I usually keep my emotional distance from the issues I discuss on DOTE, but there is so much nonsense about U.S. dollar policy and the coming "currency wars" making the rounds right now that I am actually angry and disgusted. The first issue to be cognizant of—this consideration is paramount—is that many economists and commentators are having exactly the discussion that Tim Geithner (and Paul Krugman) want them to have.
It has become fashionable to blame trade relations and international currency valuations for the economic problems of the United States. I first covered this issue in When In Doubt, Blame China. It is not an accident that this discussion is taking place right before the mid-term elections.
Commentators like Yves Smith, Ambrose Evans-Pritchard, Tim Duy and many others tell us that the ultimate, super-secret purpose of the Fed's QE2 is to wage a currency war on the trade surplus countries. Thus its ostensible purpose—a straightforward (albeit insane) strategy to pump up asset values as I described in The Fed's QE2 — Speeding Our Demise—is a ruse. Evans-Pritchard nicely summarizes the argument—
The countries actively intervening in exchange markets to suppress their currencies — China, Japan, Korea, Thailand, even Switzerland, to name a few — are all too often the same ones that have the biggest trade surpluses with the US.
They are taking active steps to prevent America extricating itself from the worst unemployment since the Great Depression, now 17.1% on the latest U6 index and rising again
Yet this is an intolerable situation for the US. It should be no surprise that Washington has begun to retaliate in earnest, and not just by passing the Reform for Fair Trade Act in the House (not yet the Senate), clearing the way for punitive tariffs against currency manipulators.
The atomic bomb, of course, is quantitative easing by the Federal Reserve. America has in effect issued an ultimatum to China and G20: either you stop this predatory behaviour and agree to some formula for global rebalancing, or we will deploy QE2 `a l’outrance’ to flood your economies with excess liquidity. We will cause you to overheat and drive up your wage costs. We will impose a de facto currency revaluation by more brutal and disruptive means, and there is little you can do to stop it. Pick your poison....
I know that Smith, Evans-Pritchard, Duy and the rest have complex, sophisticated views of the economic issues. But I would like to remind those talking about how our Mighty Federal Reserve will crush these evil currency manipulators by turning dollar bills into toilet paper and then flooding their economies with bathroom tissue that you can not blame the Asian surplus countries for—
- the 25-year rise of Wall Street and its preference for gambling & predation over investment in America and fostering productive work for its citizens
- two massive bubbles, one in tech stocks and another, bigger disaster in housing
- stagnant wages for almost all Americans since the early 1980s
- Overconsumption based on the phony wealth the bubbles "created" which Americans used to replace lost income growth
- Federal Reserve interest rate policies that fueled the bubbles
- the huge loss of phony wealth & the debt overhang leftover after the housing bubble collapsed
- the enormous inequality in the distribution of the wealth in the United States
- the general decline of U.S. manufacturing and outsourcing of jobs in that sector, which pulled down wages
And so on. Any such list is necessarily incomplete. And then there is America's dependency on foreign oil, which I shall discuss below.
Oh, the Hypocrisy! We were told repeatly throughout the nineties and the aughts that globalization was good for America. There were many variations on this theme, but somehow the flood of cheap goods from overseas as manufacturing job losses mounted was presented as a workable scheme that would benefit us all. One such story explained how we would become a services-based, information-based economy. We didn't need to make things anymore, we were told. It was like magic! And now everybody wants to blame the inevitable, disastrous outcome of this completely unworkable, crazy scheme on the failures of globalization. Now we are told that only a massive devaluation of the dollar (as part of the "currency wars") will correct those evil trade imbalances that have caused all our troubles.
This distorted view of America's failures has caused some people to lose track of Reality altogether. Consider this from Yves Smith—
For the US, reducing our trade deficit really means reducing imports of manufactured goods. That ultimately also means increasing exports, but that will take a longer time to put into effect, assuming the US multinational vogue for offshoring can be partially reversed. Before readers start haring on how cheap labor is in Bangladesh, recall that factory labor is only 10% of the final sales cost of most manufactured goods, and sending work overseas involves some offsets (transit time, which reduces flexibility, higher managerial/coordination costs, need to finance a longer production cycle). So in many industries, more flexible, just in time manufacturing could have been competitive in quite a few sectors. The real reason for the loss of jobs isn’t so much worker cost as lack of management imagination and resourcefulness (how fashionable is it in the US these days to be in a manufacturing business? “Talent” wants to be on Wall Street or in Silicon Valley).
Hold it right there, Yves! You would like to downplay the fact that emerging markets have a comparative advantage in labor costs, but cheaper labor was precisely the reason why those jobs left this country. Sorry, but I'm not going to let you rewrite Reality.
You've created a false dichotomy—it couldn't be labor costs, so it must have been "lack of management imagination and resourcefulness." Since when do American-based multinational corporations do anything based on something other than the bottom line? They are in no way wedded to the communities where they are located anymore, as they once were in the decades just after World War II. This "flexibility" in the labor market was another "benefit" of globalization. And if corporate management did indeed lack imagination and resourcefulness, it was only because of their singular focus on potential profits, even if the margins were thin. It's patently absurd to say this country has been outsourcing jobs because it's fashionable (in "vogue," as you put it).
And you've stumbled inadvertently on a key point. As you say, the "talent" in America wants to work on Wall Street or in Silicon Valley, not supervise or work in a manufacturing plant. Nobody in Finance wants to invest in productive economic activities. If they do invest in something, they prefer to invest in Malls or McMansions as part of some broad scheme to defraud the American people. Bankers would rather gamble and prey on Americans instead of investing in their long-term future. Short-term profits are everything, whether you're moving jobs offshore or running a Ponzi Scheme. If bankers had acted as bankers did in the past, America wouldn't be in this sorry state. It's not A Wonderful Life anymore.
And Silicon Valley? A "good idea", some VC seed capital, a few sales, an IPO and suddenly you're rich! Or at least that's the idea. It's another get rich quick scheme. You can't hit it big overnight manufacturing t-shirts or coat-hangers. All of these considerations are part & parcel of the American Empire's decline.
And now let's turn to imported oil. Strange as it seems, none of the wise commentators talking about onerous trade deficits remembered to mention it.
The U.S. trade deficit in July. From Calculated Risk
The oil share of the trade deficit as of July. Source same as above
This data makes it abundantly clear that a large part of America's trade deficit comes from imported oil. And it is also abundantly clear that the Asian surplus countries are in no way whatsoever responsible for America's using 60% more oil than it produces on a daily basis. If Americans want to reduce the trade deficit, they should stop using so damn much oil. Every month America's trade deficit starts below the line because of imported oil. And that's not going to change anytime soon, folks.
Yet America's oil imports are never considered in discussions of why the evil Chinese are to blame for America's real output being far less than our "potential output" (Tim Duy). Talk about Hypocrisy!
It is entirely hypocritical for policy-makers like Geithner to tell Americans that globalization would ultimately benefit them, and then turn around and say imbalances in global currencies and trade are the real cause of their problems. I find it disturbing that so many skillful commentators can so easily take up this distorted, deceitful view. Seeking out scapegoats (e.g. China) deflects blame from ourselves. If Americans want somebody to blame for their obvious fuck-ups, they should look in the mirror.
I happen to think the American Empire is in irreversible decline. And the very fact that I need to write a post pointing out our obvious hypocrisy (and thus denial) about our situation is just more confirming evidence that my view is correct. It's disgusting.
Agreed.
Posted by: brett | 10/15/2010 at 03:19 AM