Foreign and external debt: not the same

In this whole discussion of the debt-ceiling limit the distinction between foreign debt (that is denominated in foreign currency) and external debt (owned by foreigners) has been often lost.  In the case of the US around 30% of Treasury securities are held by foreigners or around half if you discount the ones held by US governmental institutions (see data here). A country can default on its foreign debt, but not on the external debt denominated in domestic currency.

There is a fear (to some extent manufactured) about the Chinese taking over the country, and not just by pundits and late night comedians, as if the US would be unable to repay debt denominated in a currency that the US can produce.  Even Krugman has been excessively guarded on the issue. While noting correctly that the US is not Greece he said:

"So the US has much less debt than Greece. Also worth noting is the pattern over time. Greece ran up debt relative to GDP at a fairly good clip even during good times, while the United States — despite the Bush administration’s best efforts — did not. So America does not have a comparable record of sustained fiscal irresponsibility; we’ve only developed large deficits in response to the crisis, which happens to be exactly when we should be running large deficits.
And that’s not even to get into the issue of us having our own currency."

The fact that the US has it's own currency was almost an afterthought, and he avoided the crucially important fact that the external debt is in domestic currency.  The point of having your own currency is that you cannot default on debt denominated in it by definition.  This is not about fiscal responsibility or about how large debts and deficits are, but in what currency they are denominated.  The problem is not the ability to print bonds, bills, or dollar bills, which foreigners and the domestic private sector continue to hold without a problem, but the political blackmail by Republicans, and apparently accepted by Obama, to obtain gains for the rich at the expense of the rest.  Franklin Serrano aptly referred to this situation as dysfunctional finance!

The debt-ceiling limit: a guide for the bewildered

It is very difficult to explain American politics to those that are not Americans and/or have not lived here long enough. Add to that the confusion over basic economic principles, and it becomes almost impossible to explain the debt-ceiling debate to rational people.

As noted by James Galbraith, this is not a fiscal crisis, which should be obvious, since it was a Wall Street driven bubble.  Also, contrary to what you think the Republicans are the big government party. The graph below shows total federal government spending as a share of GDP (in black), and some spending categories as a share of government spending (in colors). As it can be seen total spending goes up in 1981, 1989, 2001, when Republicans assumed the administration, and down in 1993, when Clinton did.  Also, note that even if spending went up in 2009, as a result of the crisis, it did come down in 2010 (which is not a good thing, by the way) with Obama.

Read the rest here.

Political Conventions are a Waste

They say American presidential candidates must sell their product retail. But as the nominating conventions of both major American political parties recede into memory, all I can think is:

Someone just wasted a lot of money.

But then it’s not just the money that's wasted, is it? When I looked at the faces in the convention crowd, I didn't see Republicans and Democrats, Northerners and Southerners, delegates and super-delegates. Instead, I saw tens of thousands of roundtrip airfares and as many or more rental cars. And for what?

Originally intended to facilitate the choice of a candidate by delegates from far-flung states, these conventions have evolved into something entirely other, but, nevertheless wholly American: A product launch.

The major political parties can no longer afford to indulge in the messy, unpredictable nominating conventions of the past. The election cycle has elongated while the news cycle has collapsed on itself. Like celebrities and big corporations, politicians have got to manage their brands. And that means driving news coverage. A successful convention does that.

While it might be good for business, it's a bad model for the 21st century.

Last year, Matthew Taylor, Chief Executive of The Royal Society for the Encouragement of Arts, Manufactures & Commerce (RSA) in the U.K. came to the Carnegie Council for a discussion of Climate Change and the Green Economy. He made several points, but the one that stuck with me related to business travel.

I was just thinking on the way over here, sitting in a business class absolutely filled with business people – all exhausted, all away from their families, all going to business meetings. When is this going to stop? Of course the reason it can’t stop is if you are pitching for a contract and there are five of you competing, and four of you fly, and one of you tries to do it remotely, then you’re going to lose. When is business going to get to the stage where they say, “Actually, we only want to talk to people virtually.”

Both the Democrats and the Republicans tried to sell their conventions as "the greenest convention ever." But that is just preposterous. A green convention would be one where all the delegates stayed home, watched the speeches on YouTube, and cast their votes via secure online connections. Seems like it would be easy to do.

Unfortunately, if one party tries it and it flops, then like the business travellers in Taylor's example the other will feast on that failure.

I know somebody has to lose. But do they have to waste so much doing it?

Creeping Protectionism

A stunning new Wall Street Journal-NBC News Poll portends a sea-change in U.S. trade policy. According to John Harwood in today’s Wall Street Journal:

Six in 10 Republicans in the poll agreed with the statement that free trade has been bad for the U.S. and said they would agree with a Republican candidate who favored tougher regulations to limit foreign imports.

This makes Matthew Slaughter and Kenneth Scheve’s prediction in Foreign Affairs look even more prescient. This summer they wrote:

U.S. policy is becoming more protectionist because the American public is becoming more protectionist and this shift in attitudes is a result of stagnant or falling incomes. Public support for engagement with the world economy is strongly linked to labor-market performance, and for most workers labor-market performance has been poor.

All of this should be of concern because, as Slaughter recently told Policy Innovations, globalization adds between $500 billion and $1 trillion to annual US income.

The leading Republican candidates for president are all still solidly pro-trade. Will they begin to change their tune in light of this emerging trend among the party base? And what about the Democrats? The new poll claims that a majority of Democrat voters believe that free-trade hurts the US. Hillary Clinton is looking less and less like her free-trading husband. She recently opposed the US-South Korea free trade pact. Will the trading stance of a Clinton presidency look more like the 1990s or the 1930s?

More to the point, if both parties start sounding the protectionist horn, what effect will that have on US incomes and growth rates around the world? Are we headed for a return to the disastrous Smoot-Hawley era of the 1930s?

Say it aint so.

- Matthew Hennessey