chapter six

DEFICITS AND DOLLARS Uncle Sam the International Beggar

Neither a Borrower Nor a Lender Be

A few years ago I went to dinner in Los Angeles with a group of close friends and a couple whom we had recently met. Because some people had very expensive meals with cocktails while others consumed very little, we decided not to divide the bill equally, but rather to each pay for our own consumption. When the bill came we all pitched in what we felt was our fair share (or so we thought).

We came up about $40 short of the tab. Since I had eaten a very modest dinner consisting of a turkey burger and a diet coke, I was pretty sure that I had not made a major mistake in calculating my share; nevertheless I pitched in an extra $5. So did most everyone else, and we paid the bill.

A few days later we revisited the embarrassing shortfall, and we began to piece together the puzzle. Because we were all good friends, we soon figured out that the new couple had consumed the most extravagant meals and had drunk the fancy cocktails yet had contributed almost

nothing to the bill. We thus labeled the man Cheapskate (he had paid for the couples dinner).

We resolved that in future interactions, we would not allow Cheapskate to take advantage of us. We even practiced confronting Cheapskate over the bill. I had the turkey burger, what did you have? Even though such displays are deeply embarrassing, we found them preferable to having Cheapskate take us for more money.

Our role-playing was never put to use with Cheapskate because he met a fate similar to Elvis. He died on the toilet from a heart attack just weeks after shorting us on the bill. After his death, his girlfriend discovered that she had a big mess to clean up-Cheapskate owed money to almost every single person he knew.

A small-scale con artist with a drug dependency, Cheapskate had put the touch on everyone by borrowing money and never repaying it. Interestingly, although he owed many people money, his total debt was only a few thousand dollars. People were quick to cut him off. Just as he was never going to get more than $5 from me, others were not willing to make repeated loans.

A lesson from Cheapskates life is that it is hard to be a perennial borrower. People are built with instincts that prevent and limit exploitation. When we loan money, we expect repayment and stop lending to deadbeats.

The same is true of countries. Those that consume more than they produce must return the favor or get cut off. The current account describes whether a country is consuming more or less than it is producing. Countries with current account surpluses, like Japan, are producing more than they consume. The excess Japanese production is being sent to other countries in return for IOUs in the form of money. The current account is the broadest measure of a countrys consumption and includes everything from cars to movies, legal services, and investment income. Thus the current account includes the trade deficit and all other international transfers.

As shown in Figure 6.1, unlike Japan, the United States has a large

$700 $600 $500 $400 $300 $200 $100 $0

Mill.......I

* estimate from part of year

FIGURE 6.1 The United States Consumes Far More Than It Produces

Source: U.S. Commerce Department

current account deficit. Weve had a deficit for so long that we show the negative current account deficit as positive numbers. Because we cant imagine a world where the United States consumes less than it produces, we measure the amount of profligacy, not its existence. Residents in the United States consume far more than they produce. In return for Saudi oil, Japanese cars, and Canadian lumber, the United States sends the producers IOUs to the tune of about $500 billion a year.

How big is $500 billion a year? The short answer is: the biggest current account deficit in history. The longer answer is: The current account deficit is about 5% of the size of the U.S. economy, which still makes it one of the biggest current account deficits in history. How did we get here?

Current account imbalances are influenced by currency values. When Canadian lumber is made cheap by a strong dollar, for example, we import more logs from Saskatchewan. To understand the U.S. current account deficit we begin by looking at exchange rates.

When I was first learning about money, the British pound was always