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.
Wish no more, I've got great news for you..
Sony manufacturing plants are in Dothan, AL, Pittsburgh, PA, Pitman, NJ, San Diego, CA, and Terre Haute, IN. The products are developed and designed at Sony's R&D/Engineering Facilities in San Jose, CA, San Diego, CA, Boulder, CO, Park Ridge, NJ. Maybe you're wishing that Motorola still made televisions, but their last televisions were made in Mexico and workers there are just not as productive as Americans.
Hey expat, that was actually my comment that Hunterite was responding too. I was trying to make the point that low cost alone doesn’t guarantee success for imported goods, but silly me, I didn’t research where the stuff was actually manufactured. Oh well. It just goes to show us that globalization can actually CREATE manufacturing jobs in the US, huh?
No problem. My sister is a teacher. Just because the overall system has problems doesn’t mean we conservatives shouldn’t support those of us who are going into it for the right reasons. After all, if our kids aren’t learning anything, how are they going to support me in my old age? :)
graph—comment #18
paper—comment #31
[chuckle]
Acura TL Becomes First U.S. Model Exported To China By Japanese Luxury Nameplate, July 27, 2006 [Free Republic]
As long as you're pulling numbers out of your ass, why not make it an even 100 million?
I didn’t feel the need to be rigorous,
Feelings? You don't have the ability either.
obnoxious spellchecker.
Stupid idiot.
Hunterite was supposed to come back at me and say that whenever foreigners move in and set up a factory, they're just ripping off the local workers and all the profits go right back home --so that way we could talk about US manufacturing plants overseas:
|
...But there already are signs of weakness, such as corporate domestic profits, which actually fell 4.2% during the third period, according to data from the Bureau of Economic Analysis. Ordinarily that would be a disaster. But today, 31.5% of all corporate earnings come from foreign sources. Thanks to the weak dollar, foreign profits of U.S. companies are healthy. In the third quarter they surged 20%. So despite the decline in domestic profits, U.S. companies' net profits actually rose 1.2% in the July-September stretch. Don't Fear The Weaker Dollar — It's Keeping The Economy Afloat |
A third of US corporate earnings from overseas; that's more than even I'd have thought...
As long as you're pulling numbers out of your...
No wonder the numbers stank; however, the sun does shine on the BLS data site and the number of truckers is more like 2 million:
| Industry | 2004 employment | Projected 2014 employment | Change, 2004-2014 | |||
|---|---|---|---|---|---|---|
| Number | Percent distribution | Number | Percent distribution | Number | Percent | |
| Total employment, all workers | 1,738,375 | 100.00 | 1,961,768 | 100.00 | 223,393 | 12.8 |
LOL!!!
Coming from a guy who was unaware Red Chinese infantry divisions attacked US troops?
Say, how's the housing market doing ?
Stick to the subject, not why Hilary will be our next President please.
You are one to talk about sticking to the subject. LOL
Back to topic: The writer of this article is totally clueless about capitalism. the reason the dollar is sliding, cause there are too many of them floating around.
Our trade partners just happen to use those dollars they receive from us to purchase oil, minerals etc, etc. If you understand free markets, then you'd know their in competition with our own freshly minted dollars.
A concept of capitalism called: Increasing supply without increase in demand causes price (value if you will) to fall.
*That was a joke for the humor impaired.
I saw MASH when I was a kid.
LOL! Remember when those yankee bastards killed a few hundred thousand of my and my neighbors' ancestors. That's why I don't buy anything made north of the Mason Dixon.
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