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.
We have the biggest economy in the world.
I see otherwise.
I think maybe you are just emoting and reacting to scary propaganda.
I see us rolling over and playing dead, about trade.
There are certainly things we need to do such as lowering taxes, ending regulation, and reigning in the tort lawyers.
I see a lot of people like you insisting, that rolling over and playing dead is something called “free trade”.
Lowering trade barriers is free trade.
I think we should be rather MORE competitive.
I will always agree with that.
That means we need to start playing hardball. Because the alternative, is the end of America.
The alternative to more competitiveness is a lower standard of living.
That 60% is going one one direction.
In BOTH parties.
China to end...
Too funny, so now that they have destroyed whichever industry that was being targeted, they have deigned to eliminate their payments to their internal industries....
How very gracious of them...
That’s what’s funny about you guys. No amount of good news, whether small or substantial, is good enough. Every silver lining has a dark cloud.
“That 60% is going one one direction.
In BOTH parties.”
I am aware of that, they however, are not, it would seem that the proponents of “Competition” fail to see that they they are losing the Competition for votes...
I will say this though, Gigantic MultiNational companies want free trade, politicians want money to run for office, so one buys the other like a commodity.
“Asked and answered, do try to keep up”
No wonder Globalists are losing the public opinion war.
I am in the mist of passing my state's exams so that I can teach Business, Economics, or Middle Grade Mathematics. The current generation is in desperate need of teachers who challenge them and don't fill their heads with collectivist garbage. It'll be a good gig when I secure an actual teaching position and the taxpayer money will be well spent, at least in my case...I know my stuff and can teach it if given the benefit of a receptive audience (or at least one that hasn't bought into the stupid shit that gets parroted by pundits who should know better).
I've done many things in my career and I have not been afraid to quit a job -- with notice -- if I become dissatisfied or find an all-around better opportunity; I do not fear competing for employment, either. The job I'm most proud of having: a 10-year active duty United States Marine that achieved the rank of Staff Sergeant.
Satisfied, now, that I am not I high society type and who's rather just an average Joe?
This is one of the silliest arguments about free trade. No one is "driving" anybody to do anything. The purpose of trade, both domestic and foreign, is to intensify the division of labor allowing more goods to be produced and consumed by everyone. Free trade allows consumers to buy from the most efficient producers. There is nothing stopping you from competing except your own prejudice that you are somehow more deserving that the guy who does you job more efficiently than you.
I deal with OSHA a lot. It is a necessary evil. You’re just pining for the day when the US becomes a polluted turd world $hit hole, hugh?
“That’s what’s funny about you guys. No amount of good news, whether small or substantial, is good enough. Every silver lining has a dark cloud.”
Of course, so now that the Fed is going to inflate the currency even more to bail out the Financial industry, I suppose I should optimistically watch my purchasing and investing power slip lower and lower..
I am benefiting from this process how exactly?
Oh that’s right I’m supposed to be the Optimistic American...
OK I’ll admit, I may have misjudged.
A lot.
My apologies. And compliments for your profession.
That said. Now let’s get that trade war going! :)
So your students, won’t have to read in books about things called “jobs”, which Americans used to have.
I do that. In fact, I show the Chinese what to build, and how to build it. And it helps me and my family.
And my customers (other businesses), which benefit from having a lower bill of materials cost, so they can sell more product.
Which means it helps their employees, and their families...
Contrary to popular protectionist belief, economics is NOT a zero sum game. Believe it or not, ALL sides can make money on the same deal:
1. The Chinese companies I work with (I live in China 1/3rd of the year) earn extra sales, and learn more about American style QC.
2. Me, the engineer, designer, and guy in the middle makes a good living allowing me to afford a home in the US, one in China, and one in South America.
3. My clients, who can sell for a lower cost or increased profit margins or a mix of the two, allowing them to increase their own pay and invest in growing their companies (and payrolls).
4. The local and state govnernments where I and my clients live, because of the increased tax base both in terms of actual direct tax rates and high-paid taxpayers (employees).
5. The Federal Government, who gains more income tax directly, and capital gains tax from my investments that my increased income allows. And the duties and customs fees associated with importing product.
6. You. Because business powers the economy, and those businesses create the wealth that provide your income, pay for the soldiers, build roads, and keep your standard of living higher than anywhere else in the world.
So who loses in this situation?
Working Americans.
No, I wouldn’t advocate it.
I believe the deal is much more simple: You don’t get to turn back the clock. You can’t make things the way the used to be. What you do get to do is adapt...or die. Either way, you don’t get to grow old in the same country you were born into.
“This is one of the silliest arguments about free trade. No one is “driving” anybody to do anything. The purpose of trade, both domestic and foreign, is to intensify the division of labor allowing more goods to be produced and consumed by everyone. Free trade allows consumers to buy from the most efficient producers. There is nothing stopping you from competing except your own prejudice that you are somehow more deserving that the guy who does you job more efficiently than you.”
Hmm “intensify” that would be “Drive wage competition down to rock bottom levels” wouldn’t it?
And politically speaking, why should I, or anyone, support a decrease in their wages?
“Free trade allows consumers to buy from the most efficient producers.”
Yea, child labor.
Oh wait...brb....let me go out to the sweat shop next door and kick the little 11 year old ingrates around a bit more to stir up “productivity”.
It’s a race to the bottom.
Yeah, I really pine for that day! That's why I spend time here trying to educate you know-knothings so that maybe, by chance, you wont convince the asshat politicians to take us down that precise road that you fear.
I deal with OSHA a lot. It is a necessary evil.
Yeah, just like the you champion 'necessary' government intervention in creating disincentives for people to voluntarily exchange lawful goods and services with one another no matter their proximity to the United States. Limiting freedoms comes so naturally to your ilk.
That's a real big 'if'. And later in this same paragraph he refers to foreigners investing in America, presumably with the dollars that he assumes they will never cash. Why so much internal contradictions when "free trade" is so inherently easy to understand?
"... Americans would essentially be getting foreign goods free of charge.
So dollars are worthless? I thought that was the goldbug line? And, BTW, the real-world fact that people worked countless hours for those dollars in order to purchase foreign goods doesn't seem to amount to anything to this lofty intellect.
"Protectionists like Buchanan condemn this as "borrowing," but this is actually a form of investment — both in US industry and in US dollars.
How is our money going out to purchase foreign goods an investment in our industry? Basic Economics 101 says that the companies which provide products and services at the best overall combination of quality and price will have the best chance of succeeding in the marketplace. Right now a large number of those companies seem to be in China, which is why we are investing in Chinese corporate development and not the other way around.
" Foreigners have been investing in the United States for decades for two primary reasons:"
Oh darn it! So I guess we can't hope that the dollars we send abroad will go uncashed! And it only took the author about two sentences to contradict himself! How very efficient of him!
" the superior returns due to the growth potential of American capitalism, and the dominance and (relative) stability of the US dollar,"
Oh but wait the US dollar isn't so relatively stable anymore ... I guess that's why he had to put 'relative' in cringing parentheses.
" which made them useful as a means of exchange apart from their purchasing power of US goods."
How is "means of exchange" different and set apart from "purchasing power"? We use currency to purchase goods and services, or in other words, as a means of exchange because it is more efficient than barter. I suppose in a perfect free market world with no artificially constructed trade borders there would be a single world currency. Now we have a system of a few competing national and regional currencies. The value of these varied currencies is that they allow the market to essentially give each nation/region a grade based on their overall fitness for trade. The world seems to be judging our nation as relatively less suitable for trade than in previous years. Maybe we should take note of this and adjust our behavior accordingly. When the peso starts to tank we can't wait to be the first to say what a horrible place Mexico is for doing business: all the crime, graft, corruption, uncertainty. When the dollar starts to tank somehow its part of some superintelligent plan by American Capitalists to screw the Chinese and the Eurotrash.
" 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."
And a large portion of that money that came this way was to invest in subprime mortgage debt, which although very innovative and cutting-edge and hip-hop-happening turned out to be worth less than tulip bulbs.
Individual corporations in America are good investments so some foreigners invest in them. There are suckers born every minute, everywhere, so foreigners also invest in stupid things like subprime mortgage debt.
Regardless of the individual success stories, the fact that the dollar is dropping relative to pretty much every other currency in the face of the earth suggests that the overall business climate in our nation is deteriorating.
Fewer Americans can now afford European or Chinese vacations. You may not personally value such things, but lots of other people do. And the fact that fewer people can now afford them is a bad thing.
At some point Walmart will have to start raising their prices or China will have to start increasing subsidies to their toy and bauble manufacturers ... which would be just soooo 19th century!
The one thing I agree with is what the author finally says near the end ... which seems to dovetail with what the man with the pitchfork says ... we need to lower government spending or we'll suffer larger taxes. Which is the last thing we need going into a potential recession.
Did you even read what I posted? How about me, my partners, my employees? Are we not working Americans?
How about the employees of my clients? How about my clients? They live, work, and file 1040s in the US. Aren't they working Americans?
What is a working American to you? I figure someone who draws a living wage paycheck, pays their taxes, and votes. And those are the people who actually benefit from what I do.
I suspect your wife could stay at home as well if you were willing to live the way they did. And staying at home was a major job back then.
No TVs (one, maybe).
No DVDs.
No VCRs.
No cable.
No satellite.
No Internet.
No cell phones (heck few phones period).
No computers.
Modest basic car (not his and her cars).
No fast food.
No dining out except special occasions.
Basic house without HVAC.
No house insulation - what’s that?
No double pane glass - what’s that?
No health insurance - what’s that?
Prepare your own food.
Grow your own food.
Hunt your own food.
Can your own food for winter.
Skin and clean your own food.
Make your clothes.
Repair your cloths, when’s the last time somebody darned their socks?
Repair your shoes.
Clothes washing machine - what’s that?
Clothes drier - what’s that?
Dishwasher - what’s that?
Microwave oven - what’s that?
the list is long... And those are just things I could think of off the top of my head... Electricity wasn’t all that common either out of the cities.
My grandparents and my wife’s grandparents had outhouses when they where young adults... They didn’t have indoor plumbing.
So those “stay at home mom’s” back then had a bit of work to do each day far beyond the children.
We take a lot for granted these days. It comes with a price. When we look back we only see what was good, not what it was really like. Ask people who grew up then which they would take now.
Simpler - yes, easier - no.
So figure your monthly house budget removing all of these expenses and see how much it really takes to live like they did.
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