paying job.
I like this description a lot, it really sums up what is otherwise a difficult concept in an everyday scenario. I’m afraid I’m going to have to steal it, and as I can’t be giving proper attribution to a SDMB user handle like Lemur866 in a formal context, I’m afraid you’ll just have to accept this note of appreciation
So where does one work in the analogy to spending way too much time sitting on the living room couch, knee-deep in pizza boxes and beer cans while playing Halo 3 on an XBox?
I’ve always looked at it more like a Ponzi scheme with our descendants being the losers.*
The article in Rube E. Tewesday’s link matches a report that I heard on National Public Radio’s Sound Money. In the meantime, the US owes China, other countries and future Social Security recipients over $9.2 Trillion. (Here is a less biased source.)
I did not read the full Atlantic Monthly article yet. They probably cover the possible outcomes properly, but I’ll lay out a few possibilities anyway.
The US can sell stuff to China to reclaim our IOUs. The problem is - What we will sell?
Electronics? Not likely. We do have some things that we sell them, but is such a drastic turnaround feasible?
Weapons systems? Possibly, but there are potentially severe consequences.
Property or businesses? IMHO, likely. But consider the long-term consequences.
The US can have high inflation to decrease the value of the foreign holdings, or even refuse to acknowledge the debt. This would have devastating effects on the world economy, in particular the US economy itself.
We can buy back the debt for cash and pay it off. The problem with this one is that we do not have the national will (or leaders) to accomplish this. In only 8 of the last 50 years has our annual expenditure been lower than our annual revenue. This is why we have such an astronomically high debt. It is a decision that each generation winds up leaving for future generations to solve.
As this forum is GQ, your question of “Is this thing a house of cards?” can’t really be answered. But, with looking at the facts of our real national debt, how much China owns in US funds, and the history of budget deficits built into annual budgets, you may arrive at your own depressing conclusion.
On preview (and due to getting distracted by a phone call), I see that others have raised some good and valid points. Lemur866 is much more optimistic than I am. I hope he is right and I am wrong.
OK, so it’s not really a Ponzi scheme, but I do feel that way at times.
Lemur866 wrote: …the hope is that we’ll just grow our way out of the problem, like a college student who takes out a massive college loan that he has no hope of paying back today, except 10 years later he’ll have a high-paying job and will be able to pay it back easily. The only trouble comes if 10 years later he’s still working in a video store instead of that hypothetical high paying job.
So, your take is that instead of being a college student with a massive loan but a bright future, we’re more like the guy from Bonfire of the Vanities who’s raking in a ton of money, but after tallying up the expenses of his exorbitant lifestyle (some of it on credit), realizes he’s actually in the red?
As long as we’ve got the biggest nuclear stockpile on the planet, we’re too important for global safety to risk destabilizing – China or Europe will give us some big cash infusion. Or we could trade nukes for oil, but we’d better do it soon before they assemble the expertise and materials to do it themselves and won’t need us any more.
Well, I’ve never seen Bonfires of the Vanities, but I guess so. I liken it more to knowing someone* who earns $100,000 per year; a pretty good wage from my perspective. The problem is that they spend $115,000 each year, year after year, and have $383,000 in credit card debt. (Not including the mortgage. That would be equivalent to US bonds for long term infrastructure improvements.) Their interest payment is one of their highest expenses but they never pay off any of the principal. I would say that such a person would have some severe problems and was not fiscally responsible.
By the way, the numbers I used are based on US estimated 2007 receipts and outlays and today’s budget deficit.
I do not see where Administrations and Senators/Representatives have a lot of incentive or will to work to correct this problem. Instead they will continue to push it off into the future, as past administrations have done. And this has been allowed because we are the biggest player on the planet, with a huge economy and a bunch of nukes. But, someday, the strain has to reach the limit and it will all collapse. I don’t know if it will be in 20 years or 100, but it won’t be pretty and it will have worldwide consequences. Unless, as you point out, other groups work in the next decades to wean themselves from the need for the US as much as possible. If I was China, that would be part of my 100 year plan.
