2 ms·

Well, my point (and Pettis's) is that causality runs the other way: we have debt in the US because non-US entities (individuals, businesses, and governments) co

Well, my point (and Pettis's) is that causality runs the other way: we have debt in the US because non-US entities (individuals, businesses, and governments) continue to invest money here. That investment results in spending in excess of production, i.e., debt. It plays out in government spending, household debt, corporate debt, and the exact distribution is a function of internal dynamics. But the entire amounts must balance, and must balance with the US accruing more debt.

yuhong 9y ago
I like to think more in terms of the trade deficit and budget deficit.
- ryandamm 9y ago
  While important, those are driven by capital flows (into the US), not the other way around. Because the US has open capital markets and a floating exchange rate, exogenous flows really dictate everything. If the exogenous capital flow is held constant, then the budget deficit reflects the allocation of debt (driven by capital flows) to the government sector. But you could have a perfectly balanced budget, and the debt burden would fall somewhere else -- likely the household sector, via constant consumption but increased unemployment. (This is because government spending is consumption, and therefore stimulative; government cutbacks to enforce a balanced budget, or tax increases, would result in job losses elsewhere in the economy.) I think it's easy to get lost in the weeds of how the capital flows are apportioned within the economy. What's appealing about Pettis's analysis is it's rooted in balance sheet arguments, which have really beautiful identities. The exact balancing mechanisms are complex and dynamic, but the overall balance is true by definition. It's a powerful framework to look at international economics.
  - nstj 9y ago
    They're not even really that complex - people just try and make them difficult :) If you import more 'stuff' than you export then you have to balance that difference with something (ie: stocks, bonds, hard currency, land). And causality is seemingly a difficult one to track down!

yuhong 9y ago

I like to think more in terms of the trade deficit and budget deficit.

ryandamm 9y ago
While important, those are driven by capital flows (into the US), not the other way around. Because the US has open capital markets and a floating exchange rate, exogenous flows really dictate everything. If the exogenous capital flow is held constant, then the budget deficit reflects the allocation of debt (driven by capital flows) to the government sector. But you could have a perfectly balanced budget, and the debt burden would fall somewhere else -- likely the household sector, via constant consumption but increased unemployment. (This is because government spending is consumption, and therefore stimulative; government cutbacks to enforce a balanced budget, or tax increases, would result in job losses elsewhere in the economy.) I think it's easy to get lost in the weeds of how the capital flows are apportioned within the economy. What's appealing about Pettis's analysis is it's rooted in balance sheet arguments, which have really beautiful identities. The exact balancing mechanisms are complex and dynamic, but the overall balance is true by definition. It's a powerful framework to look at international economics.
- nstj 9y ago
  They're not even really that complex - people just try and make them difficult :) If you import more 'stuff' than you export then you have to balance that difference with something (ie: stocks, bonds, hard currency, land). And causality is seemingly a difficult one to track down!