by Gary North: An
Exchange of Empires
two deficits that we hear about most: the federal government's deficit
and the balance of payments of the United States. They are linked,
but they are very different in their effects.
deficit is seen by Keynesians as mostly a benefit and by Austrians
as mostly a liability, and for the same reason: higher government
of payments deficit is seen by virtually all economists as a benefit
for Americans and their creditors. Otherwise, the exchanges would
not take place.
At some point,
the twin deficits will become unsustainable. Then the debtors will
have a choice: either default or else adopt a systematic reversal
of policies: debt-repayment. This means a federal budget surplus
and a balance of payments surplus. Balanced budgets won't do it.
There will have to be surpluses.
That day is
coming. That will be the day of reckoning – of counting up.
give no indications that they believe that day is coming.
Greece's politicians in early 2010.
The heart of
the disagreement between Keynesians and Austrians is easy to state.
Each group has a unique selling proposition or USP. I have boiled
them down into four words each.
Federal deficits overcome recessions.
Tax cuts increase liberty.
If you are
a glutton for punishment, you can view my
presentation on this at the Mises Institute in 2010.
If you think
about this, the positions can both be used to justify federal deficits
in the short run. The federal deficit exists because tax revenues
do not cover expenditures. Austrians favor lower taxes, no matter
what. So, Austrians are concerned with the deficit because spending
cuts do not match – or, better yet, exceed – tax cuts. The government
continues to expand its operations. The goal of Austrians is to
shrink the state. This means spending cuts.
of the Austrians is as follows. The government is not ready – will
never be ready – to cut spending prior to a crisis that forces them
to cut spending. They recognize that only a financial crisis will
stop the government from spending. So, in the meantime, it is best
to take whatever tax cuts we can get. This increases the deficit.
But, the Austrian says, there are two ways to have a deficit: (1)
with higher taxes, or (2) with lower taxes. Congress is going to
spend. Which way is better for liberty? Austrians generally conclude:
the lower tax/high deficit way.
this mean there will eventually be a Great Default? Yes, it does.
But there is going to be a Great Default in either case: high tax
or lower tax. So, let us keep more of our after-tax money today
and prepare for that default. Congress is going to spend every dime
that comes in, and then borrow against future revenues. Nothing
will change this, short of a financial crisis when lenders will
no longer lend at low rates. Call this the "Greek event."
applaud the deficit for a different reason. They see increased government
expenditures as an enormous advantage for the economy. Federal borrowing
enables the government to increase expenditures in the short run
without tax hikes. There is therefore no tax revolt by voters. The
government can therefore spend more as a result.
less government spending. Keynesians want more government spending.
Both sides accept a rising deficit. Keynesians think the deficit
gives consumers a chance to increase spending, even if this means
taking on more personal debt. They also think there will never have
to be a Great Default. They trust deficits and central bank inflation
to defer the Great Default forever.
the deficit gives future-oriented people time to prepare for the
Great Default, which is inevitable in a world dominated by Keynesian
pair of attitudes separate Keynesians and Austrians over the long
run, yet unites them temporarily.
of opinion favor free trade, meaning no sales taxes on imported
goods and no import quotas. Both see this as an advantage for customers
on both sides of a border, just as they see benefits from people
trading across the street or even next door. Both schools of opinion
favor customer authority. The difference is this: Keynesians think
that economic planners, especially the federal bureaucracy, know
best what is good for customers. Austrians think customers know
best what is good for them. Keynesians want to use state coercion
to benefit certain voting blocs over others. Austrians do not.
So, both groups
look at the trade deficit, which is a subset of the balance of payments,
and conclude: "no problem." If some customers want to buy more than
they sell – that is, if they want to borrow – that is their business.
of economists know there are limits to this process. A payments
imbalance can exist only while lenders agree to lend to borrowers
at rates borrowers are willing and able to pay. Loans must eventually
But isn't this
also true of federal debt? Keynesians admit that, in theory, the
U.S. government should run surpluses in good economic times, to
reduce the debt. But, in practice, Keynesians never say "Congress
should run a surplus next fiscal year." I do not recall that any
Keynesian in the last 50 years has recommended this in public. They
may admit in theory that there should be surplus years, in which
principal should be reduced, but that is always a theory only, never
understanding Congress and understanding Keynesians, recognize that
federal surpluses cannot last long. So, the debt will grow. The
goal, then, is to let taxpayers keep more of their wealth. Run the
deficits. Let taxpayers keep more of their wealth. The losers will
be the short-sighted lenders who let the U. S. Government borrow
at historically low rates.
have the same view of trade deficits. It's up to customers to decide
where to put their money. If they want to buy imported goods, that
is their decision. If exporters want to sell on credit, that is
their decision. This is what customer authority and seller's authority
is all about.
But isn't it
better to be an exporting nation? That is irrelevant for economic
theory, say Austrians. What is relevant is individual authority,
not political authority. What is relevant is for the government
to butt out.
government-funded trade subsidies by exporting nations? Austrians
say these are a bad idea. The government should butt out. But these
subsidies do exist. The Austrians say, "So what?" But doesn't this
make American customers dependent on subsidies from foreign governments?
The Austrian responds: "Flat-screen TVs are not heroin. If the exporters'
subsidies from their governments ever end, Americans will buy fewer
imported goods. There will not be widespread withdrawal symptoms.
It is silly to think of families' budgeting as a de-tox program."
Again, this goes back to the Austrians' view of individual responsibility.
People should be responsible for what they do with their property.
Governments should butt out.
Show me an
advocate for tariffs as a tool of social planning, and I'll show
you a person with a central planner deep inside, trying to get out.
"Tariffs must save customers from themselves." So, the tariff supporter
wants the government to send out people with badges and guns to
tell citizens that they are not allowed to buy imported goods at
"unfair" low prices. "I'm from the government, and I'm here to help
you." To which an Austrian-influenced shopper asks: "Then why are
you pointing that gun at me?"
of trade deficits says: "This can't go on forever." The Austrian
says: "Then it will stop." The critic says: "I think the government
should use force to make it stop now." The Austrian says: "Why is
Congress competent to decide?"
IS THE PROBLEM
why there is a trade/payments deficit is this: foreign central banks
buy U.S. debt. They create their own domestic currencies and use
them to buy U. S. dollars. Then they use these dollars to buy U.
S. government debt.
Why do they
do this? Because it subsidizes exports. Their domestic currencies
do not rise. Foreigners can buy more imported goods,
wants this to continue. Each Administration wants buyers of the
government's IOUs. Each Administration thinks that there will never
be a time to pay off this debt. "Federal debt is forever. Federal
debt will grow forever." So, foreign central bank purchases of T-bills
at 0.01% is free money for the Administration.
like free money even more than customers do. There is a reason for
this: the all-or-nothing position of most members of Congress. Congress
wants the export nations' subsidies, which holds down Treasury debt
interest rates. Unlike Congress, a customer can cut back on his
spending and still muddle through. He cuts back at the margin. The
politicians cannot cut back on their spending without being threatened
by a loss at the next election. It's all or nothing for members
of Congress. It's not all or nothing for a buyer of imports.
If a defender
of tariffs wants to take a free market position, he should call
for a ban on the sale of all government debt to foreigners. That
is where the main export subsidy is. The government should pass
a law: "As of [date], the United States government will no longer
make interest payments on its debt to any owner of this debt who
is not an American citizen. It will also no longer redeem its debt
held by non-citizens." Foreigners would start selling their U.S.
debt on the day some Congressman begins sending the draft around
to other House members. Interest rates would soar. The depression
would begin. The Great Default would be next, either openly or by
Federal Reserve hyperinflation.
BETWEEN THE DEFICITS
This is why
the twin deficits are connected. The U. S. Government is running
massive deficits. Foreign central banks buy U. S. Government debt.
This is the main form of their export subsidies: holding down their
domestic currencies' price in relation to the U. S. dollar.
There are other
links. The main cause of the trade deficit is the cost of imported
oil. The U. S. Government offers a military safety shield for Saudi
Arabia. It allows the Saudis to buy American jets and weapons. The
Saudi military is dependent on these exports from the U. S. So,
the government accepts dollars for oil. It gets OPEC to do the same.
connecting links are made at the highest level: government to government.
This is good
for American consumers of energy. It keeps oil prices low. It is
a subsidy from OPEC.
economist says, "Make hay while the sun shines. Consume cheap oil
while it is still cheap. If Saudi bureaucrats want to sell us their
only valuable resource in exchange for government promises to pay,
good for American consumers."
It is true
that Americans may squander this cheap oil. They may not use the
savings to save money the way intensely future-oriented people would.
Americans will probably remain present-oriented. They will not sacrifice
consumption today for more consumption later. But I do not expect
Congress to balance the federal budget by cutting spending. I do
not expect Congress to become the exemplar of future-orientation
Mises called this time preference. Some people are highly future-oriented.
They are willing to sacrifice present consumption for even greater
future consumption. Mises said they have low time preference. Other
people are the reverse. So, at any given interest rate, some people
will save more than others.
Mises did not
pass judgment on people's motivations. He did pass judgment against
government policies that use coercion to restrict people's peaceful
pursuit of their own self-interest, as they see it.
There is a
crucial economic chapter in the Book of Deuteronomy that recommends
thrift. It is chapter 28. Here, we read of positive sanctions and
negative sanctions relating to credit/debt.
The LORD shall
open unto thee his good treasure, the heaven to give the rain unto
thy land in his season, and to bless all the work of thine hand:
and thou shalt lend unto many nations, and thou shalt not borrow
that is within thee shall get up above thee very high; and thou
shalt come down very low. He shall lend to thee, and thou shalt
not lend to him: he shall be the head, and thou shalt be the tail
indicate that it is better to be a creditor than a debtor. But this
is another way of saying that it is better to be future-oriented
than present-oriented. Low time preference is better than high time
preference. Leadership is better than followership. "The rich ruleth
over the poor, and the borrower is servant to the lender" (Proverbs
These are ethical
issues. They are not technical issues. There is great debate over
whether a specific debt is a good idea or a bad idea. The old answer
is correct: it depends mainly on whether the debt is for a tool
or consumption. Even here, it is not always clear. A consumption
debt – water in a drought, food in a famine – may be a good idea.
The issue is (1) goal and (2) future-orientation. What is the purpose
of the goal? If it is accumulation of assets, then the question
arises: Accumulation for what?
person prefers greater capital in the future to present capital.
He may be a miser. He may be a philanthropist with a vision. In
either case, his desire for greater wealth in the future is reflected
in his low time preference. He will save at a lower rate of return
than a high time preference person will.
When this outlook
is widespread in a society, it will be marked by reduced debt and
increased credit. The old Jewish gag is this, "Why are there gentiles?"
Answer: "Someone has to pay retail." (This is qualified by an observation
made by my Jewish roommate regarding Fresno, California in the 1940s:
"When the Armenians moved in, the Jews moved out.") But the gag
has a corollary: "Somebody has to borrow." To sell more, you must
lend more. Low time preference people lend to high time preference
people. It's win-win, given the time perspective of both groups.
But it may be win-lose if either side is incorrect about what lies
If a nation
has the power to inflate its currency, the high time preference
person may be a winner. The low time preference person lends in
a currency that is worth a lot. After the inflation, the high time
preference person pays off the loan by selling an egg. This happened
in the German inflation of 1922-23. Farmers won. Urban people lost.
Is the American
shopper stupid for buying cheap imports that have been subsidized
by some Asian central bank's domestic inflation and its willingness
to buy bonds from the U.S. government? Not necessarily. When the
FED inflates, as it will, the Asian central banks will find out
how short-sighted their monetary policies were. They will discover
that mercantilism fails.
The twin deficits
– trade and federal – are linked. They are linked by (1) the mercantilistic
central bank policy of inflating the domestic currency in order
to buy IOUs from the U. S. Government, and (2) the Keynesian policy
of increasing U. S. Government spending by borrowing. We have two
fiat money governments specializing in what each does best. The
Asians specialize in lending fiat money to buy fiat promises. Congress
takes advantage of this blindness of Asians. Both sides say: "Let's
are American consumers – for as long as the party continues.
North [send him mail]
is the author of Mises
on Money. Visit http://www.garynorth.com.
He is also the author of a free 20-volume series, An
Economic Commentary on the Bible.
2011 Gary North
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