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.
‘So who loses in this situation?”
The machine shop next door loses because they can’t compete with the machine shops in China that pay the equivalent of 4 dollars a day and do NOT have to contend with the likes of OSHA. That’s tens of thousands of jobs lost here in the US.
“That said. Now let’s get that trade war going! :)
So your students, won’t have to read in books about things called “jobs”, which Americans used to have.”
Ohh there will be plenty of jobs, the majority of decently paying jobs will requires advanced degress to obtain, and if a high speed fiber optic line can allow data to be sent from India or China rather then Houston, and they work for a third of the cost, say “adios” and back to college with you.
Of course, if you are an American and do not have an advanced degree, your won’t so quite so well in Globalist America, unless of course you are a member of constituency that can pressure “Nanny” into hiring you for Unionized govt work.
Granted, a bit cynical, there is a grain of truth in it however.
Intensify means to perfect or make stronger.
Hey, can’t you shove those disabled kids in some sweatshop somewhere where they can be more productive?
Just curious.
Oh wait...brb....let me go out to the sweat shop next door and kick the little 11 year old ingrates around a bit more to stir up “productivity”.
It’s a race to the bottom.
What kind of life do you think Chinese who don't work in factories have?
Sounds good to me, in fact I’ve made a study of doing without those items that you listed (save a few) in order maximize investment capitol...
But even still, they did have actual “Wealth” the means of production, not “VCR’s”..
Yes I’m familar with the toasts: “To cooperation and mutual benefit”.
Fact is, you’re selling out.
Makes you money. Hurts America.
“intensfy”
As into concentrate, to put under stress through maximum effort?
Here I thought we were getting along so well.
OK. You drove me to this.
I really didn’t want to say this ... but:
THOSE WHO CAN’T DO. TEACH.
OK now what were we saying. :)
Yes, and they both worked darn hard to get it.
“Yeah, just like the you champion ‘necessary’ government intervention in creating disincentives for people to voluntarily exchange lawful goods and services with one another no matter their proximity to the United States. Limiting freedoms comes so naturally to your ilk.”
Yea, OSHA and DEP suck. But they are a necessary evil to stop people like you who would rather turn our country into a cesspool. Hey, maybe that will be more job security for you......you know... more kids with flippers....right?
Here’s a site that’s about 5 miles from my home.
http://www.epa.gov/region01/pr/1998/072498.html
http://www.epa.gov/region01/pr/1997/pr0312a.html
http://www.scorecard.org/env-releases/land/site.tcl?epa_id=CTD072122062
funny thing is if I get 3 feet of snow in my yard.... the snow MELTS off the ground there!...even if it’s 10 degrees above zero.
I guess “you and your ilk” like things that way....hugh?
Sure, and the 3 engineers now employed - and earning more money than the 5 now-unemployed machinists because the factory in China can produce more products, keeping the 3 engineers in higher demand - shouldn’t get their jobs. Better to keep the lower-paid machinists.
So tell me, who lost their job so you can work? Unless you work the land with your hands - no oxen, no tractor, no plow - you’ve displaced at least one other job.
Lumberjack? How dare you use that chainsaw, doing the work that normally 10 men would do.
Mechanic? Why, you’ve put farriers, buggy makers, and hay farmers out of business!
Machinist? Bah, with your lathes and mills you’ve put dozens of craftsmen to the soupline.
Those tens of thousands of jobs in China would not exist if the US didn’t buy their output. And the reason we buy their output is that we have money. And we buy their output because we have more money on the whole.
So, here’s a question for you: I design consumer electronics - loudspeakers, in particular - for a living. I can get them entirely made in the US. Will you commit to buying your next pair of speakers from me, guaranteed to be made entirely in the US versus running down to Best Buy or Circuit City and picking up the $99 special? It’ll only cost you a few thousand dollars for a small pair of speakers...
As [in to] concentrate, to put under stress through maximum effort?
Yes.
“So tell me, who lost their job so you can work?”
No one. I’m self employed.
Think what you want to think. It’s called growing the economy of the US. How much do YOU add to the GDP of the country?
It’s called capitalism. Read about it some time - it actually works. It’s what this country was founded on.
Or we could keep with the collectivism and status quo that you seem to support. After all, it was so successful in the old Soviet economy - everyone has a job, even if it becomes obsolete...
Many of them are 18 or older. If I had a business and could put them to work making things that consumers wanted, I could probably make huge profits (which I'd profit share with them) by marketing the products and appealing to the consumer's emotional aspect to the operation. I see that emotional appeals are very fashionable and effective these days. I get a heavy dose of this reality every time a thread about trade gets broached. Now, what does your gut say: would these young people be willing to voluntarily take a job in order to improve their financial position and self-esteem?
Indeed, that is life, they did however work for enough money to actually build something with their efforts.
Don’t misunderstand, Trade is a good thing, shipping industries to China wholesale and replacing them with Wal Mart is not a good trade off at all, it will lead to economic populism for everyone.
“Soak the Rich with Taxes”
Yahh, that can pay for my health insurance that I lost..
Why can’t I get a job?
Because the “Rich” got soaked you dolt.
I don’t think either side sees what this is heading towards.
No. Be honest about what you are doing.
It is called growing the economy of the Peoples Republic of China.
If that’s what you choose to do, at least be honest about the results of your efforts.
So you created a brand new job, no one ever worked in your field before, so you’re not competing with others, you don’t force down the costs charged by those in your industry?
Do you never try to out-work your competition? Do you price your quotes higher than your competition so you don’t take work from them?
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