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.
?
True.
In the past,a FReeper has reported here that he buys Chicom brake drums and rotors for $4 a piece, when purchased by the container load. Yet these items are still in the neighborhood of $60 at retail.
But those of us who oppose the so called free trade are allowing the opposition to set the terms of the argument.
For the most part, they are actually arguing for 'labor arbitrage', in other words, a global race to the bottom.
Free trade only exists between places that are using 'comparative advantage', not cheap labor. They try to rationalize their positions by saying China will be a free and democratic country if we just export a few million more jobs to them.
Ahhh sure ;^)
"The world is a kind and peaceful place, no one seeks to harm another. No need for us to retain a messy and smelly steel industry, let others do that, we can shuck and jive electrons and all be rich".
But when the so called free trade crowd talks about the 'declining dollar', they expose themselves. As we have flooded the world with dollars, the market automatically recognizes that and places less of a value on them.
So you won't tell me their profit margin?
and not all Walmart brands are imported from corrupt and/or Communist nations.
Don't tell the other protectionists that.
Most of their overhead (if coming from China) is after the stuff reaches American shores.
But you said, "The profits made of foreign cheap labor is so vast" Change your "mind" already?
It's pretty simple, in your case . . . just take a look at a chart that uses constant dollars and say it's not adjusted for inflation.
-”So you won’t tell me their profit margin?”
Doesn’t matter what Walmart’s profit margin is, if they aren’t a manufacturer.
-”Don’t tell the other protectionists that.”
Like I said. You free-traders drive Republicans away from the polls, with both your policies and elitist anti-American rhetoric.
-”But you said, “The profits made of foreign cheap labor is so vast” Change your “mind” already?”
Only with a Chinese manufacturers who make their profit soley from the wage disparity between the US shores and the Chinese worker. Walmart isn’t one of them. Walmart is a warehouse.
Sorry, not meant for you.
I’m saying that you don’t know how much money 4 billion people are making. Some aren’t making any, some are making more than 10c and hour.
Nice photo of A. Lincoln. I don't know what the hell it means, however.
Economic recessions drive away a lot more voters than free trade rhetoric. And your class warfare babble doesn't fly here.
I’m saying that you don’t know how much money 4 billion people are making. Some aren’t making any, some are making more than 10c and hour.
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Definitions of average on the Web:
* approximating the statistical norm or average or expected value; “the average income in New England is below that of the nation”; “of average ...
* lacking special distinction, rank, or status; commonly encountered; “average people”; “the ordinary (or common) man in the street”
* lacking exceptional quality or ability; “a novel of average merit”; “only a fair performance of the sonata”; “in fair health”; “the caliber of the students has gone from mediocre to above average”; “the performance was middling at best”
* amount to or come to an average, without loss or gain; “The number of hours I work per work averages out to 40”
* around the middle of a scale of evaluation of physical measures; “an orange of average size”; “intermediate capacity”; “a plane with intermediate range”; “medium bombers”
* modal(a): relating to or constituting the most frequent value in a distribution; “the modal age at which American novelists reach their peak is 30”
* achieve or reach on average; “He averaged a C”
* a statistic describing the location of a distribution; “it set the norm for American homes”
* compute the average of
* median(a): relating to or constituting the middle value of an ordered set of values (or the average of the middle two in a set with an even number of values); “the median value of 17, 20, and 36 is 20”; “the median income for the year was $15,000”
wordnet.princeton.edu/perl/webwn
You: “Deficit spending does not cause the trade deficit. The implication in the article made no sense whatsover.”
Here is the connection between trade deficit and budget deficit: With the trade deficit, international entities take their dollars and invest in the US—often they buy US bonds, which is government debt the government sells to finance its excessive spending. If we balance our budget, then we don’t need to sell bonds and we don’t have to raise our interest rates to attract investment.
The other nations will invest in our companies then, which can only be good for us.
Economic recessions drive away a lot more voters than free trade rhetoric. And your class warfare babble doesn’t fly here.
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Class warfare? I am simply explaining the dire and immediate political realities. To ignore it, will bring total disaster to the Republicans.
-”Here is the connection between trade deficit and budget deficit: With the trade deficit, international entities take their dollars and invest in the US—often they buy US bonds...”
OFTEN? Wouldn’t RARELY be more accurate, proportionally speaking.
By describing opponents to your protectionists fantasies as “elitist” you are engaging in class warfare.
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Actually, the FASTEST way would be through people like Hunterite: the direct route. Why wait for Democrats to raise taxes on the rich, when we've got envy-coddling Buchananites like yourselves.
Hank
By describing opponents to your protectionists fantasies as “elitist” you are engaging in class warfare.
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By describing “fair traders” as “protectionists” is demagoguing.
Actually, the FASTEST way would be through people like Hunterite: the direct route. Why wait for Democrats to raise taxes on the rich, when we’ve got envy-coddling Buchananites like yourselves.
Hank
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No, the Democrats are going to continue to win elections because of these raw trade deals and immigration (even though the Democrats are mostly at fault for immigration).
Lou Dobbs is a master propagandist. “War on the middle class” Brilliant! He blames Republicans for what Democrats do on immigration.
Yup, cause of the free-traders I foresee Democrats winning big in the House and Senate. BIG BIG! Its all about perception, watch Lou Dobbs if you get the chance.
If Hunter don’t win primaries, Republicans are going to lose big. Now I read that Thompson is for Mexican trucks coming across:
http://www.mentata.com/ds/retrieve/congress/vote/VC107S17
Crap were screwed. There are 2 million truckers in about 80 million voters. Do the math, thats like 5% of the votes right there.
Perception.
“This explaination of the so-called trade deficit “
Excellent link! I love the explanation—it is better than this article.
Good post. It’s funny how people pine for the “old days,” when they could easily live like their grandparents if they chose to. But then, they’d have to give up all their modern conveniences. They want the conveniences of modern life without the cash outlays required to obtain those conveniences.
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