Posted on 04/19/2006 12:56:38 PM PDT by 1rudeboy
One year ago, the chorus of the consensus told America that the dollar’s exchange rate was due to fall in 2005. Under relentless assault from cheap Chinese imports and facing a record trade deficit, the dollar had nowhere to go but down. The influential Economist magazine went so far as to say, “[t]he deficit is unsustainable: sooner or later it will need to shrink, and that will involve a cheaper dollar.” Politicians and pundits predicted economic trauma at the hands of outsourcing. Time has proven them wrong. What the U.S. needed then and needs now is to stick to the reliable keys to growth: low tax rates, deregulation, limited government, and especially free trade.
A Dollar – Deficit Link?
The U.S. economy did set two records last year. First, 2005 saw a new record trade gap. Imports to the U.S. exceeded exports by $724 billion, or 5.8 percent of GDP. Second, more Americans were employed than ever before in history, arguing against those who preached doom and gloom.
The data continue to support our contention of last May that the trade deficit is not the signal to watch: “This is all wrong... Many economists and the weight of history suggest that the trade deficit, a symptom of investment capital inflows, is a sign of national economic strength.”[1] Additionally, two papers published last spring pointed out the lack of a historical relationship between currency values and trade deficits.[2] Indeed, despite the widening trade gap, the dollar gained value against other currencies.
The January 5, 2006, Economist admits that the dollar pessimists “were all wrong.” Yet the conventional wisdom of “trade hawks” is again resurgent, arguing that trade deficits are unsustainable and the dollar cannot hold. Last week, the government reported the third deepest trade gap on record, with imports outweighing exports by $65.7 billion. Current exchange rates, however, appear normal compared with exchange rates over the last few decades.
Unless Congress moves from protectionist rhetoric to protectionist legislation, there is no reason to expect the dollar to slide significantly. Trade flows are the “tail of the dog,” as Fed Chairman Ben Bernanke once explained. From time to time the dollar does fall when the world’s investors lose confidence in the superiority of America’s institutions and markets. Sadly, congressional hostility to the U.A.E. port deal was a bipartisan embarrassment and isn’t likely to reassure the world that America is as free and fair as it proclaims. Equally troubling is the Schumer-Graham proposal in the U.S. Senate to place trade barriers on imports from China.
The Chinese Invasion
According to the last week’s data from the Department of Commerce, the U.S. trade deficit with China was $13.8 billion in February. In 2005, the U.S. trade deficit with China grew by 25 percent to $202 billion. That amounts to nearly twice the $103 billion bilateral deficit in 2002. The ratio of imports to exports with China is now 5 to 1, perfect for the “Chinese invasion” storyline. The U.S.-China deficit’s growth probably won’t continue, but not because it can’t. Consider these points:
We should cheer the triumph of capitalism and its alleviation of poverty within China, as well as its benefits for American consumers and shareholders. The only point of debate is whether American workers’ wages are suffering due to trade with China, but there is no clear evidence of wages “racing to the bottom.” Instead, China is experiencing a severe labor shortage that is driving wages up rapidly in a “race to the top”—the level of free-market workers.
The real dangers to America are not free trade or China’s currency. That’s not to say there aren’t smart policies that should be taken to curb abuses of fair trade, rather that protectionism and currency haggling aren’t part of the smart mix. The real danger is that Congress will try to fix what is not broken and adopt a mercantilist policy of import limitation. Congress would do well to stick to the reliable keys to growth spelled out in The Heritage Foundation’s Index of Economic Freedom: strong property rights, low tax rates, low regulation, limited government, and especially free trade.
Tim Kane, Ph.D., is Director of, Marc Miles, Ph.D., is Senior Fellow in, and Anthony Kim is Research Associate in, the Center for International Trade and Economics at The Heritage Foundation.
[1] Tim Kane, “The Brutal Price of a Dollar,” Heritage Foundation Backgrounder No. 1855, May 31, 2005, at http://www.heritage.org/Research/TradeandForeignAid/bg1855.cfm.
[2] See Ibid. and Tim Kane and Marc Miles, “Trade Deficits, Dollars, and China: Wrong Lessons Make Dangerous Policy,” Heritage Foundation WebMemo No. 743, May 12, 2005, at http://www.heritage.org/Research/Economy/wm743.cfm.
[3] A.B. Bernard, J.B. Jensen, and P.K. Schott, "Importers, Exporters and Multinationals: A Portrait of the Firms in the U.S. that Trade Goods," NBER Working Paper No. 11404, June 2005.
Somebody please explain to Paul that when everyone (both Americans and the Chinese) puts their money in US concerns, that this is what makes the trade deficit bigger. It's called the balance of payments. The Chinese have been buying stocks of US concerns with money that they got by selling stuff like oil below cost.
Maybe I'm not explaining these technical terms clearly enough. Is there anyone one else here that can tell Paul how the Capital and Current accounts operate?
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I see your reading skills are still weak. I said "If China holds $260 billion in US Treasury debt, that's $260 billion more that Americans have to invest in creating new businesses or expanding old businesses"
They could also spend it, put it in the bank or buy Paul a reading comprehension class.
It is going into good old fashioned GOVERNMENT SQUANDRY.
It the Chinese stopped buying treasuries either other buyers would come forward or the government would have to raise taxes. I prefer paying 5% to the holders of Treasuries because I can earn more than that on my investments. If you'd prefer to pay higher taxes, that's your problem. The best case would be if the government spent less, a lot less, but that won't happen if the Chinese stopped buying.
Even were that point granted...it is meaningless...bla bla
My mortgage is lower because the Chinese bought our debt. Why is that meaningless?
And we are having to increasingly bid against China as a competitor for our own resources. Energy is only one.
Our economy uses less oil every year per dollar of GDP. You remember our $13 trillion GDP?
It enables that increasing U.S. debt load that the Comptroller General is truly frightened of.
So if they stopped buying and Treasury rates rose to 7% would that cost the Feds more or less in interest payments?
The interest rate set on the T-Bills by the Feds is climbing steadily...likely at least 3 more increases planned...
The Fed doesn't set the rate on T-Bills. You really shouldn't comment on the financial markets. Your ignorance is so obvious, it's painful to watch.
Upshot: We're exchanging economic positions
Yeah, our probable 4%-5% GDP growth this quarter shows we are doomed.
"Experience has proven, however, that without any controls a sudden reversal of capital flows can not only destroy an economy, but can also result in increased poverty for a nation."
That's kind of what I was thinking, although it's usually wiser to wait until the the price stops falling. Over the past 6 months the stock has increased by 50%, and the price has still not caught up with it's earnings. It could double in price tomorrow and still not be valued as high as American stocks are.
Enough shop talk --back to patriotism. Should I be the kind of traitor who increases the trade deficit by not investing, or the kind of traitor that lowers the trade deficit buy putting in an order for tomorrow's opening bell?
Decisions decisions ;-)
Let me tell you what I call real. Two weeks ago I bought 200 shares of a big oil company called Maverick Tube Corp. at $55.23. Yesterday I sold it at $57.26 because of all the talk about how bad 'excess profits' were. OK, I made $400 but I promise to donate it to a home for retired Defense Department employees. I want the people a this home to enjoy all the benefits of a grateful nation, so I plan to invest it for them, but I want your advice about investing patriotically. I swear I'm not making this up.
Do I invest the sales income plus cap gains into SNP and lower the trade deficit, or do we let the trade deficit get worse while we impose additional hardships on people who've already sacrificed enough for America?
I'm talking real money, real people, and real account balances here. You tell me, which way do we go?
My take is that Paul is not even able to insist on just one way. We went around and around and neither Paul, nor any of the others for that matter, was ever capable of deciding what he wanted. They seem to know a lot about what they don't want, but they never say what they want.
That must be why they always seem to get what they don't want.
It wasn't until after I reread Paul's reply to me (in his post #531 in the linked to thread) did I realize why he posted it in the first place. I had worded my post kind of awkwardly - certainly to the point that the Rhodes Scholar misunderstood what I was writing and felt that he needed to provide a definition of what the meaning of the word "bond" is. After the he replied I was scratching my head thinking, "Yeah, what's this got to do with the price of tea in China?" But, no matter. It allowed the perfect opportunity for one of us to, once again, take him over the knee and spank his little fanny over his terrible ignorance/stubbornness on economics.
You have barely scratched the surface of traitorous ploys in your investing dreams. Markham opines:
For stone-cold U.S. investors, the obvious play here is to simply tag along by taking positions in foreign and domestic companies supplying the Chinese juggernaut, whether they are base metal producer Falconbridge (FAL, news, msgs) in Canada; a producer of Turkish energy like Toreador Resources (TRGL, news, msgs) of Texas; a producer of Venezuelan oil and gas like Harvest Natural Resources (HNR, news, msgs); or the two big Chinese energy companies CNOOC or China Petroleum & Chemical (SNP, news, msgs).
So you can be traitorous to your miserly heart's content. But you know how and from whom China is getting their oil...and what they are in fact enabling? They are aiding and abetting the Scum of the Earth. And there you'll be...aiding and abetting them all.
Meanwhile, the U.S. will just be plugging along making a 5% GDP growth. Apparently way too boring for you, an impatient type.
As Markham notes:
And our politicians are unlikely yet to ease up on rules preventing U.S. companies from participating in the sort of bribery and weapons brokerage that has become de riguer for doing business in the equatorial zone where most new energy sources are being discovered.
Thanks for reposting one of my clear knock-outs of you all! You in particular Joe. Semper Fi.
You didn't have a leg to stand on after we were through with you. I know your little "bums" are still bleeding all over the place after the spanking we gave you and ToddAnti-Patriot...you probably still can't sit down.
But it looks like you have come back for more. My, you are bad boys, aren't you? Probably would have helped if any of you had actually had an REAL education... not what passes for it nowadays in Bsns School.
I assume you pine after being a Rhodes Scholar? In other words you want to be just another Typical leftist looney-tune. Dreaming of your World Government. And carrying around a sheepskin from Oxford?
Sad.
I just hope that this young Marine is not making a similar mistake as he goes to Oxford: Backstory: High school dropout to Rhodes scholar - mission possible
Maybe he won't get deluded like you were. But I would have to say since he is studying politics...there is grounds for concern.
Should we get advice from him on whom to vote for in upcoming elections too?
Meanwhile, the U.S. will just be plugging along making a 5% GDP growth. Apparently way too boring for you, an impatient type.
Wishful thinking on the 5%...one could only imagine what you could possibly complain about in that instance but I'm sure you'd find something. For that matter, 5% is practically unobtainable with all the populist sentiment and economic stupidity that exists out there (and here). Protectionists would never stand for that kind of growth rate without finding some industry to regulate and protect.
This is no knock against those that have not served but you, Paul, should be ashamed of yourself for being the poser that you are. I've watched you post things about equipment being fielded in the aerospace and defense industries and you seem pretty knowledgeable. But yet when I asked you if you've served - as I recall - you declined to answer. So, using a little intuition, I've come to the conclusion that you're either a defense department bureaucrat or some wannabe GI Joe who reads Soldier of Fortune magazines and fantasizes about being someone who doesn't have the stomach to do it for real. Which is it?
Semper Fidelis.
First, your libertarianism Leftyism is fundamentally incompatible with any kind of Duty, Honor or Loyalty. Did you your tongue burn with the Oathe?
You have been a consistent and utter phony. You are the Chinese mole infiltrators...the equivalent of General Giap...trying to sap American Resolve from within:
""We were not strong enough to drive out a half-million American troops, but that wasn't our aim. Our intention was to break the will of the American government to continue the war."--North Vietnamese General Vo Nguyen Giap, in a 1990 interview with historian Stanley Karnow.
Oh yeah. Embraces it just like Globalists Thomas Friedman. Thomas PM Barnett. John F. Kerry. Barbara Boxer. Diane Feinstein. Bill Xlinton. And yeah. Hitlery too.
Why don't you tell us again how the Fed sets the interest rate on T-Bills? Clown.
Oh please. Your ignorance is just abysmal. Clown yourself.
Your anus.
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