5% of 80 million is 4 million, Einstein.
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.
Anything other than free trade is protectionist. "Fair trade is a euphemism for protectionism. The prim rose path is way too crowded with such jargon.
5% of 80 million is 4 million, Einstein.
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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Technological innovation would have went on in spite of cheap labor. In fact abundant cheap labor stifles innovation. Disagree?
By describing “fair traders” as “protectionists” is demagoguing.
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“Anything other than free trade is protectionist.”
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Anything other then “fair trade” is unAmerican.
-”So? He’s also growing the economy of the US on a macro scale, and creating high paying jobs for several US citizens on a micro scale. Would you prefer those US citizens lose their jobs to prevent the growth of China’s economy?”
US citizens wouldn’t lose jobs, and why do you care so much about the Chinese economy?
-”You’re assuming that the machine shop employees who may or may not have lost their jobs would have a job if PugetSoundSoldier wasn’t engaged in his business. That assumption requires you to believe that the same demand would exist for the imported product if it were produced at a much higher cost here in the US. I sincerely doubt that is the case.”
Thats a lie, the US doesn’t produce widgets at a “MUCH HIGHER COST.” So unAmerican.
( Ya I done it once, waiting for tires to be put on my ride)
5% of 80 million is 4 million, Einstein.
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Actually there are more like 10 million, I didn’t feel the need to be rigorous, obnoxious spellchecker.
It’s like talking to LaRouchies
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It’s like talking to a traitor.
Help me follow your reasoning. Because of the Republicans' stance on free trade, Duncan Hunter won't get the nod because most of the people who would vote for him will otherwise vote Democrat?
Then define "fair" for us.
Calling me, or anyone else, a traitor is not helping. Why don't you make your case, or can't you?
Help me follow your reasoning. Because of the Republicans’ stance on free trade, Duncan Hunter won’t get the nod because most of the people who would vote for him will otherwise vote Democrat?
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Free-traders are a very small minority of voters, even in the Republican Party. How many times in the debates has trade been brought up? The issue is quietly swept under the rug.
Yet (up to this point) protectionist Republican candidates fail at the national level.
By way of illustration, one prominent "F.T." type here kept crowing about "levels of American homeownership have never been higher". We don't hear that anymore now do we?
Seems there were a bunch of folks who should have never been financed for a house..... but no need to beat the dead horse.
And these "F.T" types really aren't interested in politics per se, they just want to howl how smart they are because they've discovered there is a S/L of Chinese who will work for peanuts.
And speaking of class envy, the one thing that jumps out is their whining about blue collar tradesmen making $20 or so an hour.
That's where my joke about bowling alley night managers comes in.
And never forget, Karl Marx was a free trader.
In 1992 20,000,000 people voted for Ross Perot simply to oppose NAFTA.
In 1996 8,000,000 people voted for Ross Perot simply to opppose NAFTA.
Whats the difference between those 4 years? Did everyone start to love NAFTA in a 4 year time span?
Now. Does the 1992 election mean that there were twice as many Bush supporters then Perot supporters? Does this statistic mean literally that twice as many Republicans love NAFTA? Or does it really mean:
A) A majority of Republicans are cowards and afraid to vote for what they really believe.
B) It could mean that most Republican voters don’t really pay attention except the next football game, and vote for who their daddy votes for.
1:2 Perot:Bush. That is one hell of a statistic if you think about it.
Going on theory A) Then that would mean there are twice as many cowards.
Going on theory B) 33% of Republicans actually PAY ATTENTION close enough to protest vote, or thought they actually had a serious chance to win.
Any combination of A and B) Most likely. Perot would have gotten allot more votes if Republican voters actually voted for who they really wanted to win, instead of going on the “electability theory.”
So, I can definately say with 100% assurance, that free-traders are in the minority, and they are costing Republicans elections.
Did you bother to read the post I was responding to? PugetSoundSoldier’s company employs a dozen Americans at high paying jobs.
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Those products coming to the US, displace American jobs.
1 American consumer has a choice. Widget X (produced in China). Widget Y (produced in the US)
Widget X made with slave labor, costs 1% less then Widget Y. The jerks from Widget X jacked up their price and still manage to undercut Widget Y by 1%.
American consumer buys Widget X because it costs 1% less, now the Americans are out of business.
Far more money is lost in wages then 12 plantation owners, who by the way, sink allot of their money back into China cause they live there half their lives.
Just because someone disagrees with you doesn’t mean they are traitors or are unAmerican. It simply means we disagree on what is best for America. You like calling people liars, but do you ever post facts to refute the points being made? Or is name-calling all you’ve got?
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If not traitor then how about unAmerican? Or jerk? How about ahole? Accusing American citizens of being the most inefective nonproductive workers on the planet.
“OMG IT COSTS MUCH MORE IN AMERICA!”
Elitist punks. Get off your cotton plantation once in your life.
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