Debt is an effect of wealth, not desperation. That’s true for individuals and corporations, but also governments. The power of compounding vivifies this truth, and explains why Apple has lots of debt but the corner store doesn’t, and the U.S. has tens of trillions of debt, but Haiti next to nothing.
The Washington Post’s Fareed Zakaria and the Wall Street Journal’s Joseph Sternberg could probably be convinced otherwise, but for now they write as though the above isn’t true. Sternberg contends “Americans have discovered we can use our reserve-currency status to feed our consumption addiction,” while Zakaria writes that “we benefit enormously from what has been described as the ‘exorbitant privilege’ of having the world’s reserve currency.’” They’re focused on effects, not causes. There’s no such thing as “exorbitant privilege” or “consumption addiction,” there's just production.
Sternberg and Zakaria leave out that U.S. Treasuries have been on a 40+ year tear since the early 1980s. The rally has been an effect of the market truth that “exorbitant privilege” is anything but. In the 1970s investors around the world lost faith in the dollar and dollar income streams provided by Treasuries. The markets are fierce.
Referencing the amount of U.S. Treasury debt ($36 trillion and counting), Zakaria cites Kenneth Rogoff and Niall Ferguson ahead of a speculation that there’s a “50 percent or more chance of a financial crisis,” while Sternberg worries that we “trick the Chinese into beavering away in factories producing toys in exchange for IOUs issued in such enormous quantities that any rational actor long ago would have started questioning our ability or intention to repay.” Answering Sternberg first, a visit to China would correct his image of the Chinese as factory-dwelling ascetics. Production is an expression of a desire to get, including enormous quantities of American plenty.
From there, both might agree that investors don’t see what they do. Treasuries are the most owned income streams in the world, by far, and as evidenced by the total amount of U.S. debt. Which means Treasuries are the most “priced” income streams in the world. The most powerful sign a debt crisis doesn’t loom is all the debt.
Zakaria claims “most every large country is quietly making efforts to wean themselves off their dependence on the dollar,” while Sternberg claims “Consumption is a lot more fun” than deferred gratification. Both could probably be persuaded that no one buys with “money,” rather production buys production. Whatever foreign governments want, including North Korea’s, Venezuela’s and Iran’s, the people (yes, the market) feel differently such that where there’s production the dollar circulates to facilitate exchange of the production. It’s about getting roughly equal value for what’s brought to market. Where there’s production there are dollars, period. “Dependence” is a non sequitur.
Sternberg believes that we’re not really importing “surplus production” from China and Germany, rather we’re taking in “their self-discipline.” No, imports are an effect of exports. The world is lined up to buy shares in the corporations created by Americans, along with income streams representing taxable access (Treasuries) to American production. As before, Sternberg continues to leave out the production part when focusing on its effects.
Which is why his conclusion that President Trump’s tariffs “mark a clumsy attempt to reimpose discipline on the American economy” was so puzzling, as was Zakaria’s pessimism so puzzling. Products once again buy products, which means global production directed at the U.S. is yet another sign that the U.S. economy is the world’s most “disciplined” one.
Sternberg believes the U.S.’s “consumption addiction” is what caused Trump to retreat from the “tariff abyss.” More realistically, Americans have an “addiction” to production. There’s your “privilege” that markets continue to reward to the surprise of pundits who still imagine that consumption just happens.
