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.
I've got something stuck in my head, too. An image that you're [a compound word!] that ape-like creature above the word "xenophobe", banging out messages on your keyboard with that one finger.
Now, [d]on’t get offended, were just jaw jacking on the internet. You['re]...probably [a] great [primate] in real life.
I came to be a Republican from Libertarian principles. I was never a Democrat. I understand Libertarians inside and out. I know exactly how they think.
Okay, I call bullshit, right here, right now. There's no way you are telling the truth here. Not saying your lying. No scratch that...you've got to be lying.
Higher tariffs, for smaller government! LOL!
“Yeah, which part of those inalienable rights suggests that it is okay for one class of people to try and prevent or discourage the other class from voluntarily exchanging their stuff with others? Can you find that one for me in those inalienable rights, Mr. Federalist?”
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I know you want the inalienable right to purchase, trade, or work slaves, but how many more dead bodies is it going to take to convince you guys that people aren’t goods and services.
I’ve got something stuck in my head, too. An image that you’re [a compound word!] that ape-like creature above the word “xenophobe”, banging out messages on your keyboard with that one finger.
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Told you so. Libertarians think this way. Just like Democrats.
There is nothing big government about tariffs.
“Higher tariffs, for smaller government! LOL!”
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LAWL LAWL LAWL, you prefer to tax Americans instead of foreigners, LAWL LAWL LAWL.
Because tariffs don't raise prices for Americans? You're right, you've never taken an economics class. LOL!
you prefer to tax Americans instead of foreigners,
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“Because tariffs don’t raise prices for Americans? You’re right, you’ve never taken an economics class. LOL!”
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If prices of products from 3rd world countries were representative of their 10 cents an hour labor costs, then you would have a point.
In some of the 3rd world 10 cents an hour is the difference between eating and not eating.
In some of the 3rd world 10 cents an hour is the difference between eating and not eating.
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There are 4 billion people earning 10 cents an hour, and only 0.25 billion Americans Mr. Compassionate.
Who’s fault is it they are earning 10 cents an hour? Will you blame America like the Democrats do?
Well said. Many current taxes that could be reduced. Plus tariffs are elective - buy American. Protectionism is patriotism.
So tariffs don’t raise prices for Americans? If you understood economics, you wouldn’t make that ridiculous claim.
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A moderate tariff wouldn’t raise prices to the American consumer one cent. The profits made of foreign cheap labor is so vast, it would take a prohibitive tariff of galactic proportions to start driving down volume.
Really? How big are WalMart's profits? They're the largest importer, they must make a 50% profit margin, or do you think it's higher?
Ok, one thing I don’t understand.
20 billion dollar a month trade deficit right?
But the Chinese government only hoards ~1.3 trillion dollars. All other governments in total only hoard about ~5 trillion dollars. Where in the hell is the other ~10 ~20 ~30 trillion? What form is it in? Paper? Electronic? Barter-able goods?
20 billion a month is allot, its more then ~6 trillion, cumulative over the decades. And I’m not talking about the national debt.
It's none of my business, nor yours, if they want to earn 10 cents an hour or 5 cents an hour.
There are 4 billion people earning 10 cents an hour, and only 0.25 billion Americans Mr. Compassionate.
How do you know that, Mr Protectionist?
You mean one more thing you don't understand.
The profits made of foreign cheap labor is so vast,
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Really? How big are WalMart’s profits? They’re the largest importer, they must make a 50% profit margin, or do you think it’s higher?
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WalMart is the last link in the chain. Walmart doesn’t produce anything except for a small number of Walmart brands, and not all Walmart brands are imported from corrupt and/or Communist nations.
Walmart is a warehouse, not a manufacturer. Most of their overhead (if coming from China) is after the stuff reaches American shores. Mostly because Americans don’t earn 10 cents an hour.
You're the one waxing gradiloquent about slave labor.
There are 4 billion people earning 10 cents an hour, and only 0.25 billion Americans Mr. Compassionate.
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“How do you know that, Mr Protectionist?”
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Are you denying 75% of the world’s population is WAY below the poverty line? Are you denying there are about 6 billion people? Are you denying there are 300,000,000 Americans? (0.3 billion!)
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