From: livesey@solntze.esd.sgi.com (Jon Livesey)
Subject: Re: The Decline of Britain (was Re: Great Britain as a malfunctioning democracy)
Organization: sgi
Date: Fri, 17 Apr 92 00:22:32 GMT

In article <1992Apr16.231805.14186@leland.Stanford.EDU>, rna@leland.Stanford.EDU (Robert Ashcroft) writes:
|> In article <jknkgt4@zola.esd.sgi.com> livesey@solntze.esd.sgi.com (Jon Livesey) writes:
|> 
|> >Two points here.   First, the budget deficit is an internal measure
|> >of tax revenues versus government spending.   It has only indirect
|> >connections to trade.    Secondly, I'm not claiming that having a 
|> >bidget deficit "boosts" anything.   Where did I say that?
|> 
|> You said that Germany "pays" for its good statistics with a big balance
|> of payments deficit.

Every economy is a trade-off.   Here in the US we are paying for
excess consumption by running a trade deficit, and paying for
extra government services by running a fiscal deficit.   Germany
is trying to get its new eatern region up to speed.   West Germany
alone can't produce all the capital goods and investment required
to modernise Eastern Germany, so they are importing goods and 
services that show up as a small trade deficit and a much larger 
balance of payments deficit.

No-one deliberately does this kind of thing to "boost" themselves,
it's the other way round.   People in the US go on consuming, 
and that leads to a trade deficit.   The Germans, rightly in my
opinion, decided that getting their eastern region up to speed
was the right thing to do, and the result is the balance of 
payments deficit.

What does happen, as you pointed out, is that these things
can't go on for ever.   The US fiscal deficit has been to
some extent financed by foreign money, and now that the Japanese
economy is in trouble, that foreign money won't be there any 
more, so pretty soon the US will have to a) cut the fiscal deficit, 
and b) pay some of it back as the Japanese withdraw investment.
So the short term effects allowed the government to overspend,
while the long-term effects will impose more fiscal discipline
than anyone will really enjoy.

Germany's case is slightly different.   As long as interest 
rates in Germany are high, the Mark will stay strong, and they
will be able to let this balance of payments deficit run.   So
in the short term, a strong Mark is being used to import other
countries' productive capacity to get East Germany modernised.
In the longer term, high German interest rates will start to
slow down the German domestic economy, and if the Government
continues to rebuild East Germany using imports, then the
balance of payments will continue to weaken.   Then, if the 
Mark weakens, the the rest of Europe will be able to reduce
their own interest rates, and the non-German EC economies
may start to grow at the expense of the German.   Alternatively,
if World Trade as a whole weakens, so that both the domestic
and export sections of the German economy are negatively affected
at the same time, then we might see real trouble.  I hope we
don't go back to 1929-30, for example, when the German economy
collapsed with World Trade, and there were five million unemployed
in Germany.   And then whatsisname.

But one should never predict, especially the future.

jon.