Pushing the envelope to link debt and energy

John McCain says we're borrowing money from foreign governments to buy oil. He's not too happy about this. ( Read our story on how other candidates make similar statements here .)

"We are borrowing from foreign lenders to buy oil from foreign producers," he said in a Houston speech. "In the world's capital markets, often we are even borrowing Saudi money for Saudi oil. For them, the happy result is that they are both supplier and creditor to the most productive economy on earth. For us, the result is both dependency and debt.

"Over time, in interest payments, we lose trillions of dollars that could have been better invested in American enterprises. And we lose value in the dollar itself, as our debt portfolio undermines confidence in the American economy."

When McCain says "borrowing", he doesn't mean a literal loan from a foreign country's government. Rather, it's the investments that foreigners make -- through buying bonds, but also through investments in the private sector -- because they see America as a good place to invest their money and want to keep their wealth in dollars.

Economists we talked to say McCain is right that collectively the United States as a whole spends more than it saves.

"As a country, we borrow because American households save very little and the government runs large budget deficits. As a result, we have a saving deficit that can only be financed by borrowing from abroad," said Barry Bosworth, an economist with the Brookings Institute, a nonpartisan research group.

We also import much more oil than we produce -- a lot more -- and that leads us to the second part of McCain's debt equation.

But there's no direct line between borrowing money from the Saudis and buying their oil, said Dean Baker, co-director of the Center for Economic and Policy Research in Washington, DC., who also blogs for the liberal magazine The American Prospect.

"What McCain says about Saudi Arabia and oil would be equally true of any imported good from any country," Baker said. "China is also a huge buyer of dollars, so they are lending us the money to buy their clothes."

Jerry Taylor, an economist with the libertarian Cato Institute, had the harshest assessment of McCain's comments.

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"All trade across borders implies some degree of 'dependency,' as John McCain seems to define the term. If 'dependency' is bad, then free trade is bad," Taylor wrote us via email. "Restricting investments to 'American enterprises' is to restrict profit opportunity."

Bosworth says McCain is connecting problems -- low savings and dependence on costly foreign oil -- that are really separate issues.

"I don't think that there is any link between oil prices causing the low saving of American households or the government's budget deficits," he said. "Both preceded the rise in oil prices. Some people will prefer a solution that increases energy supply and others will argue that it is time to reduce demand. I don't think the lack of saving will play much of a role."

McCain is right in some of the larger themes he's expressing. The U.S. does borrow more than it saves, and we import large quantities of oil to satisfy our energy expenditures. But the two phenomena aren't causally related. The Saudis aren't running a company store, where we're required to borrow from them to buy the product. Rather, these are two issues taking on new relevance because of dramatic increases in oil prices.

McCain isn't entirely wrong, but by his choice of words he gives the impression that the two dynamics are working together. For this reason, we find his statement Half True.