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.
Good arguing with you, Professor. :)
Next time then.
“.....as Reagan would have asked from us.”
Ah yes, the Ronald Reagan who saved Harley Davidson with a tariff.
Foreigners can own things outright in China. It makes us think that’s the way things operate elsewhere.
This is also a true statement.
The casinos in Macau? Owned outright by Wynn and MGM. And is the big reason the stock of both of those companies has skyrocketed in the last 2 years.
“You also have no idea what many companies would do absent regulation.”
I see “proof” of what companies DID do all over Ct without regulation.
“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?”
TV? Not quite so, bought from fmr coworker at a fire sale price as he was fired. He lost his shirt as he paid 500 or so for it, 75 bucks was all he got.
My Schwin was made in Ohio, you guessed it..it’s old
JVC, Pioneer RCA Sony etc? No, electro brand circa the 70’s.
Regular phone? GE circa 1992 or so..
I despise debt driven conusmerism, it’s like constantly writting bad checks at 15% interest..
Foreigners can no more own things outright in China, than you can fly to Mars.
Dodge truck - Mercedes Benz, German. No trade there!
1999 pre benz......LOL
Occupation: Custom motorcycle builder. Airbrush artist.
Funny, I’ve bought two apartments, sold one of them. Actually had the title to it. Looking at buying a nice mountain house as well. Seems to me I can actually own property in China.
Try to not pay your property taxes here and find out how much you actually own...
You are ethnic Chinese.
“Hua Chao”, yes?
Do you hold dual citizenship?
Which did you hold, first?...
OK on the truck.
But custom bike builder? I guess every bike you make is one less that OCC, West Coast, Graves, or one of the other builders doesn’t get to build. You like putting their employees out of a job? You like taking bread off their table?
What about HD? Every custom bike means at least two or more HDs not sold. Maybe you’re skinning them, too...
Why the quotes around the word "why"?
Productivity increases make goods cheaper. Wages do not necessarily have to rise in order to increase standards of living.
Would that be “to put under stress through maximum effort”?
Should I queue the Night Gallery music?
I think you will find they had plenty of regulation; but regulation to enable them instead of restrict them. See my tag.
OK dude. What happens to Jap import cruisers when Bernanke bangs another point off the rate?
Answer: Jap Cruiser prices go up.
HD quality? Depends on what you’re talking about. They’ve got the best paint. HD’s are not throw aways.... Compare how many Jap bikes from the 50,s, 60’s , 70’s are still rollin’ around out there as opposed to HD’s. Lot more HD than Jap. HD is an icon. They were smart and stopped selling bikes and started selling the image after they got out from under AMF.
...just so you know... I’m not biased as far as what I ride / own. I’ve got two Jap bikes and one HD and one Italian bike. None were made by child / slave labor. Been to the Ducati factory? I have. The bikes are assembled by blue-haired ladies with mustaches.
I’m not against TRADE!. I’m against TRADING amongst unequal partners. Tariffs rule! But scumbags who like “free trade” as opposed to “fair trade” are ok with sweatshops and kiddy slave labor...as long as they can get their cheap crap at Walmart.
Wo bu shi zhong guo ren, wo shi mei guo ren.
Half German, half Irish, (2nd generation on both parent’s sides; my grandparents on both sides were immigrants). I was born and raised in Seattle, WA. Hold a US passport, did my time working for the US military back in the late 80s/early 90s. Pay my taxes every year.
No dual citizenship (not possible with PRC and the US). I buy my visa once a year. I can get a permanent residency card for the PRC next year (long enough “residency” in PRC) which I probably will because it negates the need to get visas ever again.
China’s allowed foreign ownership of private property and companies for a few years now. And in fact the taxation is a lot less than in the People’s Republic of Washington, and simpler to pay, as well.
I’m on my second apartment (upgraded, live in the Minhang district of Shanghai), a car, and a 100% personally owned company with three US partners, a dozen employees here in the US, and half a dozen employees in China.
If I couldn’t trade with China, none of these people would have the jobs they have now. Jobs they love, jobs that pay well, jobs that are in a growing industry and adding more to the tax rolls of both countries.
I’d still be working for another company, and the 15 US jobs - and 6 Chinese jobs - simply wouldn’t exist.
Ever read “Atlas Shrugged”? Good fictional story of the real impact of trade barriers and tarrifs on actual economies.
RE: post 151...too silly to respond too. With all due respect...you seriously do not know WTF you’re talking about regarding bikes.
Check recent Nationwide laws pertaining to “composite bike fabrication”.. Read up.
Oh sure, rub it in our faces that we had to import 1 billion bullets from Taiwan
I suppose.
Not sure you could have swung that arrangement, if you were trying to import goods into China, rather than the other way around.
Your guo-yu seems pretty good though. :)
A completely pointless exercise since the union immediately went on strike and ended up consuming all the increase in income from the tariff.
What really saved Harley was the attention it got in the press and the increase in interest from the buying public. Harley got a free product reputation makeover - largely undeserved BTW because Harley quality was lousy.
What happens when our rate drops again? Not much. Japan manipulates the Yen to stay close to the dollar. Like the PRC, like South Korea, like Taiwan. So in the end, not much.
You own Japanese bikes? Care to guess where the parts come from? And that Ducati? I’ve been to the speaker factories of RCF and 18 Sound - also in Italy - and know the base parts come from China.
Like it or not, the world is open. If you want to change other countries, to export democracy, the best way to do it is to export economic success. Our standard of living increases because of the accessibility of more products - both frivolous and useful (think microwaves, cell phones, computers) - for reduced costs.
China’s got a growing middle class, the pollution problem is actually being addressed, and personal and political freedoms are starting to poke through, because the people now making money want to use that money.
Economic freedom is inherently linked to political and personal freedom. You want to free the world? Free the economies.
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