Sunday, June 26, 2005

Deficit funding of economy (USA)

Have always wondered how US funds its deficit. There is a perpetual trade deficit. In the past it was the foriegn investment fudns flowing in that fudned this to a large extent. Now this is good assuming the economy and trade imbalance improves over time and eventually there is sufficient resilience in the economy to ensure no deficit or atleast fund teh deficit domestically.

Now, with FDI coming down in the US, the deficit has still been growing. Was wodnering how this is getting funded. There was this piece of news today that kind of explained this. In recent years the home equity prices have gone up very significantly. To the point that this is seen as the next likely economic bubble in the US. Now if the price of homes rise and owners just keep the house, it is just notional "profit" that can at worst (in case of a prices slump) just not be there. BUt the problem is that this "notional" profit is converted to real profit by going for home equity loans.

This agian is not a problem so long as the raised loans are used for other capital purchases. Say another house. But the problenm is that all these "loans" are seen as easy money, and is essentially sepnt in raw "consumptin". IN effect the money is just spent, there is nothing left other than the "loans" on thehouse. Now, if there were to be a burst in real estate prices, then all hell breaks loose- as there is no way fro the people to repay the lonas. NOt sufficient value left in the house, and no other capital-investment available even that could be redeemed.

Looking at all these, unless the developing country learns from the potential pitfalls from the american way of consumerism, and look little harder at the more long-term view of life & economy that europe possesses, lot of the developing countries may end up in the same trap as US is in. Economy booming with not sufficient substance behind it. Just driven by "credit". Credit for capital & industrial investment is a great thing- as it creates more and potentially perpetual economic activity. Unliek 'consumables" such as holidays, which create a very short term economic activity.

So much for capitalism. As much as it is hard to imagine why communism should work, it is still would have been really nice if communism as an ideal (the "collective" spirit.. not the anrchist/dictatorial instances there are today) worked!


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