I just don't see a connection between a balanced trade account (via higher prices to the consumer) and a difference in the position we would be in today.
It's almost as if you're arguing that it's better that the consumer get stuck coming and going, instead of just getting stuck when going.
For this discussion, let’s just assume at the outset that we have a “free trade” policy with a big nation with cheap labor and that we have expensive labor - ie, let’s talk about China and the US.
China wants to export stuff to us.
Our consumers want to buy “stuff.”
Our consumers don’t really care where the ‘stuff’ comes from, just so long as it is cheeep.
So China rigs their currency to keep their goods cheap in the US, which we allow in because we have a “free trade” policy. The US consumer consumes - and much of this consumption is based upon easy credit and low prices.
The Chinese realize that in return for all the cheap goods they’re shipping to the US that they have a huge stack of US-denominated currency surplus. They have only a few things they can do with this money: a) spend it inside their own economy, or b) spend it acquiring assets and resources for their economy off-shore, c) save it for a rainy day.
Prior to 2008, they were choosing (c), but in the form of buying US Treasury debt. As of today, they’re starting to do both (a) and (b) at prodigious rates.
But back in the US before the melt-down, the rate at which consumers are going into debt and mining equity out of their homes is at least partially controlled by the interest rates on their debt. Low interest rates allow US consumers to buy, buy, buy.
Really low interest rates induce the banking system to loan money out to people with dubious credit histories, because it is by lending money to “sub-prime” clients (whether we’re talking mortgages or consumer credit) allows the lenders to charge extra for the sort of lending we see on late-night TV, ie “Bad credit? NO PROBLEM!”
The Chinese, realizing this, know that they can influence US consumer spending habits by buying the benchmark debt (ie, the US 10-year T) used to price consumer debt and mortgages, as well as buying RMBS and agency debt. Until July of 2008, the Chinese were buying quite the bundle of Fannie/Freddie paper, because it carried a “AAA” rating and had the implicit guarantee of Uncle Sammy. People buy more stuff when they’re homeowners - you don’t buy just a house - you buy all the crap that homeowners acquire, from lawnmowers to dishes and appliances. For the exporting nations like China, Korea and Japan - this is the motherlode of us consumption.
This lending to the US consumer, the Chinese have done with gusto in the secondary market. There’s also an added benefit from doing this - under ordinary terms, most nations would object to the artificial manipulation of the Chinese yuan vs. the US dollar that China is doing in order to keep their exports to the US “cheap” in the US consumers’ eyes. By buying so much US debt and keeping our interest rates low, the Chinese are buying the complicity of our Fed and Treasury officials. Witness what happened with TurboTax Timmy before and during his confirmation hearings. At first TurboTimmy says that the PRC is “manipulating” their currency. This is a loaded word - it requires explicit reaction by the US government as a result of trade agreements. During his confirmation hearings, TurboTimmy recants and backpedals furiously.
The reality is that TurboTimmy was right - before he was confirmed as SecTreas - now he’s been leaned upon and told to shut up. He’s also been told to string the banks along, to not rock the boat, but that’s a wholly different discussion.
The US consumer keeps consuming — and going ever-deeper into debt, because debt is “so cheap” relative to historic norms of interest rates. This is made possible, in part, by the exporting nations with current account surpluses buying our debt - the PRC and Japan most notable among these.
At some point (right about now), these lending/exporting countries realize (with a somewhat revolting discovery) that there is a small, but rapidly growing, chance that they’re not going to make money by holding US debt - that we might pay them back with inflated/devalued dollars and net:net in the scheme of things, they’re going to lose real value. They’re somewhat trapped in their current debt portfolio, but they can affect US interest rates by simply not buying any more debt. Look at what happened when they quit buying RMBS and agency debt last July - the Fed and Treasury stepped in to prop up Fannie/Freddie and starting buying hundreds of billions of mortgage secondary paper.
With me so far? I’ve completed the circle, where we start out with free trade and end up in a debt deadlock with the exporters of cheap goods. Sooner or later, this deadlock is going to be broken - and the Chinese have far more power here than we do. We’re dependent upon their lending us money - critically so. Without Chinese and Japanese purchases of US paper, our interest rates will start climbing like a homesick angel. At that point, the US consumer a) starts REALLY scrimping on purchases, and b) starts really saving, because regular passive savings accounts invested in US Treasury debt will start paying quite handsomely - remember the early 80’s when Treasuries were paying double-digit percentages? Remember the rates you got on CD’s back then? Woof. People who bought CD’s at their local bank back then were sitting fat and happy.
Heck, if T’s went up to 10%, why the heck be invested in stocks, bonds or anything like that? US savers and investors will buy our own debt and kick back while Uncle Sugar pays a tidy interest rate of return.
So not only do the Chinese/Japanese not want that to happen (because they’d take a hit on the value of their bonds), the idiots in DC and NYC don’t want that, because they want to hawk all manner of crap to us little people. The last thing they want is a population that has figured out that if we quit the “free trade” nonsense, that our own interest rates will go up and saving will be rewarded once more.
The Chinese, however, have enough money to develop their domestic economy and other markets and in a few years be able to suffer the consequences of US interest rates going up when they quit buying US paper. So they’re going to take some time to find a way out of their side of this bargain with the least amount of hit to their portfolio of US debt and the least impact to their own currency, which is currently pegged to the US dollar.
Solution: de-reserve the US dollar. Imports to the US go up in price, while the yuan is re-valued according to the terms the Chinese put into the new reserve currency agreements.
So, how do I want this solved? Let’s get rid of the “free trade” dogma, and when a country such as China is pegging their currency to manipulate the trade balance, we impose tariffs. This keeps more of the consumers’ money here in the US (even if in taxes), helps keep manufacturing on a more level (not “level” - “more level” or “closer to level”) playing field so that we keep more productive industry in the US viable. At the point the Chinese drop their artificial support of their exporters via their manipulation/peg of the Yuan:dollar, we drop the tariffs.
Would it result in higher interest rates in the US? Yes — but it would also have kept our consumers from going into debt so deeply and creating a classic Fisher/Minsky “tower of debt” that is now going to collapse. Consumers would have consumed less, true, but consumption on unsustainable debt isn’t anything more or less than consumption packed into the current timeframe from the future.
Right now, consumers are stuck coming and going already - they’re stuck paying for this wreck on their taxes going foward, and they’ve lost income, jobs and they’re indebted where they would not have been if proper economic signals had been given to the consumer. Paying “coming and going” is the natural state of things - to get some upside, you have to take on a downside. All I’m suggesting is that we pay more over a longer timeframe in order or gain some better stability of debt markets. This is one of those things like 20% down payments on mortgages - sure, it makes it more difficult to buy that first house. The result is that your house won’t go down in value by 25% or more when the debt bubble bursts.
The Chinese (like us) would like to get out of this with their cake and the ability to eat said cake. The way out (they think) is to introduce a new reserve currency, which would allow them to price oil and other items they need to import at lower prices. Right now, because they’re pegged to the US dollar, if the dollar goes down in value, so does the yuan, and oil and other commodity imports go up in China, because oil and many other commodities are priced in dollars.
The GOP, however, is so stupid that they’re willing to auction off our national sovereignty one US Treasury auction at a time - all to keep paying lip service to this idiotic dogma of “Free Trade.” This lack of ability of anyone in the GOP to connect the dots here is one of the reasons why they’re perceived as stupid by the electorate. The electorate can certainly sense that something is way, way wrong here... but most of them are not financially literate enough (nor have the time to dig down into Fed, Treasury and other data) to suss out the problem. All they know is that “free trade” means “Always Low Prices!” at Walmart, and they think and have thought that is good.
The US electorate and consumer are only starting to cop a clue as the US economy continues sliding downhill that there’s something very wrong here...