Foreign Trade - the dirty details on the coming train wreck

[brokensymmetry]

OK - I know this posting may strike a lot of people as pure flamebait. It isn't meant that way.

I'll provide the caveat that the source is a conservative publication, and Pat Buchanan is an editor for that publication.

Despite the source, this article is, I think, important to read because it gives information about the disasterous size of the trade deficit, the likely consequences of the situation - and how much it has grown under the present mis-administration. The article also discusses why Japan and China are buying US debt. (hint: it isn't because they think we're the strongest economy around, despite what the press says).

I've included some excerpts, and a link to the full article. Flame if you must, put please read and consider the information in the article. The four paragraphs I extracted give a hint of the information in the complete article.

---------------------------------------------------------

The Sphinx in Winter


America’s burgeoning trade deficits threaten Greenspan’s legacy.

Although the press airbrushed the problem out of the picture during the economic euphoria of the late 1990s, the trade deficits never went away. In fact, as the American public is belatedly beginning to discover, they got far worse —so much so that the monthly deficits under George W. Bush are sometimes higher than the total annual deficit in his father’s last year in office.

In the past year we have seen a dramatic rise in the number of talking heads who openly question American trade policy. In the academic world, MIT economist Lester Thurow has suggested that America’s trade deficits could trigger a 50 percent-plus collapse in the dollar’s external value, and this in turn would lead to a global depression. Meanwhile on CNN, Lou Dobbs fulminates nightly about the impact of imports on American manufacturing jobs. In the world of business, critics of U.S. trade policy include that ultimate financial heavyweight, Warren Buffett. Even investment banker Robert Rubin, who as Clinton’s treasury secretary did much to create the trade problem, has now added his voice to the hue and cry. Then there is Henry Kissinger. Obliquely criticizing American trade policy at a conference last summer, he suggested that a nation that had lost its manufacturing base could not long remain a world power.

The U.S. has already sold so much of its asset base that its economic standing on the world stage has been significantly undermined. While this may not be obvious to the American public, it is shockingly clear in figures compiled by the International Monetary Fund. These show that between 1989 and 2000, America’s net foreign liabilities ballooned from $47 billion to $2,187 billion.

Their buy-the-dollar policy makes no sense on a stand-alone basis. It makes eminent sense, however, as part of a larger strategy. That strategy is to facilitate a historic shift in the world’s manufacturing center-of-gravity. The Japanese have an adage that explains it all: “Ebi de tai o tsuru”—“Use a shrimp to catch a sea bream.”


http://www.amconmag.com/3_1_04/article.html

[kalian]

1. Remember that the American Conservative...

is the OLD GOP...not the current, neo-con driven repuke party...

[Taeger]

2. Checkmate ...

This is the CHECKMATE move for the internationalists. They want to IMF the United States. They want to make us subject to the rule of international corporations and bankers in order to "manage" our debt.

[brokensymmetry]

4. It would fit the * pattern -

and it wouldn't surprise me at all....

[madrchsod]

3. bob brinker said this last week-

"we are exporting our deflation" he also criticized all politicians for not coming up with any economic policy based on reality of the global markets and i`m sure he had a few things today about turning mcjobs into manufacturing jobs. as long as wal-mart drives the engine we are bound to derail.

[doc03]

23. In 1992 Brinker said Clinton's tax increase would wreck the economy

I remember him saying over and over that Clinton and his bunch didn't have a clue about the economy.

[nolabels]

32. We have been ridding in a sinking ship since the 70's

When OPEC turned down the spigot, Nixon took the lead with it,kind of(he had no choice) what has happened since then has been abysmal. Mostly this because Industry and corporations couldn't own up the fact that was no such thing as infinite resources.

In effect they would rather have cut off nose to spite face.

[Taeger]

5. A Careful read ..

A careful read of the article shows that America is loosing it's grasp on it's own economic fortunes. We're being sold out by our leader's own myopic grab for short term cash.

So many of the goods that we now consider "critical" are manufactured outside the nation. We cannot survive independently. If the whole thing crashes, we will be at the mercy of international financers just to keep the critical goods moving into our economy.

The "gurus" have been bad mouthing the Japanese for years because of their "stagnation". In fact, they have MORE factory output and a MUCH BETTER debt situation than the United States. Their "socialism" and "lifetime employment" have lead to a position of strength.

Perhaps Japan's recent moves in Iraq and Iran are expressions of that strength. Is Japan ready to once again become the tiger of the East and challenge China????

One thing is for certain, if the dollar collapses, our debt will ROCKET upwards. Then, we will have a serious problem. I am worried that another group will offer us "IMF Style" remedies for our financial woes. That would be the END of America as we know it and the beginning of global feudalism!!!!

[Tansy_Gold]

10. "global feudalism"

I'm glad to see someone else using that phrase.

I'm no economist, but I've been predicting this kind of move backward by the neo-cons since before I even knew what neo-cons were!

I think the neo-cons have a real emotional longing to return to the 1350s -- before the Reformation, before the Renaissance, before the Enlightenment. Maybe they think they could do it better this time, maybe even "win" the crusades????

Tansy Gold, who should not be trying to think this early in the morning

[Taeger]

15. Book reference

There's a book called "When corporations rule the world". It makes extensive use of the term "Global Feudalism".

The authors are top notch. They are proponents of "free markets", but properly regulated ones. They saw first hand the MEGA destruction done by the IMF on developing nations.

[bobbieinok]

21. good grief! I started out knowing they wanted to go back to the 1950s

- pre civil rights, pre women's liberation

- then I realized the goal was pre social security and other FDR programs

- and I ended up in the 1880s/1890s 'Gilded Age' - pre national parks, pre labor unions

I think you have a real point - undo the enlightenment, etc.

(see Hal Lindon's The Late, Great Planet Earth - big seller in th 70s? - it was all about how evil the enlightenment was)

[Indiana_Dem]

6. shoot me now or later but I've liked some of the articles

I've been reading in that magazine. I think it's because of my conservative stance on fiscal responsibility and I've been against the Iraq war. Both these issues I can agree with these kinds of Republicans on. They also kill the neoconservatives as well which is a breath of fresh air coming from a Republican!

[papau]

7. Lester Thurow is solid.

not just because he agrees with my deficit effect on interest rates and investment hurdle rate - regardless of the absolute level of interest rates - and its effect on slowing capital spending leading to slow or negative growth

and was kind enough to write same to the Boston Globe (although he also noted that the checks back early tax refund Aug 01 was offsetting)

I also simply like the guy!

:-)

[camero]

8. He's one of my favorites

I think he's really part of a dying breed of economists.
The ones that tell the truth about the economy.

[TheWhitneyBrown]

9. Great Article by Pat Buchanan in there.

No End To War ...excellent analysis of the neocons. Can't help liking Pat sometimes.

[berry]

14. Good review of Gore Vidal's latest book, too.

In this latest issue. Justin Raimondo (a libertarian) really likes Vidal. The book is about Washington, Jefferson and Madison, but also refers to the present crisis. Raimondo says that, though Vidal has almost no hope that the republic will survive this present crisis, Vidal himself gives some hope to his readers. At least there are people like Vidal.

So the libertarians are claiming Gore Vidal as one of their own. Things are getting interesting, and maybe some of the ideological "purity" is being abandoned. People are starting to redefine issues and assumptions. And think. That's rather encouraging.

(I mostly disagree with Buchanan, but there are points of agreement, and I'm happy to read articles like this in AmConMag.)

[gristy]

11. Our country's trade deficit and federal debt/deficit scare the shit

out of me. You needn't feel you are going to get opposition from DUers (flamebait? - I think not). The only thing that scares me more is impending climate change.

[brokensymmetry]

12. Climate change scares me too.

And worse, I read that the Pentagon is getting worried about it. When they start regarding it as a threat, that's a very bad sign.

The trouble is, when peak oil and climate change start to hit having a strong economy might soften the blow. It would help finance the transition to sustainable technology. But given the present situation...well, how does one buy solar panels when one cannot afford dinner?

[cryofan]

13. Here is another interview with Fingleton, the author of that amcon piece

This was a question and answer type interview with Eammon Fingleton, who qrote that article you quote from American Conservative (which is a GREAT MAG, I am sure, but I cannot read it as not much of it is online, as I recall). I am just quoting some of his answers here:

>>>>>>>>>>>>>>>>>>

Eamonn Fingleton: I mean those engaged in advanced manufacturing. Specifically, industries that are both highly capital intensive and highly know-how intensive. They typically are many orders of magnitude more capital-intensive and know-how intensive than the most advanced of "New Economy" services, such as computer software developed in the last three decades. Although Japan is known in the West for its leadership in certain consumer products such as cars and television sets, its area of greatest leadership is in much more advanced industries that largely are invisible to the consumer. Specifically, Japan leads almost right across the board in the sort of advanced materials, high-tech components and production machinery that are driving the electronic revolution. Some products may be assembled in the United States, but their key manufacture - the manufacture of the advanced components and materials - is done in Japan.


A: The impression given is that outsourcing is done within the U.S. and that available components come from many sources. But it is clear that most advanced components and materials now are outsourced from Japan. Corporate America is very guarded about its dependence on foreign suppliers, and this applies in spades to outsourcing by American defense contractors.

....


A: I believe most of the job loss already has taken place. The blue-collar worker we all knew some 30 to 40 years ago was the backbone of the American economy. He or she was the best-paid worker in the world. But more and more Americans of average ability now are employed in "Mac-jobs" within the service industries. Typically they are not as well paid as in manufacturing.



Q: Why did this "hollowing out" of the U.S. manufacturing base take place?
A: It began in the 1960s and became really serious from the mid-1970s onward. One key factor early on had been a U.S. government policy of transferring technology to Japan. There was an American tendency to underestimate the Japanese competitors. This was particularly apparent in the electronics industry, where American companies that won contracts to supply semiconductors to IBM, for instance, would be required by IBM to license a "second source" - a company that could continue to supply if the primary contractor were hit by an act of God.

much more here:
http://www.pushhamburger.com/edge.htm

>>>>>>>>>>>>>>>>>>>>

People may knock manufacturing jobs, but even though I never had one, I do know that you did not have to have a "career". And that meant that you could quit a job, not work for a year or more, and then get right back into it. With a "career", you have to keep at it.

[sweetheart]

16. There is no trade deficit

The article misrepresents trade. There is always balance in
international trade. For what american buys from abroad, and equal
opposite buy is coming from abroad for american goods.

America buys goods and services from abroad. Foreign countreis BUY
AMERICAN FINANCIAL PRODUCTS. These equalize. The dollar has to
slip to accomodate the more recent trend of fewer foreign buyers
buying american financial products. This comes full circle to
make the dollar weaker, and the weak dollar further weakens interest
in american financial markets, as whatever investment gains are
made, are lost in foreign exchange rates. The investors buy less
american financial products, and the dollar keeps dropping in a
downward spiral of self fufilling diminishment.

The budget is financed by borrowing. In practice, the US prints
treasury bonds, (paper), and these are sold to investors all over
the world as i just mentioned. This borrowing, is not as good
an investment as before for these parties, and the only ones doing
the buying are the countries who are taking the excess out of the
market to keep currency parity (read: Japan and china). Both these
countries continue to buy paper so that their currencies stay
at a rate that makes their exports competetive in the US market.

The EU central bank has NOT intervened like this, and with this drop
in EU investment in the US, the dollar has dropped.

The point i'm making is that the US has been exporting paper for
manufacturing for a long time now, and that there is parity, which
is why the currency markets fluctuate. It is a very serious concern.
as this spiral of decline ultimately will force the federal reserve
to print more money and sell thier new loans (bonds) more cheaply
at auction. Imagine the day when they print 100 billion dollars in
10 year bonds, and there are no buyers for 50 billion of them... it
leads to default and credit downgrades of the US government debt.
Downgrades mean the dollar collapses further, and the spiral continues.

It is not really about shipping manufacturing offshore. It is about
the fact that the only product america sells abroad is investment
paper, and when these go sour, the buyers go back to their own
markets and leave the US to devalue its currency until, perhaps when
1 dollar == 20 yen, japanese will start buying american products, as
they will FINALLY be cheaper than domestic ones.

Alls equal in international trade, and there is no trade deficit.
It is misleading to say that. Trade parity is at work, and we're
seeing the dynamic.

I agree that the situation is serious, and it is irreversible as
the rest of the world catches up economically to US levels.

[cryofan]

17. What can we do as investors to mitigate the effect of the dollar dropping?

I have heard this argument before, and this is first time I understood it. Thanks.

What can we do as investors? Can I buy yen? Should I? Are there stocks (ADRs?) that will go up as the dollar drops?

[sweetheart]

20. wise investors.

The dollar has a fair distance to fall against the Euro. If you
buy euros now and sit on them til november (if kerry wins) and longer
if not... A kerry win will end the dollar collapse... but until then
its going nowhere but down against the euro.

Forget japan and china, their entire economies are based on exporting
goods to the US. They need currency stability to do it... this is why
you keep reading things like "The bank of japan has intervened
buying 5 billion in treasuries to keep the yen at <###>" The
far east is not economically strong enough to take a change in rates.
Since japan is a very very wealthy nation, it can afford to wait
bush out of office. Europe, whilst more wealthy, is applying better
free trade practices.

In short, buy euro's or commodities (like gold/oil futures). Oil,
gold and secure foreign currencies always appreciate in a time of
uncerainty, and war. If you watch the rates for these things over
the past year, you'll see a marked increase in these assets when
dollar valued.

If Kerry wins, buy back dollars and be happy at your winnings.

I predict 1.50 euros per dollar by the end of december if bush wins.
1.4 dollars euros per dollar if he loses.

Don't quote me, but i've been right about this decline for 3 years
now, and dammit, i've got everything in euros and its been better
than dot com.

[anti-NAFTA]

18. There is no trade deficit?

news to me :eyes:

[sweetheart]

19. din't read the post, eh?

There is only trade parity. That's what *TRADE* is. The US buys
Porsches, Champaign and chinese computers, and germany, france and china buy US treasuries.

There is only ever balance in trade. Read the post.

[muriel_volestrangler]

24. The article doesn't misrepresent trade

the phrase "trade deficit" is the common one. It is a deficit in the virtual current account the USA has for trading abroad - each month, more money goes out of the account than goes in.
This means, as you say, that the USA ends up with more goods (or get more services), while the other countries end up with more dollars. They may keep these as dollars (in US banks), or buy US treasuries, equities, or property.

[cryofan]

25. if we wanted to be picky, wouldn't we have to say that

...there does happen to be trade parity for the time being, but if tomorrow these countries buying US bonds decided to buy EU bonds, and the US Bonds went sitting, then there would be a trade deficit. I know that the rates would rise until overseas institutions bought them, but still, we cannot say that there is some sort of default, or automatic, or natural, trade parity. Just because we import goods, that does not AUTOMATICALLY ensure the purchase of American financial instruments by the countries manufacturing the purchased goods.

[sweetheart]

26. spend some time at a bank forex desk

All the details of the trade balance are intensely followed by
bank economists and traders, that to the minute the implied forex
rate changes to the expectation of balance. The system of global
banking is compensating for the information realization so fast that
a private investor could never hope to get in on the moment to
moment moves... but there is parity. The goods are paid for.

It does not automatically, but as fast as information is realized,
the markets correct. The central bank also watches with its own
trading desk, as it must not only balance the export/imports, but also the interest rates. If foreing interests buy too many dollars, it can shorten the money supply, and vice versa. The flows may seem
very chaotic, but these folks are paid a lotta money to keep the
whole thing in balance, that the bank does its own forex transactions
at a proper rate based on the forecasts.

All banking transactions requiring forex are routed to the forex
desk to be settled... and say a desk knows it must pay 900 million pounds on thursday, then the desk makes the call to sell out of
inventory or to buy as in 2 days it will appreciate. It is really
quite stimulating for a while to see it all, as in real life, the forward, futures and interest markets all move in concert. This,
however, i'm not gonna try to explain, as textbooks do a much better
job... perhaps "how the foreign exchange market works" or some
book title like that. This sort of book will focus on technical
market dynamics... geez, its actually some macroeconomics too.

PM me if you really want to know some book sources, in case you've
nothing better to do with your amazon budget but bone up on
macroeconomics and international banking.

The amounts of money settled by most banks on a daily basis against each currency is in the billions of dollars. A little drops here,
a little rises there... the flows are more predicatable than not,
especially as the entire bank runs off computerzied realtime systems
that are constantly recalculating the sums between all banking units
and trading desks.

[orwell]

30. Banana Republic

In some respects your argument is a semantic one. While it is true that other countries may "balance the books" by repatriating dollars in a myriad of ways, the fact of the matter is we are on balance receiving real goods for abstractions. The final stage of empire is the financialization of the real economy.

In other words, your description of the mechanism is correct, but the effects are far more destructive in the end game than most are led to believe. As one investor said to me recently, "Why should I care what the value of the dollar is."

It is obvious that you are quite aware of the disastrous results of an extended foray into Banana Republic economics, but many are not. Semantic clarity will not help lessen the social unrest that is likely to accompany "the rude awakening."

Thanks for the great posts.

O

[sweetheart]

31. Its a protection racket.

What we "export" is global "security" and military preeminence.
They buy Treasury bonds and sit on them. Its a racket, all of
east Asia gets that, as it is where we've used active warfare to
demonstrate how we keep the "hood" safe.

Whilst i completely agree over the financialization of the economy,
i have been challenged for some time on what i propose as an
alternative. I don't think I'd mess with the currency markets or
their religion of a clearing price and market efficiency. I think
i would challenge the world forex information media oligopoly to
create and alternate complexity than this one dimensional measure
of international relations... as if an entire social context has
no dimensionality at the point of relationship to other countries
except "clams".

Wall street has been playing monopoly for too dang long, and it has
become ossified in hegemony-think. The rest of the world is dumping
it and letting the US citizen dig his own grave with bush at the helm.

I would also introduce a global securities market and depository,
where all nations can list, not an American one people can come to,
but a global one, where all nations companies and investments are
treated fairly under the international law of fair trade. The
instability of property rights is a huge issue in poverty in most
of the emerging world. Finance is NOT available, and without
investment, nothing... pfft... Africa. Finance is the root of jobs
and stability.

It is a semantic agreement between global banking cultures that is
the last vestige of civil international relations.

I have been very close to 4 of American financial WMD virus attacks. The Korea one, i spent time visiting all Korean banks right
leading the crisis in Korea. A few forex desks got together and
put Korea in the toilet. Morgan Stanley did more to destroy
Korea than 50 nukes. A small collusion of desks decides you're
credit is downgraded, the forex rate shifts, all external debt service
shoots up and down further and debt up, down further and credit
downgrade...... spiral down.

Mexico City in 1994. Mexico was punting American-style stock and
options markets on to an entirely unsound accounting and property
rights structure. The forex desks blew them up right fine a week
after i got out of there.

Russia in 1998. I flew to Finland and then to Russia right during
that collapse, and the ruble dropped the limit on every world market
while i was in Russia. I felt like i was wearing heavy shoes.. ;-)

Argentina in 2001. I was working with European venture capitalists
who had investments in Argentina. I got a very intimate experience
of the kind of burn investors take when the forex desks dump them.

The worlds banks, could quite conceivably apply this same sort of
attack on the US, and actually are proceeding in this very approach
until the dollar is at a much lower parity and this pseudo nationalist
abuse of forex desks for world war, can end.

[orwell]

33. Bucky Bombs

Thanks for the great discussion.

I have argued the "protection racket" motivation for many years. I remember a broker from Dean Witter calling me in the midst of the 600 point downdraft in 1987 asking me if this was the "end" for the American Financial Empire.

I replied, "No, because we have the bombs."

On your other observation about the inadequacies of our "one dimensional measure of international relations," there is some interesting work being done in the field of Hedonic Psychology regarding this very subject. As I understand it, some academicians are trying to measure "the pursuit of happiness" in terms other than "clams" as you so appropriately put it.

As far as the flighty Forex Flyboys, I would support some type of capital restrictions on purely speculative currency trading. I realize that this flies in the face of free market economic theory, but in essence no market is free. They are all constrained by rules, many of them written by the very forces the rules are meant to constrain.

There is nothing gained with the short term focus on long term structural problems. It only increases volatility/implied risk, which deemphasizes sound strategic planning. Adam Smith would be appalled at how neo-liberalism has completely appropriated select sound bites to validate their faith-based economic theories, while conveniently glossing over the social aspects of his work. It is just as severe as the Marxists emphasizing the class aspects of Smith's work, without mention of the market theory. Is there a third way...or an nth way? Of course there is.

But...a man hears what he wants to hear and disregards the rest.

O

[sweetheart]

36. Global Currency

The simplest solution is to have a new single currency worldwide.
Perhaps "the universal". This would eliminate all currency
instability in one single sweep, and provide a firm ground for
fairly measured world trade. India has grossly discounted its
currency. In 1988, i changed rupees at 14. Theyre at 45 now.
Their entire labour pool has been discounted by a third. This is
surreal. This discount is what makes this export market so
appealing for labour outsourcing.

If the currency were 1 universal, with 1000 issued per person with a
economic university as a central bank, that issued credit based on
a very wise community of leaders that could re-inspire the economy
the earth over by central credit creation.

The risk of such a currency is zero. It is perfect ice.

Dropping down aleph 1 infinity in complexity. The universal, would
incorporate an elected, and very transparent central bank that
allocated sector spending wisely, especailly in the open markets
committee of the federal reserve today. It should be elected. The
federal reserve act is flawed seriously, and should be entirely
reapproached to keep america competetive with more well disciplined
economics. Having a bulgeing currency has created "fat". To come
back

[PA Democrat]

22. Anyone Read Wealth and Democracy by Kevin Phillips?

He examines the conditions leading to the declines of former world powers, Great Britain, the Netherlands, and the Spanish Hapsburg empire. He cites speculative finance, decline in domestic industry, dramatic increase in wealth concentration and widening of the income gap, increasing foreign debt, and disgruntled politics.

Notice any similarities to today's America?

[idlisambar]

27. definitely a good one

This book helped to correct a lot of the misperceptions I had about the state of our economy, and the political observations are interesting too.

[Deja Q]

28. Well, the dude makes sense

Why should anybody be flaming you? It wasn't great when Dippydung Sr took over in 1989 (I don't see how Clinton can be blamed for starting it, but he sure as snoopy didn't stop it...), The trade deficit did continue to grow over the Clinton '90s (another thing I need to remember when I encounter people who think Big Dog is a god :eyes: )and, lastly, Dippydung Jr* has only done things to make that trade deficit that much worse...

All I know is; jobs have to come back here, the deficit nullified, and the US has to stop relying on oil. Do you really see ANY of these things happening? :-(

[brokensymmetry]

29. Do I see them happening?

Well...frankly...no.

But if we had the right leadership...courageous, honest leadership that would inspire...it could happen.

If we were to really concentrate on energy independence - and, ultimately, no reliance on oil - we'd do a lot to help the balance of trade. We'd have a massive effort in the US that would improve the job picture.

A variety of targeted taxes and tariffs would help too.

But it would take a truly great leader to take us there.

[ignatius]

34. Our national debt is slightly under $7 Trillion and all of

gdp is $11 Trillion. Because of the interest owed on the borrowwed miney, that percentage of debt to gdp will rise unless there is a large increase in production.

A country that produces little has to either plunder other nations resources(ME oil and Chinese and Indian slave labor), sell assets, or borrow more and more.

We are in a precarious situation made worse by tax cuts for the rich.

It's like a plague of locusts comsuming and devouring until nothing is left.

[brokensymmetry]

35. True. And then we have unfunded liabilities.

I suspect the national debt will exceed GDP in a few years...what happens then I don't know. But I don't look forward to it.