Tag Archives: economics

Default Looms.

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            Government deficits are covered by borrowing.  The government issues I.O.U.s in the form of Treasury bonds and other paper.  The borrowing gets added to the existing government debt.  The interest paid on that debt then becomes a current government expenditure.  It’s the same as paying for the Department of Defense or Social Security or air-traffic control. For may decades, the “Big Three” of US government outlays has been Social Security, Medicare and Medicaid, and Defense.  (Together they accounted for about two-thirds of all federal spending.) 

            Then came Covid and shut-downs that threatened the economy.  Government, under both the Trump and Biden administrations, stepped up to the plate (or trough, if you’re a Paleo-Finance person).  Vast sums were paid out to “stimulate” the economy.  The total national debt now stands at more than $36 trillion. 

Inflation followed during the Biden administration.  Administration spokespeople down-played the price rises as long as they could.  Eventually, an election loomed.  The enraging effect on consumers and borrowers became too great to ignore.  The Federal Reserve Bank raised interest rates to choke off the inflation before it became really serious. 

            One effect (but not the only one) came in the borrowing costs paid by the government to entice lenders.  In 2024, interest payments by the federal government reached $881 billion.  Interest on the debt rudely shouldered its way past Defense as the third largest government expenditure.[1]  “But Wait!  There’s More!”  President Trump’s “Bigly Beautiful [Budget] Bill” has been projected to add $3 trillion to the debt by 2035.  Then the effect of tariffs on the economy is uncertain.  Economists expect the levies on imports to push up prices and slow the economy.  That would generate less revenue, perhaps less than the income from the tariffs. 

            Panicky warnings appeared in the media.  At some point, there could be a flight from US Treasuries by investors (including foreign governments that hold dollars) who doubt the value of promises to pay at least the interest.  The Federal Reserve Bank would have to raise interest rates much higher to rent the money to cover the interest on the debt or to finance current deficits.  Furthermore, government borrowing could crowd-out private sector borrowers who want the money to invest in productive activities.  That would drag on the economy, to put it mildly. 

            Is there a way out of this dilemma?  Yes.  It will require acting on both sides of the problem.  On the one hand, it means tax increases.  On the other hand, it means spending cuts. 

            Tax who and by how much?  The net worth (assets, not income) of the five richest Americans comes to about $1 trillion.[2]  The net worth of the next ten comes to about $1.1 trillion.  But income is what the government mostly taxes.  That’s much less than net worth. 

            Cut what and by how much?  To go where the money is, it means cutting Social Security, Medicare and Medicaid, Defense, and Interest on the debt. 

            Both taxation and spending cuts will have to reach pretty far down into the ranks of the American middle class.  It will be hard to find politicians to vote for that.  The alternative is for ordinary American to suddenly abandon their “put it on the credit card” approach to citizenship.  Won’t happen.  Default looms.  After that, the International Monetary Fund will impose reforms. 

[1] “National debt: Why Congress no longer cares,” The Week, 6 June 2025, p. 17. 

[2] List of wealthiest Americans by net worth – Wikipedia 

Diary of the Second Addams Administration 18.

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            Americans have come to depend on cheap Chinese products.  Conversely, China has come to depend on massive exports of its goods to the United States.  Hence, President Donald Trump’s imposition of a 145 percent tariff on imports from China will shock both the American and Chinese systems.[1] 

            What does the United States get from China?  At least 75 percent of electric fans, dolls, video game consoles, tricycles, food processors, and smart phones.[2]  Apple, Dell, and Hewlett-Packard all source many of their products from Asia (China, Taiwan).  The tariffs could push the price of a basic iPhone 16 from $799 to $1,140.[3]  China also produces and exports renewable energy equipment, lithium batteries, and electric vehicles. 

            Much of the American reaction to the trade war with China has been “Eeeek!”  One newspaper warned  of “an economic crisis that could leave America poorer for generations.”  A West Coast port executive said that “essentially all shipments out of China for major retailers and manufacturers have ceased.”  As a result, one business economist[4] warned of “empty shelves in U.S. stores in a few weeks,” and “Covid-like shortages for consumers.”  These stoppages will cascade into job losses for longshoremen, truckers and railroads, and retail sales.[5] There could be a grievous toy shortage at Christmas because 80 percent of America’s toys are made in China.[6] 

What does China get from the United States?  Soybeans.  Some kinds of computer chips.  And many jobs.  All the stuff no longer going to America either has to be sold somewhere else, or stock-piled in warehouses, or not made at all.  Neither of the last two is sustainable, politically or economically, for long.  So China has to find a new target for its exports. 

Which country will blink first?  Is there a reasonable compromise that can be negotiated? 

Trump has wobbled on China to a degree.  He exempted some consumer electronics (smart phones, laptops) from most of the China tariffs.  He also indicated that he was ready to negotiate with China and that Xi Jinping had called him.  At the same time, he seems determined to “decouple” the economies of the two countries.[7]  At the very least, he said, “China will probably eat those tariffs.  Everything is going to be fine.” 

For their part, the Chinese seem not to have anticipated the “speed and ferocity” of the American trade counter-attack on China’s economic strategy.[8]  China’s public response has been to dig in.  “Bowing to a bully is like drinking poison to quench thirst.”[9]  Threats of retaliation abound.  When Trump said that Xi Jinping had called about tariffs, the Chinese Foreign Ministry basically called Trump a liar.  Hard to know which of those two to believe. 

[1] “Decoupling: The U.S.-China trade divorce, The Week, 25 April 2025, p. 34.    

[2] Ibid.

[3] “Inflation: How tariffs could push up prices,” The Week, 18 April 2025, p. 17.    

[4] As in an economist employed by a business, in this case an asset management firm. 

[5] “Trump shrugs off warnings over trade war costs,” The Week, 9 May 2025, p. 4. 

[6] Feels heartless denying kids their hearts’ desire at Christmas.  Still, Boxing Day can be a time for repentance. 

[7] The historian Stephen Kotkin has observed that Trump often talks out of both sides of his mouth, but if you look at what he actually does, you can tell what he really means.  His remarks bore on Iran’s nuclear program.  He thinks Trump means to stop it, whatever that may require.  There’s no reason not to apply the same view to China trade. 

[8] “Decoupling: The U.S.-China trade divorce, The Week, 25 April 2025, p. 34. 

[9] Given China’s behavior toward its neighbors in Taiwan and the Philippines, this is comic. 

Not the Country We Once Were 1.

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For quite some time now, United States government bonds were a global safe-haven when conditions got rocky somewhere else in the world.  This rested upon the belief that the US government could and would pay its IOUs.[1]  It has been easy for the United States to find lenders willing to buy Treasury bonds at lower rates of interest than might otherwise have applied. 

The consequences have been good or bad depending on how you look at it.  Various benefits for the United States flowed from the belief in the reliability of American public credit.  For one thing, the willingness to lend has eased the cost of the big deficits and growing national debt.  Americans have not had to strike a balance between taxes and spending. 

Furthermore, for those individuals who rely upon credit purchases, buying a car, or a house, or a lot of stuff at Walmart has been cheaper.  The reverse of the medal here is that all those foreigners who wanted dollar-denominated bonds raised the value of the dollar relative to the currencies of those other countries.  These “strong” dollars made imports cheapish.  This, too, eased the cost of consumption.[2]  OK, where did these foreigners get the dollars to buy Treasury bonds?  They got them by selling cheap goods to Americans.  Then they buy US Treasury bonds, which raises the value of the dollar, which makes their goods cheaper for Americans and American goods more expensive for everyone. 

Along the way, all those cheap imports first undercut, then destroyed, much of America’s manufacturing base.  If all it had done was wreck the American production of teddy-bears, we could live with that.  However, many of the goods now produced abroad are things like pharmaceuticals, computers, information/communications technology, and automobiles.  Since joining the World Trade Organization in 2000, China has been the main predator stripping the bones of the non-financial and non-entertainment sectors of the American economy.[3] 

As the national borrowing has increased, the size of the debt has grown to very high levels.  The debt can be regarded as solid so long as the United States has the will and the means to pay the interest, at least, on it.  The share of the interest payments in government spending has grown in recent years.  Partly, this reflects the sheer volume of the debt; partly, it reflects the higher interest rates charged to control the inflation. 

However, what if the debt or the interest rate on the debt grow so large, that the interest payment exceeds what Americans are willing and able to pay?  This has been a continual and growing theoretical concern among economists and investors for many years.  People will lend so long as they believe that they will be paid back.[4]  If they lose confidence, then they will try to get rid of their government I.O.U.s.[5]  (I don’t recall hearing any of this discussed in presidential debates.)  It is possible that the recent “retreat” from bonds is the first tremor of an earthquake.    

Or perhaps not.  A large share of the small group controlling global business and financial resources (countries, companies, banks) really dislike the current American economic policies.  So is also possible that this is just a warning shot.  Will people attend to the warning? 

[1] Peter Goodman, “Trump Tariffs Shake Faith In the Safety of U.S. Bonds,” NYT, 14 April 2015. 

[2] Just for fun, go through all your stuff, from underwear to lap-tops and make a list of where everything comes from. 

[3] How do you fight a war with fictional “super heroes” dressed in Spandex and piles of money? 

[4] They will lend even when they suspect that they will not be paid back in full.  Under these conditions, they charge a “risk premium’ in the form of higher interest rates still.  Argentina, a notorious bad bet, pays high rates. 

[5] Maybe something like this.  Fire sale – Margin Call (2011) 

“The System Is Blinking Red” 3.

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            In 1989-1990, the Soviet Union collapsed.  With it went the credibility of autarkic, centrally-planned economies.  Determined to maintain its monopoly on power, the Communist Party of the Peoples’ Republic of China hastened to adopt a new course.  It opened China to the global market and capitalist methods.  Essentially, use foreign-supplied capital and technology to become the workshop of the world.  Start by making cheap simple stuff, then climb up the ladder.  Pull its people out of impoverished rural life into urban prosperity.  Pull China out of Developing Country status into global power. 

American business and political leaders took an optimistic view of these developments.  China would be a cheap producers of consumer goods for Western markets, raising living standards for Western peoples by lowering costs.  China would become a consumer of high-end  Western products and expertise.  An economic revolution in China would create a growing—and increasingly assertive—middle class.  This would nudge China toward political democracy.[1]  Naturally, there would be some job losses suffered in the West.  Experience with the rise of Japan in the 1970s and 1980s showed that displaced workers would shuffle into new jobs. 

In 2001, China won admission to the World Trade Organization.  Many restrictions on Chinese exports were removed.  Things did not work out as planned.  China moved much faster than expected and on a much larger scale than had been expected.  “Many U.S. manufacturing towns couldn’t compete.”[2]  Factories downsized.  Manufacturing shrank as a source of employment in many towns.  Some workers were laid off, but most were attritted through retirement.  They were not replaced.  Most of the displaced workers were White and Black men without a college education. 

Then, it seemed, the hard-hit areas bounced back.  They didn’t return to the original state.  Instead, “affected areas recover[ed] primarily by adding workers to non-manufacturing who were below working age when the shock occurred.  Entrants are disproportionately native-born Hispanics, foreign-born immigrants, women, and the college-educated, who find employment in relatively low-wage service sectors such as medical services, education, retail, and hospitality.”[3] 

Readers may question the argument that “towns” came back, while “workers” did not.  “Those communities experienced higher unemployment, lower wages, higher use of food stamps, higher disability payments, higher rates of single parenthood and child poverty, and elevated mortality.”[4]  Would make a good movie if John Sayles was still working.[5] 

The natural response is to connect all this distress to the rejection of globalism and—eventually—to the rise of Donald Trump.  What stands out, though, is the failed hopes of the people who set China policy and their failed sense of social solidarity when the choices they made had a harmful impact on ordinary people.  Now US AID is on the block. 

[1] That’s how it had worked in Western Europe in the 18th and 19th Centuries.  Why wouldn’t it be the same with China? 

[2] Justin Lahart, “How ‘China Shock’ Upended U.S. Workers,” WSJ, 5 February 2025.  Lahart is reporting on a National Bureau of Economic Research working paper by David Autor, et al. 

[3] Places versus People: The Ins and Outs of Labor Market Adjustment to Globalization | NBER 

[4] Justin Lahart, “How ‘China Shock’ Upended U.S. Workers,” WSJ, 5 February 2025. 

[5] See: “Sunshine State” (2002) and “Casa de los babys” (2003).