Fort Sumter…And The U.S. Trade Deficit

A Daily Reckoning White Paper Report
By Bill Bonner

Today is the anniversary of the beginning of theWar Between the States. Southern troops fired onthe Federals at Fort Sumter, S.C, on this day in1860.

What is perhaps most amazing about the conflict isthe way Abraham Lincoln’s reputation grew after itwas over. His Gettysburg Address is quoted as anexample of the Republic’s most beloved orator inhis finest moment. Yet, the technique of the speechis little different from Goebbel’s ‘Big Lie’approach. Lincoln referred to the AmericanRevolution, “four-score and seven years ago,” andmade it sound as though the fight to subdue the South was a continuation of the struggle forindependence. It was, of course, the exact opposite. The South fought for the liberty to decide foritself how long to keep its blacks enslaved. TheNorth fought to avoid allowing the Southern Statesto go free.

Had the American colonies remained part of theBritish Empire, by the way, the Yankees mightnever have had a moral pretext for marchingthrough Georgia. Britain outlawed slaverythroughout its empire in 1838.

Everybody, at one time or another, seems to wantto boss other people around. Prescriptivism is afact of life. So is intestinal gas and rap music,but neither should be let out in public.

What brings this to mind is a cursory look atrecent editorial pages from the InternationalHerald Tribune. In one column Pat Buchanan tellsthe Bush Administration how it should deal withthe Ruskies. In another, the great geo-politicalthinker, Maureen Dowd, tells the BushAdministration how it should deal with theChinese. Over on the facing page, The WashingtonPost editorial team offers advice to the BushAdministration on how to deal with Sharon andArafat.

But what particularly interested me – as I’m sureit will you – was the advice offered by two NobelPrize winning economists, Franco Modigliano andRobert Solow. The article demonstrates two thingsabout people who give advice: they can be verysmart and total numbskulls at the same time.

Let us begin with the positive.


The prize-winning team has noticed what you and Ihave discussed often in the Daily Reckoning:

“Throughout [the 1990s] spending grew faster thanwhat the country earned, spilling over, in largepart, into a growing trade deficit. By the end of2000, the excess of expenditure over income hadreached about 4% of GDP and was apparently stillrising.

“For a country, just as for a family, there areonly two ways of getting the money to spend morethan one’s income: borrowing it and sellingassets. In the case of nations, the creditors andbuyers of the assets are foreigners.”

The economists note, as we have, that spendingmore than you can afford cannot go on forever.Eventually, the foreign investors and creditorsare going to want their money back. They may beginto doubt the value of the U.S. dollar…or worrythat their U.S. assets will continue to fall, asthe Nasdaq has done for the last 12 months.

So far, say Modigliani and Solow, “the size andpower of the American economy have protected itfrom capital flight…but there is no guaranteethat this will remain true.” What’s more, onceforeigners begin to drift out of the dollar, U.S.reserves of foreign currency “would be woefullyinadequate to stem the tide.”

The result would be a sharp drop in the value ofthe dollar, a rise in the cost of imports, fallingstock and bond prices, higher interest rates,lower employment and a drop in output.

All well and good. Tall guessing, but what isn’t?

But then the two Nobel prize winners cannot resistthe urge to tell the Bush Administration what todo. Not that the Bush team couldn’t use some goodadvice, but the advice the economists come up withis so moronic it makes you wonder about the Nobelselection committee.

“Many have criticized President George W. Bush’sproposal for a deep and lasting cut in incometaxes,” they write, “but hardly anyone hasaddressed its implications for…the large and growing deficit in the international tradebalance.”

Yes, hardly anyone has. Because to do so would be silly.

Give people back their money? Are you kidding?They would only spend it!

Prescriptivist economists carry such a heavyburden on their shoulders, it is a wonder they canwalk. They not only want to set the broad policiesof the U.S. Federal government, but also directthe behavior of every Tom, Dick, and Harry in thenation.


It is as if a judge, before ordering a defendantto give back stolen money, turns to the rightfulowner and says, “Wait just a minute…what are yougoing to do with the money if we give it back toyou?”

Professors Modigliani and Solow do not really knowwhat people would do with their money. Perhaps thepublic mood is already changing, and most peoplewould use the cash to pay down debt. Or maybe theywould go out to the movies.

Nor do they know what would happen if the moneywere not given back to the people who earned it.It could be that the dollar has already topped out– and that a dramatic decline is ready to begin.In either case, the tax cut is probablyinsignificant and irrelevant.

“Debt-addled Americans added another $10.5 billionto their credit card balances in February[alone],” writes the Mogambu Guru. “The communistsand socialists in Congress are dragging their feetover a few lousy billions in tax cuts, while atthe same the time the budget is already slated tobe almost two trillion bucks…the government nowtakes in the highest percentage of income in allU.S. history…a fifth of GDP, for crying outloud, there isn’t enough slack for a pittance of atax cut? Jeez…”

But Modigliani and Solow know what is best forpeople. “A large, permanent tax cut would make theinternational economic position of the UnitedStates worse, not better,” they say.

On the public stage, these people are tediousmeddlers. But at home they must be insufferable –
telling their spouses how long to cook thespaghetti and how much to pay for their underwear.
Or, perhaps they have already learned – as so mosthusbands do at home – that trying to boss your
spouse around rarely pays. Probably even Lincolnhad the good sense not to try to tell Mary Toddwhat to do.

Your editor, sharing his opinions, but keeping hisadvice to himself…

Bill Bonner

Related Articles:

US Trade Deficit:Does the widening U.S. trade deficit pose a threat to the economy?

Government Deficits:Do Deficits Matter?

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