Protectionist Rhetoric Will Accelerate the Dollar's Slide

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.

And never forget, Karl Marx was a free trader.

And he also believed in a graduated income tax. Please tell us why you are against free trade. Because it will prevent home ownership or because it will prevent $20 dollar and hour tradesmen?

Since it will do neither I'm anxious to hear from you.

Doesn’t matter what Walmart’s profit margin is, if they aren’t a manufacturer.

Yeah, you're right. Might as well drive that profit to zero, since there would be no impact if WAL-MART went away....

It's not like they have 1.8 MILLION employees to pay. At an average wage of $10 per hour, 40 hours a week, that's only $37 BILLION in wages paid to American workers.

But your right, you with an admitted complete lack of economics knowledge. Those 1.8 MILLION people and their $37 BILLION dollars in direct compensation to our economy mean nothing...

American consumer buys Widget X because it costs 1% less, now the Americans are out of business.

Do you think anyone would actually make a decision as to what to buy based upon a 1% price differential? Or would quality come into play? Does Toyota sell a lot of Camry's because they are cheaper than Chevy Malibus, or because they are better cars? Why does BMW sell anything in this country given their pricing is much higher than most American cars? How about Sony? Why do they sell well in America? I'd love to buy an American-made TV that had the same quality as a Sony. Unfortunately, I don't think there is one. Sounds like a great opportunity for an American business man to fill a void that is sorely needed.

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.

Well you just made yourself look foolish. Why am I not surprised?

Elitist punks. Get off your cotton plantation once in your life.

Do you think your company or the world owes you a living? I'm betting for 40 hours a week you add something productive to society. After that you don't. Do you know why companies offshore as much as they can?

Taxes

Regulation

Litigation

Union pay scales.

Its a big mystery how 2.2 million Union soldiers can fight AND HATE 1 million rebel soldiers, and kill off 600,000 in the process. And the vast majority didn’t really care whether or not slavery is moral or not.

Brother against brother. Father against father. Its a real big mystery to you free-traders, isn’t it. You guys don’t have a clue what drives people to kill, or vote. Maybe you guys need to be taken out of the Republican decision making process, how about it.

Let's define terminology first. What's passing for "Free Trade" is actually the practice of labor arbitrage, or the hunt for the lowest pay anyone in the world will get by on.

However in the classical sense of free trade such as between US and Canada, Australia ... some is fine, always keeping our defense industry in mind.

I do make an exception for New Zealand as they pi** and moan about our nuke armed ships, thus should pay series and hugh duties on products they ship here.

Obviously as China is the lead dog right now, and have shown they can shoot down our spy satellites, it is insane to continue to do bidness with them.

(It's still an ugly world out there)

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.

THANK YOU! That is EXACTLY the case. The reason there are precious few loudspeaker manufacturers left in the US? Price. You simply cannot offer the products the consumer wants at the price the consumer wants to pay if you build it here.

So, you take the manufacturing to where you can do it for an appropriate price. And rather than having 15 mid-paid machinists on staff, I have 6 high-paid engineers.

I used to manufacture in the US; my headcount was higher back then, but the total payroll now is higher, and so is the total profitability of the company.

The economy here is better now, because more dollars flow into it than did before. It's amazing how many people consider the economy a zero-sum game!

WAL-MART

******************

Your barking up the wrong tree if you expect me to bash Walmart like a Democrat. Or maybe you think you can entrap me into saying something like that.

I already told you, Walmart is more of a warehouse then a manufacturer, international trade with 3rd world Communist corrupt cesspools has nothing to do with it.

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.

LOL! Good stuff. I never accused Americans of being ineffective or non-productive. On the contrary, I'm convinced America can prosper in a global economy due to our productive and effective workforce. Our capitalist system encourages entrepreneurs to fill voids and make quality products. I don't fear the loss of certain low paying, low skill jobs in this country because I can see all around me people prospering in highly-skilled, high paying jobs. I guess that makes me an "un-American, traitorous a-hole" for thinking this way.

American consumer buys Widget X because it costs 1% less, now the Americans are out of business.

*******************

“Do you think anyone would actually make a decision as to what to buy based upon a 1% price differential? Or would quality come into play? Does Toyota sell a lot of Camry’s because they are cheaper than Chevy Malibus, or because they are better cars? Why does BMW sell anything in this country given their pricing is much higher than most American cars? How about Sony? Why do they sell well in America? I’d love to buy an American-made TV that had the same quality as a Sony. Unfortunately, I don’t think there is one. Sounds like a great opportunity for an American business man to fill a void that is sorely needed.”

*********************

There you go again, splitting hairs, and mangling a perfectly good economic theoretical disgusion. I am well aware that price can be traded off with quality.

Do you think your company or the world owes you a living?

***************

Do you think America owes you protection as a citizen?

LOL! Good stuff. I never accused Americans of being ineffective or non-productive.

****************

Every chance you free-traders get you say, “Well would you prefer to buy American at a MUCH HIGHER COST?”

Much higher cost = unproductive lazy fat Americans. That is exactly what you are implying whether you like it or not.

Obviously as China is the lead dog right now, and have shown they can shoot down our spy satellites, it is insane to continue to do bidness with them.

Well, I just bought a Chinese scooter for running errands because it was the cheapest, bets quality one I could find. The other brands, mostly Japanese, were almost twice as much. Remember when Japan could outproduce and outprice everybody?

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%.

That's an outright lie. You are running purely on emotion not reason or facts. Buy a loudspeaker from Eminence Speaker in Eminence, KY, and tell them to use ONLY American sourced parts (something they don't do because of pricing).

I'll get the EXACT SAME loudspeaker from a factory in China or India. And even with the 5% import tariff AND price of shipping across the ocean, I'll beat the Eminence price by a factor of at least 2.

Then we'll take our loudspeakers to the local market, and see who sells out first, with the standard 50 point markup... You see, I can make 50 points selling at the same price that you PAID for your loudspeaker. I make profit, you make zero.

You have zero basis in reality, you're just a foaming-at-the-mouth protectionist, with not a clue about economics.

If you represent Hunter's actual trade position, then he's even more dangerous to the US than Ron Paul...

It’s amazing how many people consider the economy a zero-sum game!

***********************

“...a trade surplus implied that a country was exporting goods its own citizens did not get to consume or enjoy” Milton Friedman on why trade surpluses are bad and deficits are good (rolls eyes)

Gosh that sounds like a zero-sum game to me. What obtuse libertarian inconsistant hypocrites.

I already told you, Walmart is more of a warehouse then a manufacturer, international trade with 3rd world Communist corrupt cesspools has nothing to do with it.

And here you show that you do not know of what you speak! WAL-MART is a chain who SPECIFIES PRODUCTS for their own stores. They are famous for bringing 5 manufacurers into the same conference room, showing a specification, and asking each manufacturer to bid RIGHT THERE to make that particular product.

WAL-MART doesn't just buy item X from manufacturer A, item Y from B, and so on. They ask manufacturers A, B, C and on to bid for the opportunity to make products to WAL-MART's standards.

Did you know that WAL-MART accounts for 3% of the total export of China? ONE COMPANY. If WAL-MART isn't funding China, then who is? You are COMPLETELY ignorant of the realities of today...

No use talking to you any more, you have no basis of facts, no logic, no desire to learn, and just live on hate and emotion. Much like the Moonbats on the left, I must point out...

That’s an outright lie. You are running purely on emotion not reason or facts. Buy a loudspeaker from Eminence Speaker in Eminence, KY, and tell them to use ONLY American sourced parts (something they don’t do because of pricing).

********************

Whats the price of Eminence Speaker, and its relative quality?

Whats the price of your speaker, and its relative quality?

Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.