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MYTH: US consumers need to borrow $billions from foreigners

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Helsworth
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Post: #1
MYTH: US consumers need to borrow $billions from foreigners

Source: http://moslereconomics.com/mandatory-rea...ding-whom/

FACT:
US consumers are funding $billions in foreign savings.


While the media continuously bemoans an assumed US dependence on foreign capital, a recap of the actual transactions involved reveals the reverse.

Let’s begin with the example of US consumer buying a German car.

If the consumer pays cash for it, the consumer’s checking account in a US bank is debited and the German carmaker’s account is credited, thereby increasing foreign savings of USD financial assets. Total deposits in the US banking system remain unchanged.

If the consumer borrows to buy the car, the bank makes a loan to the consumer, which results in a loan on the asset side of the bank’s balance sheet and a new deposit on the liability side (loans create deposits). After the car is paid for the German car company has the new bank deposit. Consumer borrowing increased total bank deposits and funded foreign savings of USD.

That’s what the finance behind the trade gap is all about – foreigners desire to net save USD financial assets and sell goods and services to the US to obtain those assets.

Following the above transaction the foreign holder of USD bank deposits may instead desire to purchase US Treasury securities. At the time of purchase, the seller of the Treasury security becomes the new holder of the bank deposit, and the foreigner the new holder of the Treasury security. (If the foreigner buys securities directly from the Treasury the result is the same.)

The US government is now said to have foreign creditors, and the US is said to be a debtor nation.

While this is true as defined, a look past the rhetoric at what the US government actually owes the holder of the Treasury security is revealing. What the government promises is that at maturity the foreigner’s security account at the Fed will be debited, and his bank’s reserve account at the Fed will be credited for the balance due.

In other words, the US government’s promise is only that a non-interest bearing reserve balance will be substituted for an interest bearing Treasury security. This is not a potential source of financial stress for the government.

Warren Mosler
February, 2004


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30.12.2013 11:00
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Titian
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Post: #2
RE: MYTH: US consumers need to borrow $billions from foreigners

but at the end of the chain something with a real value will have to be transferred;
Whether this occurs in the form of an export of goods or services or a transfer of ownership rights in USA-based capital (such as a vacation home in Florida) doesn't matter.

EDIT:
Also, as I was trying (admittedly unsuccessfully) to tell you for an estimated infinite number of times, the concept of "Net-Savings" is nothing more but a constructed idea resulting from artificially constructing 2 parties (Government and public sector); If you think of a system like that it is obvious that one's surplus is the other's deficit. However, it's not really like this.


"If you grab them by their balls, their hearts and minds will follow." (Yes, Minister)

This post was last modified: 30.12.2013 12:36 by Titian.

30.12.2013 12:30
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Helsworth
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Post: #3
RE: MYTH: US consumers need to borrow $billions from foreigners

Titian Wrote:
but at the end of the chain something with a real value will have to be transferred;
Whether this occurs in the form of an export of goods or services or a transfer of ownership rights in USA-based capital (such as a vacation home in Florida) doesn't matter.

In the case of the USA, is DOES matter. Simply because, the USA is like no other country. The world wants to sell its goods to the USA in exchange for US dollars. All other countries export in order to be able to import. While oil transactions are kept under the dollar by the american military, there is no changing the USA's current stance of being a net importer of real wealth, while being a net exporter of aggregate demand (paper money).
The net is what's left after taxes. If you're left with a negative figure after taxes, and you're a household, or a company (a private party) you're indebted to a creditor. And if you can't pay up in the future the credit as well as the government taxes, you go bankrupt. You lose your property.


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This post was last modified: 30.12.2013 12:41 by Helsworth.

30.12.2013 12:38
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