Posted on 02/18/2005 9:55:18 AM PST by Willie Green
For education and discussion only. Not for commercial use.
It is difficult to decide whether the trade figures for 2004 or the Bush Administration's reaction to them indicate the greater danger to the American economy and nation. Last year's trade deficit hit $617.7 billion -- surpassing the record 2003 deficit by 24 percent. The deficit in goods was even higher, at $666.2 billion. The imbalance increased as a share of the economy to 5.3 percent of gross domestic product, up from 4.5 percent in 2003. This is a situation usually associated with underdeveloped countries on the brink of financial collapse.
The Bush Administration is ideologically opposed to doing anything about the deteriorating international situation. It is content to passively accept whatever transnational corporations and foreign governments do to shape the world economy to their advantage. Attempts at positive spin took their most unbelievable form in Treasury Secretary John Snow's testimony to the Senate Budget Committee on February 10. "What those numbers reflect is the fact that the American economy has been doing well relative to other economies," he claimed. "We are importing more from those other economies because we are creating more disposable income."
Yet, according to Commerce Department figures released in January, disposable income by the third quarter of 2004 had increased at an annual rate of 3.5 percent. How does that translate into a 24 percent hike in the trade deficit? Snow apparently assumes that Americans will spend most of any increase in income on imports rather than on American made products. Why would this be true unless American firms are being beaten out by their foreign competitors?
This pattern is not seen elsewhere. Per capita income in Europe and Japan is on a par with America. The European Union actually has a larger combined economy than does the United States, with Japan in third place. Both the EU and Japan run trade surpluses, and in fact use their large gains in the U.S. market to boost their own economic output and income.
China does the same. It is growing three times as fast as the U.S., and its American trade surplus of $162 billion, up by $38 billion from 2003, is a sign of its strength as the rising manufacturing hub of Asia. Beating out the competition in foreign markets is the real sign of successful commerce and government policy, not losing market share to overseas rivals as has been the American case for over a decade.
Here is the fundamental error that has bedeviled political economy for centuries. Is international trade essentially about cooperation or competition? Classical liberals see free trade as creating a world peacefully arraigned by a division of labor and economic integration (a concept of global unity that goes well beyond trade). The Bush administration is in this camp. Those with a more realist or conservative bent see a world based on a more fundamental economic principle, relative scarcity. The first law of economics is that there is never enough to go around; wants are unlimited while the ability to satisfy those wants is limited at any point in time (though it can be increased over time). Thus, there is always competition to gain "the lion's share" of what is available, be it jobs, raw materials, industrial capacity or the means to advance to the next level of prosperity through the accumulation of capital and technology.
Everyone agrees that capitalism is based on competition. Firms are driven to innovate and expand or be left behind by their commercial rivals. What the free traders overlook is that there are societal consequences if the nation's capitalists consistently lose to foreign competitors, or abandon the nation for operations overseas (again in response to competitive pressures).
Americans understood this national aspect of competition during the decades when the United States attained global leadership. By the dawn of the 20th century, America was the largest, most productive economy in the world. In 1902, Brooks Adams published THE NEW EMPIRE proclaiming how American had surpassed Europe as the center of the world economy. While not as well known now as his brother Henry, Brooks was a prominent member of the 4th generation of the illustrious Adams family, counting from Founding Father President John Adams. Brooks and Henry Adams were in the intellectual circle surrounding President Teddy Roosevelt.
"The world seems agreed that the United States is likely to achieve, if indeed she has not already achieved, an economic supremacy. The vortex of the cyclone is New York. No such activity prevails elsewhere; nowhere are undertakings so gigantic, nowhere is administration so perfect; nowhere are such masses of capital centralized in single hands. And as the United States becomes an imperial market, she stretches out along the trade routes which lead from foreign countries to her heart, as every empire has stretched out from the days of Sargon to our own," wrote Adams.
The former global Superpower, Great Britain, according to Adams "is gradually assuming the position of a dependency, which must rely on us as the base from which she draws her food in peace, and without which she could not stand in war," a view borne out in the two world wars of the 20th century. Because London had adopted free trade while Washington still practiced protectionism in Adams' day, American firms were able to profit greatly from their penetration of the British Empire – much as the rising (reborn) empire of China is doing in the American market today.
Indeed, at the end of Adams's interpretative world economic history, he warns that the center of gravity may continue to shift, to Asia. Japan was a rising power in his time, but he thought in the long run China would prove more formidable. "Prudence, therefore, should dictate the adoption of measures to minimize the likelihood of sudden shocks," he advises. "American supremacy has been made possible only by applied science. The labors of successive generations of scientific men have established a control over nature which has enabled the United States to construct a new industrial mechanism, with processes surpassing perfect," he argues, but "America holds its tenure of prosperity only on condition that she can undersell her rivals."
One of my favorite passages also comes near the end of the work: "Life may be destroyed as effectively by peaceful competition as by war. A nation which is undersold may perish by famine as completely as if slaughtered by a conqueror. Therefore, men thrown into acute competition by rivals must have the ingenuity to secure an equality of equipment, else they will suffer; it may be by hunger, it may be by the sword, but in either case the purpose of nature will be attained. Nature abhors the weak."
While it is fashionable to dismiss works of that period as "social Darwinism," labels do not change how the world works, which is in ways just as intense now as ever. Brooks warned against the classical economists dogma of free trade. "Now men are apt to lecture on political economy as if it were a dogma, much as the nominalists and realists lectured in medieval schools. But a priori theories can avail little in matters which are determined by experiment....No one can say a priori what will succeed; the criterion is success." By this standard, U.S. trade policy is a failure, no matter how many academic economists claim it should be working in theory.
The dangerous situation in America today is no longer just one of particular industries being battered by foreign competition. The declining dollar indicates an impending financial meltdown, which would be a clear indicator of the nation's economic defeat in the global arena, and the coming end of its world leadership. America may no longer be a "new empire" but it would be tragic if its leaders allowed foreign rivals to push the country into a retirement home prematurely.
It's called supply and demand.
Interest is going up? When?
Dollar sinking? GOOD!!!!
Go yell at the UN to force China to put their yen on the floating market, in the mean time, low dollar makes life easier as far as competing with foriegn markets goes.
Look at the Euro, over inflated and KILLING the Euro-peons, who incidently are on their knees begging for the Yen to re valued.
Gold? Yipppee! I love gold, even more so when I bought lots of it years ago when it was $237 an once.
(Psst! Silver payed off much better dollar for dollar.)
Your reading too much into the doom and gloom sayers stuff.
The reason gold shot up is because of places like Japan buying up all they could to prop up their currancy or dump it rather. Plus some other problems abroad.
Interest needs to go up, but so far it's not budging much.
It makes cash holdings hard to make money on.
Sorry, Willie...
Uganda, with GDP growth of 5.2% and inflation of 4.8% does NOT seem to be on the "...brink of financial collapse..." You'll have to "try harder".
On the other hand, I have found two countries with BOP SURPLUSES that just might be on the "brink":
Country "A" has GDP growth of 1.1%, public debt of 102% of GDP and unemployment at 8.1%.
Country "B" has GDP growth of 2.7%, public debt at 155% of GDP and unemployment at 5.3%.
Does this prove that trade surpluses are a sign of economic WEAKNESS?
No need to answer...
I've concluded that the fact that your data mining has become biased and selective is sufficient proof that you have lost the argument -- although you will be the last to admit it.
P.S.:
"A" is Belgium
"B" is Japan
And YOU DO understand what the numbers mean, eh?
It means IOU's in Japan and China--the two countries who link their currency to the USD.
Not a coincidence.
The Yen is not linked to the dollar. It trades freely in the market.
Not at all. It was excessive government deficit spending that placed both Japan and Belgium in such a precarious position.
The are indeed fortunate to be running trade surpluses. That, and the high personal savings rates practiced by their citizens are what have kept their economies bolstered. We do not have such high personal savings rates and would not be able to sustain government debt at that level.
I couldn't finish reading the article once I got to this untrue statement in the sixth paragraph.
There is always enough to go around and the scarcity is alwasys allocated efficiently by the price mechanism.
That is what the "trade deficit" is: a price mechanism.
All of the countries that are getting dollars from their sales to the U.S. will now have increased their wealth.
Because of the large amount of dollars in foreign countries this will make US goods "cheap," and subsequently demand for US goods will rise.
That demand then will be satisfied by increasing production in the US. More jobs; greater wealth will result in the US.
So, just calm down. The inevitable laws of supply and demand will bring the trade deficit/surplus into equilibrium.
And "scarcity" contradicts your premise that "there is always enough to go around."
But it was a nice try.
If it is bad then why not put a tariff on exports?
If it is neither then why does the government and Greenspan bother keeping up with it and why refer to it as a deficit?
Deficit = An excess of liabilities over assets (usually over a certain period).
Actually, that would be Japan's gross debt; their net debt is considerably less since Japan's government has considerable assets, including some $697 billion of our Treasury debt.
To be accurate, their current gross public debt is 731 trillion yen. Netting out $841 billion of international reserves with 105 yen/dollar = 88.3 trillion yen, that comes to 643 trillion yen; the last figure published for nominal GDP was 505 trillion yen. The ratio of gross debt minus foreign reserves (Japan has some other assets on the books that could also be netted out) to GDP would be 128%.
However, Japan pays far less for debt than we do, so its actual interest burden is far lighter than our own. If I remember the figures for last year, they paid only about 5 or 6 trillion yen in interest -- and they received some 3 trillion yen in interest on their foreign reserves. In fact, had they continued to buy Treasuries at the same rate, in another two years or so, they would be paying no net interest (assuming that interest rates and exchange rates stay the same.)
As to Japan's unemployment rate, it is officially 4.4% currently. However, that number also suffers from a bit of the same sort of engineering that our own unemployment rate does. The number of Japanese employed is 66 million, which is just a bit over 50% of the population (the U.S. is at about 44% currently.)
When you owe the bank $1000 and can't pay, you are in trouble.
When you owe the bank $1,000,000,000,000 and can't pay, the bank in trouble.
So their ratio is 128%, what's our ratio?
well perhaps you are dripping in italian clothing and Burberry. excuse me!
textiles - your towels and sheets and linens, your rugs, etc. go to bed bath and beyond and check the tags.
hey, I try to buy USA products myself when I can - especially power tools. but the point is, whether its your clothes or my power tools, the "norm" is that most americans are buying foreign made products in these areas.
not the yen, it floats. but the bank of japan aggressively buys dollars to keep the yen from rising - they have no choice, its the only way for them to keep their export driven economy afloat.
the yuan peg is really killing the japanese and europe - because as the dollar goes lower, chinese products get even cheaper there because of the peg. its a death spiral. we should be actively engaged in a trade war with china right now to get them to float their currency. we should be doing this now, while we still have more economic muscle then they do, to try and break them. the longer it goes, the weaker we become.
do you understand what the chinese currency peg means? as the dollar devalues, the market forces you speak off don't get a chance to occur - because chinese goods become cheaper in those same markets. the forces that might move the US trade deficit towards equilibrium don't work so long as china maintains the peg, the export gains we should be making, are in part taken by chinese products.
It looks like our current debt is at $7.6 trillion (which is actually quite close to Japan's public debt), and our GDP was $12 trillion if we annualize the 2004q4 data, so that would be 63%.
However, we pay a good bit more in interest for roughly the same amount of gross debt as Japan since our interest rates are much higher.
Still, I'd rather be in our situation than their's.
Our additional debt last year was what, 4% or so of GDP?
What was their additional debt as a % of GDP?
But, I am old enough to remember these same arguments concerning the Japanese protection of their currency in the 1970's and 80's.
As we all know, in the long run, the Japs could not beat the market forces of supply and demand. They lost big time.
The same will happen to the Chinese. It is only a matter of time.
japan really didn't lose - they made some miscalculations regarding where they targetted their dollar outflows to - Pebble Beach, Rockefeller Center. But alot of it was put to productive use, for both Japanese companies, and the USA - Toyota employs 200,000 americans in the auto industry for example.
the other thing that hurt japan was the fact that china was able to undercut their costs. who is below china in the race to the bottom? africa? no one is going to be able to undercut china if they retain their current system - $120 a month for a manufacturing worker, a subsistence level wage isn't too bad when the alternative is being at the other end of a chicom gun or chained to a manufacturing machine in a prison.
Miscalculations that cost them, let's see: In September 1989, David Rockefeller and his associates sold 80% of RGI to the Mitsubishi Estate Corporation of Japan for $1.373 billion.
To date, how much have the partnerships lost on the property? In March of 1995, the cumulative shortfall was $623 million.
Yeah, I'd call that a miscalculation and a loss.
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