Tuesday, July 05, 2005

Hey e$.. This is a reply to

The Overstretch Myth


They are insane.

In order to consume a country must produce. We produce a lot less than we used to and consume a lot more than we used to. We consume more because there is a lot of cheap money floating around our economy, which causes our asset prices to rise and makes it seem that we (as individuals) are in good financial positions. There has been no corresponding inflation in goods because much of them are imported and their prices are kept down by currency manipulation by our trading partners, most notably the Chinese. The other side of this is that foreigners are using their dollar profits from trading to buy American assets and liabilities which in turn drives up the 'adjusted' savings rate that Levey and Brown talk about.

Were the exporting nations (mostly East Asian) to try to drop their dollars they would themselves be in a shitty situation. Their asset bubbles (supported by their US dollar assets) might crash, killing much of the domestic consumption, their currencies will rise in value, their goods will be more expensive in the US and they will face a huge production glut from a loss of US market share. Production gluts make for nasty economic consequences. This is the explanation for our trade deficit. Theirs is based on the assumption of perfect knowledge and fair play (ie: that foreign central banks are buying US dollars from their exporters because they think its a good investment), something that simply doesn't exist here. The change that took place several years ago when the buyers of dollar denominated liabilites stopped being foreign private investors and became mostly foreign central banks should have set off warning bells. What needs to be understood is that the problem is not in the already existing dollars that may or may not be dropped by Asian central banks. The problem arises in the fact that what is happening here is that stability of the system is based on somebody trying to maintain the price of a commodity whose supply is increasing at a very fast rate with no particular increase in the demand. We are continuously increasing the amount of dollars in circulation and somebody else is expected to keep buying them in order to keep their value constant. Its like MAD's freaky cousin.

A good quote is that the fiat dollar system is "a childish game in which, after each round, the winners return their marbles to the losers".

This is basically what is happening here... Yes this can continue for now, but to argue that this is healthy is insane. While the United States is trying to maintain some sort of hegemony over the world, the rest of the world seems to look at us as the Eloi to their Morlocks.

The first step is to stop the increase in the number of dollars being released into the wild. This must take the form of an end to US government deficits. The only way to achieve this is to kill the Bush tax cuts and in fact increase taxes on the top 5% income-earners and at the same time end these silly imperial deployments around the world. The next step is to increase the domestic production base. Since capital is cheap and will probably continue to be cheap the only thing missing to increase domestic production is to ensure a market for US-made goods. This would require a significant amount of government intervention, including tariffs on targetted industries which would also increase government revenues. When the market is ensured, this is when US corporate capital will be repatriated and used for investment rather than as dividends for additional consumption. The domestic production would eventually replace current consumption which is driven by phantom assets and easy credit with a more healthy consumption driven by real income growth for the middle and lower classes.

To rely on fair play, some strange inherent economic superiority and on the long-term continuation of the function of the dollar as the world's sole fiat currency is insane.

5 Comments:

Blogger E$ said...

Here is a nice article about protectionism
http://www.aworldconnected.org/article.php/489.html

I would also add that the case where "all industries are protected," with a reciprocal reaction from the rest of the world, has actually previously occurred. During the Great Depression.

Another good article against protectionism
http://www.mises.org/rothbard/protectionism.asp

This one was published in 1986 - the last time that the US was running huge deficits and foreign manufacturers were "stepping on the heels of American companies." Back then it was the Japanese.

Finally, another interesting article, arguing against your point in a specific (but highly topical) industry - textiles.
http://yaleglobal.yale.edu/display.article?id=5698

I'd love to write a two page declaration refuting all your points, but I don't have the time to rehash whole chapters out of every economics textbook ever written.

3:27 PM  
Blogger Bubba said...

e$,

There is no need to protect all industries. There is a need to protect at least a few, especially where it is unfair trade and not real efficiency that gives the advantage to foreign goods. The threat should definately be there, something that seems missing right now. And dont give me the Great Depression garbage. There were large tariffs on imports into America from independence until the 1960s. They contributed to the wealth that was built up in America. The Smoot-Hawley tariffs credited with inaugurating the Great Depression occured after the 1929 stock market crash. In addition to this, the miniscule portion of the US GDP that was based on trade in the 1920s should kill the suggestion that tariffs contributed significantly to the Great Depression.

However, even if you were to argue that there is no need for protectionism, there is a problem with the manipulation of the dollar exchange rate. It makes American production unable to compete with foreign production and partially causes the kind of trade imbalances that you can plainly see. The only serious way to force, lets say, the Chinese into easing up their renminbi peg is to threaten at least some protectionist measures.

Those that argue that all these money flows coming into the country are coming in because the US is a great place to keep money seem to be missing several simple points. The first is that they are not coming in, they are simply not leaving in order to keep a relatively constant dollar exchange rate and a low US interest rate (to stimulate consumption). The second is that much of this money is used to sponsor our budget deficit, which is in effect current consumption at the expense of the future. The second is that it appears that most foreign investment in the US is in non-productive assets, like real-estate, which do not contribute to future increases in productivity or wage gains, but in the short-term stimulate consumption. The third is that even if one is interested in the well-being of the rich (capital) rather than the poor (labor), then you will notice that the trade deficits can and are being used to purchase future claims on American profits.

I've read a few economics textbooks myself and you will notice several things.

The first is that free trade is considered a good policy in order to maximize global production at the cheapest cost. Where production takes place or at what ratios the goods are exchanged should be taken care of by the relative endowments of the factors of production, the efficiency of production, and the free movement of currency exchange rates. Factors of production (especially capital) move relatively easily these days which means that the Chinese, the Indians and everybody else are now starting to produce more and more capital-intensive goods and increasing the efficiency of already existing production facilities. With the domestic production of more capital-intensive goods comes R&D which the Chinese are using to bolter their military. The free movement of currency exchange which should equalize trade is something that is not being allowed here.

The second is that with free trade there are winners and losers. Some countries gain and some countries lose. I don't doubt that in sum total free trade increases global prosperity. However I am not, nor do I believe policy-makers should be, terribly concerned with the well-being of the world and am more interested in the well-being of the United States economy.

The third is that domestically free trade also creates winners and losers. In the United States, which has a relative advantage in capital, these winners are the owners of capital and those with specialized skills needed to operate the capital stock. Then there are those with few marketable skills who are in effect competing with the rest of the unskilled global labor pool. Again, the unskilled and semi-skilled make up the majority of the US population and they are being hurt here. Where possible, policies should be made in order to benefit the majority, not the minority...

5:45 PM  
Blogger Bubba said...

If you wanted an article from the Von Mises Institute, you should have gotten something more recent:

http://www.mises.org/story/1845

In any case, the basic problem with the 1986 argument is twofold. First, there there is such a thing as nations and they have real borders and the health of the economy of a particular nation has more of an effect on a 'consumer' than the health of the economy of the world. Second, there is a balancing act between the function of a citizen of a country as a wage-earner and as a consumer. If 90% of citizens are wage-earners, then something that hurts the wage-earners also hurts 90% of the consumers.

6:21 PM  
Blogger E$ said...

Pardon? Paying artificially low prices for all manufactured goods hurts consumers?

One of the articles I linked to explained that the "unfair trade" effectively involves the taxpayers of other nations subsidizing American consumers. If you want benefits for Americans, those are the benefits!

What you are using is a very circuitous path --> artificially higher prices on domestically produced goods increase profits of domestic producers (i.e. the rich capitalists you so despise) --> who will then deign to plow the profits into high paying jobs (why not more low paying non-union jobs?) --> thus ultimately benefitting the labor class, who are only too happy with their newfound jobs to pay ten times more for clothes and three times more for electronics.

6:50 AM  
Blogger Bubba said...

Subsidizing the US consumers? Yes, they were distorting the price levels so that their productive industries benefit while ours die. That was in 1986 when we had a trade deficit with only Japan. Now many of our productive industries are dead and the result is a trade deficit. And yes deficits do matter.
Now they are lending us money so that we can buy their goods. A loan doesn't sound quite as good as a subsidy, does it?

Because of the distortions in the price levels, our money is being invested in non-productive assets. At some point these 'subsidies' will have to end. When this happens, we will be stuck with millions of real estate agents, stock brokers, other service providers and few people with industrial experience. We will also be stuck with a ridiculous amount of debt, on all levels. Now this doesn't have to be Judgment Day, as in it would happen in one day. But regardless of how it happens it will not be a 'soft landing'. Adjustment will certainly be very painful, it will get more painful every year this goes on and will probably take the form of significantly lower standards of living...

Yes, tariffs would increase prices and promote the creation of more American industrial jobs. Price levels would go up for many goods, thus cutting the general standard of living. The problem is that the current standard of living is not sustainable. So the question is whether we keep increasing our national debt and selling off our industries in order to be able to consume at our current level, or whether we take measures to consume less now in order to produce more in the future.

Lets start with the fundamentals though.. Are the current account and budget deficits problems for the United States? What causes the current account deficits? How are the current account deficits financed? How are the budget deficits financed? If the trade deficit is a problem, what would resolve it?

btw, I don't despise rich capitalists. I just don't see any fundamental justification for huge levels of inequality among the citizens of a country.

12:06 PM  

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