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.
Yeah.
Like “free money”.
So if there was no “real” growth did your grand parents enjoy the same standard of living as you do?
Demonstrate that flow for me. Tell me what happens, from start to finish, from the time a purchase agreement is entered into, the stuff shipped and received, the customer purchase, the ForEx bank's involvement, and the final destination of the USD. Can you do this; yes or no?
Got some? The only people I know that believe in it don’t understand economics.
this makes too much sense
for many on this forum.
That was a good one, I’ll have to remember it.
No I don't. We don't need China to "let" us do anything. We just need create new jobs and out compete the Chinese. I'm not scared. Americans are the most competitive people on Earth.
BTW, what is your interest in “free trade”, if you don’t mind a bit of full disclosure for readers?
Do you import manufactured goods from China, then turn around and sell them to other Americans for more?...
How is that helping anyone?
You make it sound as though businesses and consumers have no choice or influence in the market process and China controls who gets what. You must have an unhealthy respect/fear thing for the Chinese. If a China man were to scream at you and demand your lunch money, my guess is that you’d instantly flinch and reflexively reach for your wallet.
Actually they were better off, stay at home mom who ran the business downstairs (A convenience store) and raised the children while my Grand Father went out and worked a job.
Ended retiring to a orange farm in FL...go figure...
They had “wealth” meaning the means of producing income, not TV’s and other “Stuff”.
If you tell me what you do, I’ll tell you what I do and how much I currently make, to boot.
“Got some? The only people I know that believe in it don’t understand economics.”
So what do those who are Economists have to say about paying to arm our enemies while weakening whole regions of the country?
We are? Americans are the most competitive people on Earth?
Based on what?
I see otherwise.
I see us rolling over and playing dead, about trade.
I see a lot of people like you insisting, that rolling over and playing dead is something called “free trade”.
I think we should be rather MORE competitive.
That means we need to start playing hardball. Because the alternative, is the end of America.
We’re in the real game now.
This is for all the marbles.
-------
Ping, ping, ping, a thousand times ping!
Thank you for demonstrating economic literacy....it's demonstrated here from time to time, but boy oh boy, there isn't enough of it.
Hank
Asked and answered. Please try and keep up.
Yea, Bernanke whackin another point off the rate will have nothing to do with the dollar falling.
Sheeeeeesh
Fair enough. I’m not really interested in your income though.
I’m a programmer. Over the last 5-10 years I have watched perhaps a full hundred of my co-workers walked out of the office by security. Some in tears. Their stuff in a box.
And yes, that sort of p*sses me off.
Your turn.
In a coincidence, I posted this thread today:
China To End Subsidies Challenged by the United States in WTO Dispute.We're not quite dead yet.
See what happens when we push back??
Nobody ever won a Kung Fu contest, by backing down.
Lord knows, China of all nations, understands that.
“BTW, what is your interest in “free trade”, if you don’t mind a bit of full disclosure for readers?
Do you import manufactured goods from China, then turn around and sell them to other Americans for more?...
How is that helping anyone?”
Who do you think is mopping all of those dollars that are being printed?
Quite honestly, if all of those excess dollars ever came back to America, inflation would be devastating, the ChiComs are using those dollars to either buy our Treasury Securities or pay the Saudi’s for their ever growing demand for Oil.
Keep in mind that one of the goals of “Free Trade” is to drive wages down to the lowest possible level, no matter the personal cost to the “great unwashed who don’t understand” in driving the wages downward, they hope ot make us competitive with the ChiComs, if we cannot “compete” then the business moves to China if it can, and the “consumer” reaps the benefit of lower costs of crappy goods.
Unfortunately for the Globalists, for some reason the average American worker doesn’t seem to wish to work for low wages and simply screams to “Nanny” to do something, and that is how Socialism and an ever growing unionized public workforce is emerging.
Ehh. Preachers without a pulpit, even the average Republican is 60% against “Free Trade” as now practiced...
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