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URL:  https://boards.fool.com/im-not-an-economist-but-i-do-spend-money-so-im-15167072.aspx

Subject:  Re: Not everyone gets a tax rebate Date:  6/13/2001  5:50 PM
Author:  Benevolent Number:  153653 of 910561

I'm not an economist, but I do spend money, so I'm going to weigh in on the national debt and trade deficit issue.

First of all, as I understand it, there is nothing intrinsically wrong with government debt. Don't forget that Treasury securities serve as the "risk-free asset" that is the basis of many investment-valuation models, not to mention a key component to constructing a huge variety of portfolios with different risk and reward characteristics. There is a demand for Treasury securities, and if the government started to buy them back en masse, it would reduce the supply, driving up prices.

Second, interest rates are very low now. If the government started buying back Treasury bonds, it would have to pay some pretty steep prices (using our tax dollars, of course). 30-year bonds issued years ago when the prime rate was much higher are trading far above par value. I don't want the government buying those bonds back now. The best time for that is during a period of high interest rates, when bond prices are lower. Can you see politicians backing that strategy in that kind of economic climate? And suppose prices are low, and the feds do indeed start buying bonds back? I can only imagine how expensive T-bonds would get if the only source for them started buying them back in huge numbers all at once. (It almost makes me want to go out and buy a bond just for the resale value.) A lot of people think that the government can just issue a $1 million bond for 30 years, then pay $1 million and buy it back after 5 years. That's not the case. Only a small number of older government bonds are callable (meaning that they can be repurchased at par value under certain circumstances), so the feds will have to buy the vast majority back at market rates. None of the bonds issued in the last few years (I forget the exact figure, though I'm pretty sure it's more than 10 years) are callable.

Third, there is also nothing intrinsically wrong with a trade deficit. The dollar is strong in part because we do a much better job of controlling our currency than do many other nations. That's unlikely to change. And so what if we import more products than we export? It's a sign that 1) we are affluent enough to keep on buying, and 2) plenty of Americans are buying American-made goods. I don't really think it matters whether American manufacturers are selling domestically or locally, as long as they're selling. There's nothing wrong with a trade surplus either, in theory. But look at Japan. That country has had a trade surplus for years, and I wouldn't trade our economy for theirs. Just as a trade deficit does not cause recessions, neither does a trade surplus prevent them.

Bottom line: It's easy to say "pay down the debt" or "reduce the trade deficit," but both the debt and the deficit serve an economic purpose, and making such change is not a simple matter of changing entries in a spreadsheet. Revamping our fiscal and monetary policy to such a degree is not a simple proposition, nor is it, necessarily, a wise one.


Benevolent
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