The Econ Club would like to welcome you to the fall semester. If this is your first semester at Georgia Tech, we wish you the best of luck! We encourage you to take advantage of all that Tech has to offer…including our club. We have planned a great semester ahead and look forward to having you apart of it.
Thanks to everyone who came out to support us today at our 1st annual Econ Club 5K! You can see the photos from the link on the Events page, or simply click here
I wanted to write a few thoughts on the national debt issue, but I soon came to realize that this would be impossible without mention of China. So, I apologize in advance for giving China so much dang attention.
You hear many politicians and political commentators go on and on about the dangers of an ever-increasing national debt, but where is the real harm? Besides the rising costs associated with my grocery list (which I believe is due to inflation from quantitative easing*), I know that I’m not currently feeling any other major and identifiable ill effects of the national debt sitting in my meager dorm room at Georgia Tech. But is all this “out-of-control spending” really taking a toll on the way of life in America?
Is debt actually a bad thing? We know that debt helps us raise our current standard of living by utilizing expected future income. Homes, cars, new businesses are a few examples of how debt is incurred to produce some type of profit, whether the profit be in terms of wealth or asthetic feel; anytime a higher standard of living is achieved a profit has been made. But how much of our higher standard of living is a true profit since it’s becoming more questionable if we can reimburse our creditors?
Is foreign debt really more of a problem? As a dollar-denominated asset, shouldn’t the dollars naturally flow to the economy where US dollars are accepted to purchase real goods, AKA the US market? – But really, the US dollar, as a currency is just some claim over wealth, productive ability that can be exchanged for other real goods and services. The US dollar is a depreciating asset (as a result of inflation), but an asset that is expected to be less depreciating than other currencies; so foreigners and US citizens choose to hold the value of their wealth in the depreciating asset, the US dollar, while charging interest.
It seems that a wise lender would never lend out more money than they expected to receive at a future date. So, surely a major investor and economically booming economy such as China would cease purchasing US debt as soon as it became unprofitable. So, if the US government is broke and becoming ever-risky to invest in, why would China continue to buy US debt? For one, US debt is still considered the safest place in which to invest relative to the debt of other countries. Secondly, China buys US debt because they believe it is a self-interested policy.
China has created a booming economy in large part by pegging the Yuan to the US Dollar in order to dramatically increase exports (by undervaluing the Yuan, overvaluing USD, and effectively making Chinese goods very cheap to Americans). Pegging the Yuan to the US Dollar is achieved by the Chinese government deciding on a certain Yuan/USD exchange rate and buying the amount of dollar-denominated assets (think US debt) in order remain at that certain exchange rate. So basically, in order for China to ensure a continuously stimulated export market, the Chinese government must buy an unnatural amount of Treasury securities. If they cease buying treasury securities, the Yuan will appreciate relative to the US dollar, Chinese goods will be effectively more expensive having a devastating effect on their export market and essentially the entire Chinese economy. You will rarely hear me quote Keynes, but he puts China’s dependency on the US rather eloquently: “If I owe you a pound, I have a problem; but if I owe you a million, the problem is yours.”
In fact, upon writing this article, I took a short bathroom break and decided to share my experience for the weak-stomached academic readers. Sitting on the toilet I peered down to my very western navy shorts that hung around my ankles, only to find a small beige tag with green lettering that read, 100% Cotton, Made in China. What a simple reminder of the standard of living the Chinese government sacrifices on behalf of its people so I can more easily afford my favorite style of short shorts. Will the tables ever turn to rebalance the standard of living China has so generously provided for us?
If you’ve actually come this far, I encourage you to finish by allowing Jon Stewart’s wisdom spill into your soul…
|The Daily Show With Jon Stewart||Mon – Thurs 11p / 10c|
|Broke Bank Mounting|
*Quantitative easing has depreciated the dollar by increasing the money supply, resulting in inflation. And while a depreciated dollar may raise exports, making US goods effectively cheaper to other countries, it lowers the return on dollar denominated assets (think US bonds); so essentially the amount investments made in dollar-denominated assets will decrease, and the US government is caught with its back against the wall, having to raise the amount of interest they pay out to their investors.
-Written by Stephanie Jackson
Thanks to Greg Mankiw for pointing these out:
Come out to the Old CE building (on freshman hill) – room 204 on Tuesday, 4/26 from 5pm-8pm for FREE doughnuts, bagels, coffee, and hot chocolate!! Come socialize, eat, and study for finals (or even take a break from dead week studying)! Respond to the Facebook event here: ECON STUDY PARTY!!
Welcome to the new ECON CLUB @ GT blog. Here you will find a forum to discuss all things related to Economics as well as information about getting involved with our many events throughout the school year! For information on joining the ECON CLUB @ GT contact Stephanie Jackson: email@example.com