Sunday, March 28, 2010

Mistakes by Yeva Nersisyan and L. Randall Wray.

This is a good article by the above two. It’s about foreign holders of national debt.

However there are a couple of mistakes near the end. In relation to interest paid they claim “We don’t owe China anything more than a bank statement showing the accounts at the Federal Reserve Bank where their funds are recorded.”

Somehow I don’t think the Chinese would be too happy with being told their billions of dollars and Treasuries have been ripped up, but that they can have a “bank statement” if they like.

The interest that non-U.S. entities earn on U.S. national debt is a genuine increase in U.S. indebtedness to those entities. Though for the moment, as the above authors rightly point out, many of these entities have no immediate intention of calling in the debt, and are happy with “bank statements” for the moment.

As regards foreign entities cashing in their Treasuries and turning these into real goods and services purchased in the U.S., the authors claim this “would almost certainly increase US production and hence employment.”

Well, the latter would not be the effect if the U.S. was at that point in time enjoying full employment, which it should be assuming its economy was being properly run. In this scenario, no more demand is possible. Thus demand from U.S. consumers would have be pared back to make room for the demand coming from foreign entities. That means U.S. citizens working just as hard as before, but not consuming so many of the goods produced. That means a real, if only temporary drop in U.S. living standards.

Alternatively, given excess unemployment in the U.S., the additional demand from foreign entities WOULD raise employment. But there would be little or no increase in U.S. living standards because the extra goods being produced are exported, not consumed in the U.S.

Thus to say that this additional demand from foreign entities results in extra “production and employment” is misleading. Extra “production and employment” are normally seen as “good” because they increase living standards. Extra “production and employment” which result in no living standard improvement is not a great deal.

Anyone out there want to work for me for no pay?

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