Posted on 11/29/2007 7:11:00 PM PST by LowCountryJoe
Pat Buchanan's recent attempt to diagnose the sinking dollar demonstrates that ignorance of basic economics is not limited to the Left. Buchanan points out the plummeting value of the dollar relative to other currencies and major commodities such as gold (up 24% this year) and oil (up over 50% in 12 months). He then declares that "the prime suspect in the death of the dollar is the massive trade deficits America has run up" to "maintain her standard of living and to sustain the American Imperium." This diagnosis offers a tantalizing glimpse of the truth, yet shatters it with protectionist bromides.
First, let's deflate the protectionist rhetoric. What are trade deficits and surpluses?
A trade deficit means that in sum, American dollars are going abroad in exchange for foreign goods. Consider what this means. If foreigners never cashed in those dollars, Americans would essentially be getting foreign goods free of charge. Protectionists like Buchanan condemn this as "borrowing," but this is actually a form of investment — both in US industry and in US dollars. Foreigners have been investing in the United States for decades for two primary reasons: the superior returns due to the growth potential of American capitalism, and the dominance and (relative) stability of the US dollar, which made them useful as a means of exchange apart from their purchasing power of US goods. Americans are not living "beyond our means," as Buchanan claims; we are simply a more profitable investment, with a more stable currency, than the foreign investors' own countries.
A trade surplus on the other hand, means that in sum, US goods are being sent abroad in exchange for foreign currency. A trade surplus is a form of investing in other countries, since (fiat) foreign currency is only worth the foreign capital it can purchase. This happened after World War II, when the United States sent capital to shattered foreign economies and reaped returns as the value of their economies — and thus their currencies — grew.
So are trade deficits preferable to trade surpluses? In a narrow sense, yes. A nation that has strong economic prospects will attract foreign investment and therefore experience trade deficits. Conversely, when the domestic economy is stifled by regulations and monetary manipulations, investors will send their savings abroad and their country will run a trade surplus. (This explains why the US deficit has consistently fallen during recessions and grown during periods of expansion.) However, the broader lesson is that trade inequalities indicate the net flow of foreign investment, and the benefit of the inequality is ultimately validated by the profitability of those investments. Profitable foreign investment results in GDP growth and positive currency valuations, whereas unprofitable foreign investment erodes economic growth and devalues the currency of the investment's recipient. Could a sufficiently large and wasteful investment be responsible for the current dollar crisis?
A large part of the US trade deficit comes from the bonds (treasury securities) the US government has been selling to foreigners to finance the growing federal budget deficit. The value of these bonds depends on both the strength of the US economy and the loss of value caused by expansion of the money supply. When the US Treasury sells bonds to individuals, it diverts savings from private investments; this diversion is a form of taxation. When it sells bonds to the Federal Reserve, it exchanges bonds for newly created dollars, which is a form of monetary expansion (inflation). Additionally, when the government sells debt to foreigners, it creates a liability against the US economy. Foreigners buying deficit debt are in essence betting on the ability of the government to provide a return on the investment in the form of positive economic growth. What happens when the investment fails to turn a profit?
The primary reason for the $9 trillion federal deficit is the so-called "War on Terror," including the spending on Homeland Security, Afghanistan, and Iraq. Unless you believe these funds averted an economic meltdown due to terrorism, these funds represent a near-total loss. Tanks, bombs, and bureaucratic paper pushers consume vast funds, yet they contribute nothing to the economy, aside from benefiting military contractors. This economic destruction is one of the biggest reasons for the declining dollar. (Perhaps the major reason is the credit bubble created by the inflationary policy of the Fed since the early 2000s, which is now collapsing and making the economy less attractive as an investment target.)
The falling dollar will make it increasingly expensive for the US government to accumulate more debt. Eventually, it will be forced to either cut spending, explicitly shift costs to US citizens by increasing taxes directly, or (most likely) increase taxes through higher inflation. Investors have already anticipated this and flocked to other currencies and to gold as a refuge. The slide will likely continue until some kind of budget reconciliation is evident.
The overwhelming response to the problems created by the government's financial irresponsibility has been to call for more protectionism, as Mr. Buchanan is doing. Because it creates barriers to trade and investment, protectionism makes the US dollar less valuable to both foreign consumers and investors, thus accelerating the fall of the dollar. Investors have certainly anticipated this as well — but don't blame them for betting on the gullibility of Americans to the protectionist rhetoric of economic ignoramuses like Paul Krugman and Pat Buchanan.
If we can avoid the protectionist trap and reconcile the budget, the falling value of the dollar will eventually attract investors and stimulate exports. As the developing world becomes richer and freer, the US dollar is unlikely to enjoy the unchallenged superiority it once had, but maturing foreign markets will attract products and services designed in America, and we will once again become a recipient of foreign investment. Free markets and American ingenuity made the United States the greatest economy in the world. They are the only way we will keep it that way.
Aw, crap! You're schizophrenic, too.
it was more like this:
Dear Duncan Hunter Campaign Staffer, some dude (or wimp) on an internet forum is saying this and that...
And speaking of lies; like the one you told in post #468, the GDP numbers from the graph that 1Rudeboy presented to the forum earlier in this thread, were adjusted for inflation.
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What was the average yearly wage in 1929 in 1929 dollars?
He's an old truck driver, where else would he get his charts?
Before I answer this easy question for you (the proverbial equivalent to the infamous Trivial Pursuit question "Who is buried in Grant's Tomb) I have to know if this was a rhetorical question. And, if I do answer this question for you, will you promise to give your own answer and have the integrity to post what you though it was (or think it is) without letting my answer influence your reply?
From Havoc, maybe?
And, if I do answer this question for you, will you promise to give your own answer and have the integrity to post what you though it was (or think it is) without letting my answer influence your reply?
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Sure, if you admit that the logarithmic technological advances over the last century drastically improves production, not soley lowered tariffs.
Whats the yearly average wage in 1929 in 1929 dollars?
Only in the housing market, due to the blowback from CDO's.
And in technology, due to lots of hard work by engineers.
"Lower prices for goods" actually means "Lower producer prices for goods"--how much does it actually cost to produce a pair of Nikes in Malaysia or Koala Paroondi anyway? But those still cost $100 in many cases.
Cheers!
Sure, I'll admit to that as long as you replace the word "logarithmic" and replace it with the word "exponential" because it is far more appropriate. I'll also admit that these technological advances were brought upon largely due to competition and quests for profits (sometimes by the very elite you wish to squeeze -- a post #213 barb thrown back at you).
Whats the yearly average wage in 1929 in 1929 dollars?
In 1929 dollars, it will exactly match the "yearly average wage" datapoint that you'll find in any nominal, not adjusted for inflation, data series that you will find. You provide a link to a non-adjusted for inflation wage "yearly average wage" series and I will spit the number back to you in a reply in a matter of seconds.
Now, you had agreed that you would provide what you thought the answer would be after I answered. So, with all the integrity you can muster, what did you think the answer is/was? Whats the yearly average wage in 1929 in 1929 dollars?
Sure, if you admit that the logarithmic technological advances over the last century drastically improves production, not soley lowered tariffs.
Sure, I’ll admit to that as long as you replace the word “logarithmic” and replace it with the word “exponential” because it is far more appropriate. I’ll also admit that these technological advances were brought upon largely due to competition and quests for profits (sometimes by the very elite you wish to squeeze — a post #213 barb thrown back at you).
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Those technological advancements happened because of labor shortages, perceived labor shortages, plain old efficiency, just plain old luck, random discoveries, and the desire to fire Union bums with robotics. NOT GOING OUTSIDE OF THE COUNTRY FOR CHEAP LABOR!
Whats the yearly average wage in 1929 in 1929 dollars?
In 1929 dollars, it will exactly match the “yearly average wage” datapoint that you’ll find in any nominal, not adjusted for inflation, data series that you will find. You provide a link to a non-adjusted for inflation wage “yearly average wage” series and I will spit the number back to you in a reply in a matter of seconds.
Now, you had agreed that you would provide what you thought the answer would be after I answered. So, with all the integrity you can muster, what did you think the answer is/was? Whats the yearly average wage in 1929 in 1929 dollars?
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I’ve been looking for it, can’t find the data. I bet, neither can you.
I’m back on my phone again so I cannot open more than one browser at a time. Let me help you out here; the question itself isn’t useful. If you measure a dollar amount from one period of time, using the same time period’s dollar amount, you do not get a useful answer...instead you would get the same answer. What you want to do is either measure the 1929 wage numbers in a later years numbers (so as to get a proper relationship) or you would want to deflate today’s numbers to what they would have been equal to in 1929. You do understand this now, right? And why your question, as written, was not a very good one and made you look as though you didn’t know your subject matter.
All I can say is doomers are still going to be gloomy at the S&P Index 2000 party. How do you gt yourself out of economic ‘jam’? Increase the size of the pie.
Deal with Chinese politics and business practices every day. You can’t grow a hemorrhoid without clearing it with the local tax office. Accounting is a joke. No credit. Everything done in cash. Accountant’s nightmare.
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Great post. But "hypocrite" is a bit too grandiose for him, I think.
I'd stick with "child."
Hank
Over 1 billion people in the world have no electricity in their dwelling.
Globalization will own you. Letting the dollar fend for itself while pushing full steam ahead means more days where oil trading partners sitting on a pile will throw billions at a US bank here or a huge real estate projest there. We can live with that kind of re-investment. The markets won’t mind. Meanwhile boots on the ground show our partners we mean ‘business’. And the circle is complete.
Doesn’t matter if the economy crashes or not, Americans don’t like losing jobs to foreign slave labor.
China to Raise Tariffs On Clothing Exports
By Paul Blustein
Washington Post Staff Writer
Saturday, May 21, 2005; Page E01
China announced plans yesterday to sharply increase taxes on its exports of clothing, Beijing’s clearest acknowledgment to date that it needs to prevent its apparel from flooding global markets.
The announcement came days after the Bush administration decided to impose new caps on imports of Chinese clothing....
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Chinese labor is so low, they tax their own exports less they be accused of dumping.
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