Dienstag, Juli 12, 2005

Your deficit counts?

Last night I read in Steven Landsberg's [i]Fair Play[/i] his explanation of deficits. Now I have heard a great deal about pro ond cons of deficits, and in general I welcome deficit spending to boost an economy - in moderation, however. Now, the fact is that deficits are loans paid of in the future, that avoid taxation right now. Though the basis is that model relies on the assumption that the loan has to be paid back some time in the future. An exuberant deficit lowers the expectation that the loan will be paid back or at least increases the risk of defaulting. Now, the general belief is that the USA will never default on its debt due to its sheer mass of assets. When in doubt we can sell Louisiana back to the French and use the money, right? But sometimes, I wonder if this isn't a very easy answer that avoids actually thinking about the chance that other countries may get worried about their investment in the USA. Many of our lenders, and the deficit is largely borrowed money from abroad, are claimed to have a stake in our market to the point that we are large mass consumer of their exports. After all, here we have quite a bit discretionary / disposable income and a high standard of living. But politics is not always based on rational, the USA blocked trades with China for a while, based on human rights issues, induced by the cold war.
What I am trying to say is, that maybe it is not always wise to alienate many nations while holding out the hand to collect a contribution to our wealth. Reminds me a bit of sawing the branch you sit on. Then again, we may have so much more wealth in the next decades that we can pay back the deficit from our petty cash. Hopefully this isn't a sort of risky gambling that ends up costing us our livelihood or we might end up like the bump I met once in Freiburg, who was a former businessman who had lost it all betting on the wrong investment.
Question than remains, is the deficit invested wisely to boost our economy. Education seems no longer a worthwhile investment, nor does public health. Ownership is the new investment, stock market purchases the answer to retirement. But critics say, we have had this type of investment before and it led to the stock market crash of 1929 and the great depression. If we truly foster new innovation, this would be a great investment into the future. However, it seems that in most technological aspects the USA still has not the cutting edge, Asia seems so much ahead, that we see outsourcing in that direction, India, South Korea, China (Japan even looks a bit out dated these days compared to the up and coming economies!). Leaves us with service and consulting, but for those we need education more than anything else or good on-the-job training.

In the end, deficits may come and go. It is just fascinating with what speed the money circulates -- and I don't believe into a Tobin-tax for foreign investment, that is just another barrier for trade. Let people speculate if they want to! You can hardly prevent someone from defrauding others. So we could use a little bit more of ethical behavior when it comes to making money. But that is another story for another day!