Economic thoughts

Ultimately, the net value of all goods and services created by a country in any given year is the fundamental economic indicator. If we ignore that and focus on consumer spending a potential balance of payment problem is created. On a very fundamental basis the amount available to spend in a country consists of the wealth created that particular period, amounts saved from prior periods, and credit. Some of the wealth created may be saved reducing the total amount available.

There needs to be a balance between credit and savings in an ideal economy so that any credit extended can be repaid. However, each year the new wealth that is created increases the total available. Now, if more of the wealth created or credit is spent on products from outside the country, the amount available for the internal economy is decreased. This is obviously offset by products exported where wealth is returned to this country. However, if you have a constant negative imbalance in those numbers you will have less wealth to spend on internal products and services and by definition that amount is not being offset by exports.

So effectively each year a certain percentage of your wealth is being exported each year. This can go on for a period of time, but in a simple example, one country accumulates the wealth of another country. China is a good current example of this when you realize that they export so much more than they import that they have accumulated a ton of US Debt. You have to wonder at what point the balance of payments between China and the US will change to the point that this debt will be reduced? In order for that to happen the Chinese would have to develop a need for American goods and services that exceed the tremendous amount of manufacturing goods we currently import.

Since the wealth being exported has to be paid it has to come either out of savings or credit. The problem with credit is of course that it has to be available. At some point, if a lender doubts your ability to repay, they will stop lending you money. Now in a situation where the number of lenders and borrowers are limited this can create a different problem. If there is only one buyer of your products and that buyer can only buy if you lend them money, you have a difficult choice. If you stop lending them money, they will stop buying your product causing you into a recession. Further if you demand your money back, you may very well find that it can't be repaid and you are now holding a lot of worthless paper.

So what do you do? If there is an expectation that at some point the borrower will become more financially secure, it is probably in your best interest to continue to lend. If there is no expectation, you simply have to decide whether to endure the pain now or endure the pain later. Since the eventual pain only gets worse year after year, logically it should be addressed now. However, much like people who put off going to a dentist, many times human nature ends up postponing pain.

There is another solution which is simply to revalue the held wealth. If the wealth is measured in the US Dollar and the US Dollar loses value, the net debt becomes less. So, can the problem be solved by revaluing the dollar?

In one respect such a revaluation will eventually fix the balance of trade issue. Exports will increase in cost and exports will get cheaper. This solution has its own drawbacks. However, as the debt increases there will be inevitable dollar devaluation that will have an impact.

The current situation is simply untenable and will eventually resolve itself. How it gets resolved is the only question.