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.
For later
“Coercion for which purpose and for what ends?”
For what ever purpose needed. To better ones position in the market.
“Please tell me, what are these remarkable results that you speak of.”
Preserving jobs.
“Protectionism is favoritism. It is the deliberate interference by government in order to discourage the natural trading patterns that would ordinarily occur absent government meddling. Trade is the voluntary exchange of lawful goods and services between two or more parties. A policy of crafting legislation to create disincentives for Americans to voluntarily trade with other people residing in a foreign country, is protectionism. If used as a policy outside of war or political embargoes, it becomes a menace to liberty and freedom. People who favor this behavior as policy have got to be asked to reconcile their views with their views on liberty and limited government.”
BS.
Explain what you mean. What is a better position in the market.
“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.”
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You economic-liberals just did it again. “Gosh ain’t we smart, were trading goods for paper.”
Keep in mind, these are the same economic-liberals who think we should be on a gold standard and think paper money is fiat.
economic-liberal = Libertarian = free-trader
I run 3 businesses very successfully. Start your own business, you’ll find out.
No takers on helping the handicapped kids make $1000.00 a week?
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.
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A) The US gave foreign aid to select European countries after WW2 to keep Communists from creating anarchy. The Truman Doctrine for Turkey and Greece.
B) Foreign money isn’t fiat, American money isn’t fiat. If it were, then we wouldn’t be paying interest on the national debt.
C) The only reaped benefits the US got from Turkey and Greece was to contain Communism.
Explain your offer again. And then explain how you use coercion to better your place in the market.
That graph is retarded. Those are unadjusted (for inflation and purchasing power) wages.
The Art of Statistical Manipulation (co-authored by the Democratic Party and Libertarian Party)
Communists that create anarchy? That's not a communist's end-goal from what I understand about them.
Foreign money isn’t fiat, American money isn’t fiat. If it were, then we wouldn’t be paying interest on the national debt.
you're blowing me away, here. What are you talking about, I'm not following you?
What if we raised the tariff on Chinese goods by 20 or 30%? After we do, can we stop worrying about Chinese ICBMs?
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Yes
The Chinese economy would fold like a wet paper bag. We wouldn’t have to worry about Chinese ICBM’s. Just like we no longer have to worry about the Soviet army anymore, after their economy collapsed.
The jobs ain’t coming back. Close off trade to China, outlaw the unions, burn OSHA to the ground and eliminate the minimum wage — the jobs still ain’t coming back. Not ever.
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I would rather gradually raise tariffs on China, to make the offshoring companies pay for their treachery. If its too sudden, the traitors will pack up their capital and move somewhere else, and we wouldn’t be able to squeeze them for all they are worth. Just like they squeezed everyone else.
An eye for an eye.
” Minnesota has a trade deficit with Florida and California, but we seem to survive....Buchanan panders to those who emotionally equate increased foreign trade with weakness. They are stuck with stone age, reflex thinking that one should keep everything in the tribe. It never works and every effort to kill foreign trade results in an increasing likelihood of economic stagnation or worse....”
Ping, ping, ping, a thousand times ping!
Thank you for demonstrating economic literacy....it’s demonstrated here from time to time, but boy oh boy, there isn’t enough of it.
Hank
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Free-traders like yourself, are totally incapable of discriminating between interstate trade and international trade.
Fair enough. I’m not really interested in your income though.
I’m a programmer. Over the last 5-10 years I have watched perhaps a full hundred of my co-workers walked out of the office by security. Some in tears. Their stuff in a box.
And yes, that sort of p*sses me off.
Your turn.
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Well according to the free-traders, you are obsolete in this new global economy. In fact, 99% of Americans are obsolete. There are 4 billion more people willing to do your job for far far less. Doesn’t matter if they aren’t American either.
Free-traders are totally incapable of discriminating between interstate trade and international trade. This makes them nationless, unpatriotic, unAmerican. Their citizenship should be revoked if they want to be a citizen of the world.
That’s what’s funny about you guys. No amount of good news, whether small or substantial, is good enough. Every silver lining has a dark cloud.
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The trade deficit is logarithmic, not linear:
LOGARITHMIC: http://www.intmath.com/Exponential-logarithmic-functions/10xlogx.gif
LINEAR: http://xpmath.com/careers/images/2-8.gif
That does it! I'm not a Duncan Hunter supporter in the least but even he has got to know that someone that adores him is coming into this forum and indirectly making him and his platform look really badly. I knew you were hard-headed but I just cannot believe that you'd be this stupid to post that kind of sentiment.
Keep in mind that one of the goals of “Free Trade” is to drive wages down to the lowest possible level
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“This is one of the silliest arguments about free trade.”
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The basic of basics of the market is to sell the highest and spend the least. A company is not going to voluntarily hire a dishwasher for $50 an hour?
You may find it silly, but us Real Americans understand economics.
It maybe a low blow to write this but I feel it must be said: at least the severely disabled children in my classroom have a little stinkin’ optimism in their bodies and many of them would be honored to work for a company like Wal*Mart which would make the charity gesture to improve public sentiment. Just having a job brings these kids dignity. And to think that some of the former programmers that you worked with have probably forgotten the great money-making opportunity they had while it lasted and are probably badmouthing or petitioning the government to save them from competition and the fierce side of capitalism/consumer wants.
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“Walmart” only demagogues on Democrat message boards.
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..
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Your a fricking liar, and a traitor.
SQUEEZE THESE SOBS! Make them pay.
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