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Friday, April 16, 2004
Who needs accountability? or What's good for the goose is good for the gander...
So the IMF has decided that U.S. budget deficits are bad for the world. The IMF suggests that our budget deficits would "shave" global output by as much as 4.2% by 2020.
How is it that the United States deficit will reduce output in the rest of the world? The claim is that the U.S. will drive up interest rates and that will make it more expensive to invest in the rest of the world and that will reduce output in the rest of the world.
So, let me get this straight. The majority of the countries in the developing world turn to the IMF for financial aid of numerous types, especially in the case of currency devaluations that run the risk of decimating their financial and banking sectors. The IMF gives money to the developing countries, the developing countries squander the money and then return to the IMF for more money. The IMF doesn't have money of its own, it gets its money from the developed world (read the United States and Western Europe). The IMF turns to the devloped world and basically says "give me more money." So, is the rest of the world concerned that the U.S. will not be able to give any more money to the IMF? And why is this a story anyway - how about writing a story about how our disposable income is lower because of the lack of well functioning markets, the widespread corruption, and fundamental lack of property rights that prevails in most countries on the planet?
The insinuation is that once again the U.S. will fail to act ON BEHALF OF THE REST OF THE WORLD. What are these people smoking?
If the U.S. is going to have such a dramatic impact on the rest of the world, maybe the rest of the world can (a) pay us back the money that we have given them over the past sixty years (including direct financial aid, indirect financial aid through the U.N., World Bank, IMF, NATO, OAS, through aid-in-kind programs, and forgiven loans, just to name a few sources), (b) give us money that we never have to repay them, (c) take care of their own defense and protection, and/or (d) ask the IMF to help out the United States like the IMF has helped out other countries who were thought to pose a threat to the rest of the world if they didn't get their act together - say, like Russia.
But we don't really have to ask the rest of the world to save us for our own sake, which is what the rest of the world does to the United States. We can make the transfers to the United States using solid economic rationale. If the U.S. is really going to reduce world output by 4% with our current deficits, the rest of the world should be willing to come to some mutually beneficial trade with the U.S. that would convince us to not run a deficit.
I'd initially suggest that the rest of the world give us 3% of their output and we will use that to pay down our deficit (3% of the rest of the world's output is currently about 900 billion dollars). The rest of the world might say, hey your deficit is only 500 billion dollars. In response, we can come back with a counter offer that the rest of the world pay down our deficit for the next few years. We won't run deficits any longer, the money is simply given to us by foreign countries (that is we don't pay interest on the money as we would if they purchased U.S. debt), and the rest of the world will still net out a gain of roughly 2 percent in output compared to what it would have been.
The rest of the world might think this is unfair, after all they can buy U.S. government debt with a payoff of four percent or thereabouts. Yet that type of thinking is exactly what is going to drive up interest rates in the first place - the U.S. will have to float more debt. So, clearly the way around the problem is for the U.S. government not to finance deficit spending by borrowing. We know that printing money isn't going to help, that will only cause inflation. Therefore, my idea would seem to be the best way to go about it - and after all, the U.S. clearly needs some help because we are addicted to government spending.
The IMF report is complete baseless because without the U.S. juggernaut (deficit and all) the rest of the world is still listening to 8track tapes and driving Honda 1500s. I'm not completely bashing the 8track, but the Honda 1500 sucked. I don't see the normal IMF customers stepping up to the plate in terms of innovation, development, and international assistance, the way the U.S. has time and time again.
The best part of the story is the last sentence: "The United States is likely to face criticism at those meetings [the spring meetings of the IMF and the World Bank] from other countries about the need to reduce its budget deficit and trade deficit in order to lower risks to the global economy." PLEASE - the rest of the world wants the U.S. to lower it's trade deficit? Okay, come on over and start buying Ford trucks and whatnot! Why does the U.S. have to lower it's trade deficit? Why doesn't the story suggest that the rest of the countries lower their trade surpluses with the U.S.?
Actually, from international trade theory we know that there is basically no reason that one country should improve or disimprove its trade surplus or deficit. However, the temptation is simply too strong - here is one more chance to take a dig at the all-too-consuming United States which is going to make it harder for the rest of the world to be able to...er....consume. Crap.
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