One Bust
Bigger Bust.
Posted on 09/20/2009 4:03:42 PM PDT by blam
Explaining Two Trade Busts: Output VS. Trade Costs In The Great Depression And Today
Douglas L. Campbell David Jacks Christopher M. Meissner Dennis Novy
19 September 2009
Trade has declined massively during the crisis. This column assesses the relative roles of falling demand and rising trade costs in explaining the collapse and compares it to the Great Depression. Surprising, the increase in trade costs today is as large as in 1929, despite the absence of any modern protectionism resembling Smoot-Hawley. It appears that reviving global demand alone will be insufficient to revive world trade.
If the world economy is now in “purgatory,” as Paul Krugman recently suggested on a TV talk show, global trade has gone to hell and not yet returned. Between July of 2008 and February of 2009, nominal world trade plummeted by 42%. Understanding the cause of this plummet is critical when assessing whether changes in trade policy are needed to revive trade or whether trade will make a “natural” recovery as global demand recovers (Francois and Woerz 2009).
Eichengreen and O’Rourke (2009) show that the recent trade drop is much more severe than that of the Great Depression. This column presents new information on the relative roles of demand and trade costs in explaining the recent trade bust and compares these to the trade bust coinciding with the onset of the Great Depression.
[snip]
Actually, “domestic trade” IS THE ECONOMY. International trade is also a small part of the economy.
International trade tends to be things, while domestic trade tends to be services which is why international trade has declined more.
Smoot Hawley was blamed for a massive decline in international trade.
High Domestic tax rates are a “smoot Hawley” for depressing domestic trade amongst individuals. It is why tax cuts are good for a domestic economy in a way that tariff cuts are good for the international economy.
When Bush’s tax cuts expire, that is when TSHF. It will be a domestic smoot hawley armegeddon.
Joe Weisenthal
Sep. 20, 2009, 10:37 AM
Well, well.It's suddenly become very hip to believe in a V-shaped recovery, and to slam the pessimists for not knowing their history. As Jim Grant argued yesterday in the Wall Street Journal, the severity of the slump predicts the severity of the recovery -- it's just like physics!
But economics isn't physics. And don't worry about not knowing your history, because economics isn't history either.
Here's why we're not in for a v-shaped recovery.
[snip]
Henry Blodget
Sep. 19, 2009, 8:11 AM
As Jim Grant himself acknowledges, he's no perma-bull. Many, in fact, would put him in the other camp. But now he's arguing that we're a quarter into what will be a startlingly sharp recovery.
Why does Grant think that Bernanke, Obama, Roubini, and other grand consensus thinkers are getting it wrong?
Because the faster they fall, the faster they rise.
Asha Bangalore of Northern Trust illustrated this with a chart of the rate of recovery of post-war recessions. And now, in the WSJ, Grant goes back even further in history.
[snip]
The Smoot-Hawley Myth for the Great Depression is probably as bogus as the whole Global Warming hysteria
The GDP grew during most of the years under Smoot-Hawley...after a few years of continued downturn when Smoot went into effect
You hear all the Smoot-Hawley myth because the Free Trader Globalist crowd cannot (or will not) understand that we are in the first Free Trade Recession/Depression. Also:
You cannot create a job in the USA by shipping it to Communist China...or anywhere else in the world
Free Trade merely redistributes wealth...it does not motivate nations and people to create wealth
The loss of wealth from Free Trade is being made up through government money (your tax dollars) by giving aid to families who lost their jobs, bailouts to banks and companies who cannot make money in the current economic times...and, when manufacturing slows, there is nothing (or a lot less) to trade.
One Bust
Bigger Bust.
In 1929 most of our trading partners had specie based currencies. Today fluctuations in foreign exchange rates are effectively the same as tariffs.
“Today fluctuations in foreign exchange rates are effectively the same as tariffs.”
BINGO.
And on the flip side, they can also be subsidies. Creating artificial weakness in a currency makes a nation’s exports cheaper to the rest of the world than they would be otherwise.
This is why China isn’t going to abandon the ‘soft peg’ of the Yuan to the $US anytime soon.
It is also the reason why I now maintain that “free trade” in a world where nations are allowed to peg their currencies is a complete farce.
Smoot-Hawley produced a 60% decline in foreign trade. Some myth.
The GDP grew during most of the years under Smoot-Hawley
GDP is a bogus statistic in which government spending is counted as production.
You hear all the Smoot-Hawley myth because the Free Trader Globalist crowd cannot (or will not) understand that we are in the first Free Trade Recession/Depression.
Please explain how it is possible to have a "Free Trade Recession/Depression" when we haven't had free trade since the 19th century?
That doesn't follow. Free trade is exactly the right response to China's currency policy. China is taxing their own citizens so Americans can have cheaper goods. What's wrong with that?
It's not as if we don't do exactly the same thing with the dollar. What do you think is the affect of Bernanke's printing binge?
China is deliberately pegging their currency at an artificially low exchange rate, which makes their economy appear more attractive and lower cost to the US, which is part of why the US is exporting manufacturing to China as fast as we can ship the jobs there. It looks nice on paper inside the corporate board room, because the decisions inside the corporate board room don’t take into account the issues of our current account deficit.
If the yuan floated against the dollar, it would be going up in value while the $US is going down right now, and the price of goods imported from China would increase, making them less attractive to the US consumer and leaving room for the US manufacture to compete.
But as it is with the yuan pegged, the $US goes down, the yuan goes down with it, and Chinese goods continue to look cheap compared to US goods, and there is no equilibrium that can be reached between the two economies.
We don’t peg the $US to anything. Not to gold, not to other currencies, not to oil.
Let’s lose the “I hate China” crap and talk basic mathematics.
Taxes (aka tariffs) are bad for the economy. A 5% tax means you pay 1.05 for something that should cost 1.00. A 50% tax means you pay 1.50 for something that should cost 1.00.
Domestic taxes, income, sales or otherwise, decrease internal trade (sometimes called gdp). International taxes decrease international trade.
A 200 percent tariff (cost 3.00 to get something worth 1.00) will decrease international trade.
Ditto for Domestic trade.
But 90 percent of the reason is US labor unions, high govt taxes and regulations, and a disdain in the US for manual labor.
Ah. You’re falling into the “correlation is causation” trap.
A 60% decline in trade occurred after Smoot-Hawley was enacted. That is as far as anyone can go in an assessment of S-H.
Can you prove that the decline in trade was *caused* by S-H? No, that cannot be done except for limited sets of circumstances. With the recent data showing similar or worse declines in trade without anything like S-H in place now beg the question about what effect did S-H really have.
There were similar drastic declines in trade during the “Long Depression” of the 1870’s too. We have less data for that time than the 30’s or today, but there was a significant decline in trade.
What all three periods have in common is that they were all debt deflations and attending melt-downs of the financial/lending centers of the world.
If both currencies were based on gold wouldn’t the yuan be “pegged” to the dollar then as well?
Actually I'm applying the laws of supply and demand. Raise prices by enacting a huge tariff and demand will be reduced.
Those are part of the reasons, but they’re not the majority of the reason. I’ve sat in meetings where exec’s discussed the reasons for moving jobs offshore. The real reason is that the workers overseas make spit compared to US workers, unionized or not.
The high tech jobs that have been off-shored — those were not union jobs. The regulations were few. The margins were so fat and the pricing power so good that taxes were pass-through costs.
And still the jobs went off-shore.
The reason why those jobs went off-shore is that in India and China, you can pay an engineer less than what you pay someone in minimum wage here in the US. And because there’s a currency peg in place, it will always look like a screaming deal.
Median annual pay for engineers in China? About $7,000.
Per year.
No.
The "artificial" link between the yuan and the dollar is the only thing that gives the yuan any value, since China is a tightly controlled economy where anyone holding its currency doesn't hold much of value.
That may change in the future, but I don't see it happening anytime soon.
You need to go back and review the details and facts surrounding S-H, and not the popular press and pop-economics gibberish that has been trumpeted by “free trade ueber alles!” types.
Our duties on many imported goods were already high when S-H was enacted. On average, most imported goods were already subject to about a 40% tariff coming into the US, and the average increase by S-H was to raise that 40% to 48%. This was not a large enough increase, on average, to crash trade as trade crashed in the 30’s.
The deflation of the 30’s was what effectively raised tariffs to over 55%, and really reduced demand. In debt deflations, consumption drops and consumers and businesses hoard cash because there is a growing fear and uncertainty of the future. You’re seeing this happen even now - look at how much consumer credit contracted in August, for example. Look at how banks are continuing to tighten credit issuance. These are symptoms of a debt bubble bursting.
When people start hoarding cash, and prices then start to fall, then the deflationary spiral begins. People and businesses start to see that any purchase that can be deferred can be rewarded with a lower price for the delay.
The true target of S-H was already impacted by the Fordney-McCumber tariff act of 1922: Ag commodity prices. Ag had little real competition from imports (other than sugar) back in the 1920’s, yet in the space of 8 years, we saw two huge tariff acts to prop up ag prices, and then the insane AAA under FDR to buy and destroy surplus commodities even as people were going hungry.
The REAL reason for low ag commodity prices was that there were too many farmers who had too much production that was brought about by cheap & easy money from the banking sector, handed out willy-nilly to everyone with a mule and a plow and a quarter section of land. Sound familiar? It is the same reason for crashing real estate prices, too. A sector of the economy was inflated beyond all bounds of sustainable pricing by insanely easy credit.
This is why I increasingly see Obama not as a repeat of Jimmy Carter or Bill Clinton, but as a repeat of Herbert Hoover. Contrary to popular misconception, Hoover did NOT do “nothing” and “stand by while the economy imploded.” No, Hoover meddled far and wide in the economy, with flailing legislative schemes that bear ominous parallels to what we see today.
The biggest difference between then and now is that the Fed isn’t repeating the mistakes of 1930 to 1935. They’re making whole new mistakes, but they’re not repeating the ones of the 30’s.
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