15 November 2010

Deficit Unimportant

Despite immense public rhetoric by Tea Party types, the truth of the matter is that there is bipartisan indifference to the deficit as a national problem. Majorities of all political stripes care more about the health of the economy and jobs, not the federal government's credit card balance. Deficit talk is merely a means to manipulate the public discussion towards other ends that people really care about.


Maju said...

Absolutely. Deficit is not unimportant but the establishment believes that they can manage it... as long as the dollar is the reference currency.

However deficit itself can kill the dollar's status and the US economical pre-eminence altogether. In fact it is already happening to some extent at least. So this indifference is not rational from a statesman's (long-term) point of view, but can be rational from a short-term politicking one.

Another issue is where does the US deficit come from, which is obviously from Military spending to a very large extent and from an import economy in the wider picture. Both such elements are based on the pre-eminent status of the US dollar globally, something that should not last but does because of lack of alternatives (the renminbi or yuan is the most solid alternative now but has problems of transparency and undervaluation - well this could also be an investment asset if you expect revaluations in the future, while the euro has been attacked, more or less fairly, by US-based speculators)

Andrew Oh-Willeke said...

I'm not at all convinced that currency, be it the American one, or the Chinese one, or the Euro, is anything more than a bit player in the drama of international macroeconomics.

Perpetual deficit spending by the federal government isn't great policy, but isn't necessarily driving recent economic malaise either. Indeed, the opposite is true. The deficit is more a consequence than a cause of a weak economy.

Maju said...

The USA is right now the only country worldwide to have foreign dept denominated in its own currency, which it can print at will (more or less) the value of holding US debt (and circumstantially also anything denominated in dollars like oil or nearly anything today). This trick, if abused, is surely suicidal in the long run (as the Spanish Empire example cannot illustrate better) but certainly offers your country a major advantage of maneuverability.

"The deficit is more a consequence than a cause of a weak economy".

It may be true to at least some extent. Obviously the economy is built on circulation of goods and money and, when the invisible hand does not do its job, the state has to made up for it.