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"The energy system in the U.S. is undergoing its most profound transformation in decades..."

Posted 5/13/2013 by Michael Gerrard

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Peter, you are referring to disanalogous examples. Weimar Germany had... MorePeter, you are referring to disanalogous examples. Weimar Germany had debts denominated in another currency, not to mention a large loss in its own productive capacity due to handing over the industrial Ruhr region to France, and large labor strikes at the time. Argentina also had a currency peg, which the US does not have, and which forced it to print currency in a way that was inflationary. By contrast, the United States has run virtually continuous deficits for over 200 years. Contra to your analysis, the fact that the US runs a trade deficit is even more reason to run deficits, as trade deficits leak currency out of the American economy and exert a deflationary pressure that, if not counteracted by greater stimulatory spending (i.e. deficits), will lead to recessionary unemployment. Moreover, contra to your idea of the Soviet Union, the US today has a floating currency, so any currency depreciation – were it to occur – would be reflected in fx markets, which may alter trade conditions, but is completely distinguishable from a “completely closed economy”. In terms of the idea of “capital flight”, you are 1) assuming currency depreciation, which is not going to be the case if the stimulatory spending improves economic conditions by putting people back to work, and 2) you are assuming that there are better places for capital to fly to. Remember, other countries like China are trying to keep their currency artifically low to remain competitive. Given the huge, huge, demand for the US dollar, the claim that there would be large capital flight is quite unwarranted, and moreover, there is no reason why it could not be responded to by other alternatives to exchange controls. The fact you refer to “borrowing money” from other countries like China and Vietnam suggests you don't undersand how central banking operations work. In order for those countries to purchase treasury securities, they must first gain access to reserve deposits held at the Federal Reserve. So they are not “lending” us currency, they are exchanging non-interest-earning currency they already own for interest-earning securities as an investment strategy. The truth of the matter is that China and other countries want export-led growth, and so are willing to sell the US goods and services in exchange for dollars – i.e. reserve deposits on the Fed's computer that are currently earning 0.25% interest – and once they have them, it makes logical sense to invest in bonds, which are really just higher interest-earning accounts at the Fed (known as securities accounts to bond traders). These countries cannot “charge more for the privilege of borrowing from them” because they do not participate in treasury auctions – that privilege is reserved to primary dealers (see: http://www.newyorkfed.org/markets/primarydealers.html) who are legally required to participate in bond auctions at a rate considered reasonable by the Federal Reserve. Your numbers about interest rate payments are scaremongering at best – the US government cannot run out of dollars, and the fact that the Fed has $4 trillion on its balance sheet has no impact on whether it can continue to create new reserves to fund government debt. It can do so indefinitely – where is the limit, in your opinion, and why? Why is $4 trillion ok, but not $5 trillion? $10 trillion? You are welcome to ask to be paid in gold, but since gold is a traded commodity, all you're really asking is to be paid in $US at whatever rate gold is trading. I would suggest learning some central bank accounting before continuing this line of discussion, as your understanding of how federal budget operations work is underdeveloped for the claims you are making.

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