The U.S. Is Not a “Debtor Nation”!
The May 16, 2019 New York Times article, Trump Found a Love for Tariffs Battling a Booming ‘80’s Japan by Jim Tankersley and Mark Landler, mentions Donald Trump’s belief that “We’re a debtor nation”. Such erroneous belief is in line with the fallacious conventional economic wisdom that the United States depends on foreign capital to finance its budget deficits. That mistaken theory, based on the superficial observation that foreigners hold some of our Treasury bonds, persists even after the Federal Reserve’s enormous QE (quantitative easing) which financed the entire budget deficit (over $3 trillion) from 2011 to 2014. That enormous round of QE financing by the Fed should make clear that we have no need for foreign capital. Mysteriously, that economic reality is still not understood by most economists and politicians. We have the Fed’s QE, so we will never need Chinese or Japanese capital. We are most certainly not addicted to (or dependent on) foreign capital.
Why is it that foreigners holding even large amounts of our Treasury bonds does not mean we are a “debtor nation”? The reason is that all of our government debt is in our own currency, the dollar, not in a foreign currency. The difference is crucial. First of all, the Fed can always service foreign-held Treasury bonds with QE (which is essentially printed money), meaning that foreign-held government debt is never a problem (nor is domestically-held government debt!). Secondly, if the dollar exchange rate drops, our foreign-held debt will not increase. Whereas when a nation’s debt is in foreign currency, that debt will increase in terms of the nation’s own currency when the national currency weakens. So, to be a “debtor nation” means having government debt in a foreign currency, regardless of the nationality of the bond holders. A nation is not a “debtor nation” just because foreigners own some government bonds when those bonds are in the nation’s own currency.
Another point: consider Argentina and Brazil, for example, nations which have had recurring severe economic crises due to their truly foreign debt denominated in US dollars, not their own currency. That foreign debt increased as the exchange rate of their national currencies fell, leading to a downward spiral whose initial cause was bad economic policy. The decision to borrow in foreign currency was economically and politically expedient for the short term, but inevitably disastrous. The Argentina/Brazil crises were compounded by the monumental mistake of persisting with foreign currency financing, organized by the IMF and requiring tight fiscal and monetary policies, which deepened and lengthened the crises!
The IMF has truly been totally incompetent, even with Poland and Russia, as they emerged from communism in the early 1990’s, imposing fiscal and monetary austerity along with artificially strong national currencies (making their economies much less trade competitive) in exchange for fresh dollar denominated loans. Those were extremely counterproductive policies, deepening and lengthening the Polish and Russian recessions to depression levels. Poland and Russia both ended up feeling that the IMF’s advice was economic sabotage directed by the United States. In fact, the IMF was not attempting sabotage, it was simply grossly incompetent. The only good advice for nations is to never borrow in a foreign currency. And, to never implement fiscal and monetary austerity during recessions (which caused the Great Depression of the 1930’s and the long, deep recession in the Eurozone starting in 2011).
© Edward Sonnino 2019
May 17, 2019
