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Friday, December 30, 2005

Milton Friedman On Dumping By US Creditors- They'll Never Do It

A worry regarding the US trade deficit is that foreigners holding US government notes (the creditor-enablers of US profligacy) will dump their assets and create an economic disaster. Milton Friedman dispels that hysterical fear in his discussion with PBS' Charlie Rose and provides a simple economic lesson (thanks to Cafe Hayek for the partial transcript):

MILTON FRIEDMAN: Why - who -- how would they dump it?

CHARLIE ROSE: They would sell it back.


CHARLIE ROSE: The interest on the debt that they have. The dollars they have.

MILTON FRIEDMAN: To whom? To whom would they sell it?

CHARLIE ROSE: Your point is that there is no buyer.

MILTON FRIEDMAN: Well, there are buyers, of course there is always a buyer. At what price?

CHARLIE ROSE: But wouldn`t that be destabilizing?

MILTON FRIEDMAN: Who would lose money? Who would lose money on that kind ...

CHARLIE ROSE: Wouldn`t that be destabilizing? Wouldn`t that suggest a lack of confidence in the American economy?

MILTON FRIEDMAN: Yes, it might. But the people who would lose by it would be the foreigners who held that and who dumped those dollars.

CHARLIE ROSE: Well, then are they in a frozen position then, so that they - they have no flexibility?

MILTON FRIEDMAN: They are not in a frozen position. They are in a position they want to be in, because that`s why they are holding these assets. Because they are afraid of risk, of political risk.

CHARLIE ROSE: What happens if they would allow ...

MILTON FRIEDMAN: And in general, let`s suppose foreigners start dumping their assets here. They would dump them at distressed prices. They would have no ...

CHARLIE ROSE: Once it started (INAUDIBLE) would begin.

MILTON FRIEDMAN: And who would buy them? The people at home, here, the people in the United States, who had confidence in the United States. So what you would have would be that the assets would go from weak hands to strong hands. It isn`t going to happen, because there is no reason for foreigners to dump the dollars.

CHARLIE ROSE: But nothing is certain, is it? I mean, certainly in economics ...

MILTON FRIEDMAN: Of course not. Nothing is absolutely certain. But you can be pretty damn sure of what is likely to happen and what isn`t.

CHARLIE ROSE: What might -- but argue the other side. What might cause someone to say we`re holding too many dollars and - and we don`t think it`s healthy.

MILTON FRIEDMAN: There is only one thing that would cause them to do that, and that`s if we engage in inflation.

Charlie, let the man talk!

Mike Taylor adds:

Nothing like a little Friedman-esque common sense to end the year…

If there is one fundamental economic precept that is lost on many people is that there is a buyer… and a seller… and they meet in the marketplace to determine a price to exchange goods/services… and that price provides benefits to both buyer and seller.

Liberals believe in a “zero sum society” wherein a gain by one is a loss to another… a theory that surmises that the vast majority of us are stupid and make stupid choices every day. Charlie Rose has obviously bought into that premise. He couldn’t grasp the simple truth that Friedman was trying, patiently and persistently, to make clear to good ol’ Charlie.

It is my strong belief that the Liberals in this country succeed because they generate fear in the population at large: fear that voters will be economically ripped off if they buy or sell something without a paternal government bureaucrat watching out for their best interests….and fear that a Conservative government means more poverty and starvation because they believe in a free market.

The reality couldn’t be farther from those cynical theories.

Happy New Year to all and to all a free marketplace!

-- Mike Taylor

Skip March adds:

Greater economic interdependence will lead to greater political/economic stability and national security. Tom Friedman makes an excellent argument for this using India/Pakistan and China /Taiwan examples in his book "The World Is Flat". Nixon understood this when he opened the door to China and sought detente with the Soviet Union. In the Soviet Union's case he knew we would eventually beat them. In China's case, he understood their vast economic potential.

These financial transactions (given that there is free access and liquidity) are quite rational. Unless you have completely bought into James Bond novels and Spectre, there is no one entity that would be able to corner the market on currency or national assets. Of course nuclear blackmail is always a possibility, but if our economy is damaged other major economies in the world are going to get hit hard too. The more interdependence the more cooperation against terrorism, etc.



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