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, 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...”
I have no problem with that. I buy hand made local stuff and go out of my way to buy made in USA every chance I get.
$99 speakers? I don’t think so. For some people at least....quality matters.
Now this:
“It’s called capitalism. Read about it some time - it actually works. It’s what this country was founded on.”
I simply not true, Locke was a High Tariffs advocate, he theorized that they would not only grow Nation based business, but also increase Patriotism.
He was right, Globalism also decreases the concept of Loyalty to pretty much everything but the bottom line.
I put a lot more money in the hands of Americans than I do in the hands of Chinese. I think I’m growing both economies, and using the Chinese to grow ours faster than they grow theirs.
It’s called actually understanding what Trade is.
I guess you don’t shop? I mean, be honest about it, you’re just helping to grow the bank account of the grocer, taking from the mouths of your own family to make his pocketbook fatter...
You have no idea what I'd do. You also have no idea what many companies would do absent regulation. You're arguments mirror those made by Upton Sinclair and Eugene Debs...hardly conservative icons, bud.
So what brand TV do you have? What car do you drive? Have a CD player, or cell phone?
You know, you CAN get purely-US built versions of each of those. Do you put your money where your mouth is?
“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.”
____________________________________________________________
No brainer ace......
Can you “invest” $1000.00 for a student who has artistic talent? Would it be “acceptable” for one of your students to rake in $1000.00 a week in income?....probably working 30-40 hours a week?
I got ya covered.
“So what brand TV do you have? What car do you drive? Have a CD player, or cell phone?
You know, you CAN get purely-US built versions of each of those. Do you put your money where your mouth is?”
Hmm i’ll take your challenge
1. TV..bought used
2. Ride a Schwin/ drive suburban
3. CD player none, most modern music is CRAP, listen to old radio.
4. Cell phone? Hate those damnable devices wouldn’t have one.
“So you created a brand new job, no one ever worked in your field before”?
Nope.
“so you’re not competing with others, you don’t force down the costs charged by those in your industry?”
Nope...I’m the most expensive guy around here...
“Do you never try to out-work your competition? “
Out work? I work smarter, not harder.
“Do you price your quotes higher than your competition so you don’t take work from them?”
I price my work according to the job and my customer. If I’m in a bad mood and my customer is a tule...I price the job higher. If the customer is a decent bloke... I charge a bit lower.
I have an “a$$hole tax” to be sure.
That the best you got?... Insults?
Looks to me like they are all coming to Las Vegas and Macau and giving it right back at the baccarat tables. ;)
I’ve gotta get some sleep. I look forward to responding more on Saturday morning; maybe.
LOL.
You do know Macau is China, right?
You do know the casinos are privately owned right?
“So what brand TV do you have? What car do you drive? Have a CD player, or cell phone?”
This is embarassing...I do not watch much TV...LOL Last one I bought was Curtis Mathes....years ago.
Car. Dodge truck....made in St Louis way back when....
Cd player: nope MP3 (toshiba) as a gift.
Cell phone: motorola el cheapo
SO no go on the brand of the TV... You know, by purchasing a used Sony or JVC you’re adding value to those brands by increasing the desirability of them in the used market.
Schwinn? Part of Dorel Corp, and the bikes roll out of factories in China. I’ve been to one of them in Su Zhou that makes the forks for quite a few of their models.
Radio - like a JVC, RCA, Sony, Pioneer?
Regular phone then - AT&T? Samsung? Panasonic?
I've got time for one more. No, the best I got is the content that I reserve for those who wish to discuss the matter rationally and without hyperbole. Check out my prior posts, if you wish, and look for the ones where I provided specific answers to fears and misunderstandings. But don't just read my stuff. there are many good FReepers who post here that can explain this stuff even better than I can if you'd just be willing to read their opinions, ask questions of them, argue your own points intelligently, and keep an eye toward liberty and optimism always...as Reagan would have asked from us.
” “intensfy”
As [in to] concentrate, to put under stress through maximum effort?
Yes.”
So is that “why” productivity has increased for at least 5 years now, and yet wages stagnated until the last year or so?
Would that be “to put under stress through maximum effort”?
IIRC one Chinese guy owns most of it. Delicate balancing act between him, the Beijing government, and the Triads.
Asia is much different from America. Foreigners can own things outright in America. It makes us think that’s the way things operate elsewhere.
It’s not.
OK, so an old CM TV.
Dodge truck - Mercedes Benz, German. No trade there!
Toshiba MP3. Check.
Motorola cell phone? Built in China.
Oh, and the computer you’re using? Most of the parts come from China or Malaysia, and the reason you can get a $300 new laptop is because of leveraging overseas production.
So about your job, it’s a brand new field that never existed before, and you have no one else in the field. Mind if I ask what the field is?
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