P.J. O'Rourke on Balance of Trade with China

[sailaway21]

A brief tour of economics by the inestimable Mr. O'Rourke. P.J. is the guy who said, "If Italy can make a Ferrari, imagine what America could do if she put her mind to it". As usual, set all beverages down before reading and don't eat unless your wife knows the Heimlich manoeuver.
http://www.weeklystandard.com/Conten...ypyxm.asp?pg=1

[artbyjody]

I focused on the advert "Our best investment is in knowledge"....

Sad...I didn't puke I usually wait until everyone else eats so I know it wasn't poisoned.. Some expert though

[Rockter]

Then you have no problem.
Just keep borrowing plenty and producing little.

I am the most pro-American I know, but I cannot understand why you do not call a halt to this rampant borrowing. It will overwhelm you in the end. Few will even talk about it, and they are not popular.

Pretty soon, a foreigner is going to own you.

[chucklesR]

Here's short sighted stupid statements at their best:
He says:
"
But there is no such thing as a trade imbalance. Trade can't be out of balance because a balance is what a trade is. Buyers and sellers decide that one thing is equivalent to another. Free trade is balanced trade."

Okay, I'll trade you my gold for your your cheap products that my consume consume consume society wants but does not need.

Sooner or later you have no gold, China has it all and buys our silly consumer society on piece at a time, starting with contributions to our political parties who will then help make sure it happens because politicians are only focused on the next election.

[sailaway21]

chuckles assumes that gold and cheap products are of intrinsic value which they are not. As mentioned in the article, the value of the labor to produce a given product within the US immediately becomes less the minute it can be produced anywhere in the world for less. It will take time for that labor value to decline, but decline it will. On the world market, the availability of a cheaper supply of product affects all markets. We and others may embargo oil from Iran but, the moment that one country buys Iranian oil the world market price for oil is affected.

As Mr. O'Rourke stated, the Japanese and the US went through much the same situation in the 1980's. Japan, flush with American dollars, notably bought Rockefeller Center and Pebble Beach Golf Course. Last I checked they are both still in the US although no longer owned by the Japanese. One may recall that it was the Japanese who subsequently went into a decade long recession, mostly due to a lack of free trade and attempted government management of the economy. The US, presumed to have been passed by Japan, Inc., proceeded upon a 28 year expansion that has yet to end.

All of those dollars that the Chinese are collecting are backed by the full faith and credit of the US government. What does that mean? It means that they are backed by the US economy because the full faith and credit of the US government is based upon the ability to tax the wealth of the US economy. There was a day when those dollars were indexed to the price of gold. And you could literally demand gold for your dollars. That is no longer so. If you have a horde of US dollars, the only thing you can purchase with them is either goods that someone will sell you for dollars or you can purchase units of another country's currency based upon the exchange rate.

If you elect to take your dollars and buy euros with them, you are betting that the euro, and thus the European economy, is going to outperform the US and therefore be more valuable. That is a bet that has yet to prove true for any significant period of time.

As the dollar devalues it becomes more attractive for foreign dollar holders to redeem their dollars for either goods from the US, or buying holdings in the US, or even building factories in the US. With the exception of goods exported from the US, the foreign holder of the dollar spent in the US is still betting on the US economy. He's betting that the golf course he bought will go up in value. What he is not doing, and cannot do, is ship the golf course back to China.

Trade is inherently balanced when conducted freely. That's why the prices of some items might vary. A million down coats are worth considerably less in Jamaica than they are in Canada. You might sell your down coat in Jamaica for 1/1000th of an ounce of gold. In Canada it might well be worth a full ounce. But that imbalance cannot last long either. It's only a matter of time before someone notices that you can buy down coats in Jamaica really cheap and they start up buying Jamaican coats and reselling them in Canada at the higher price. Shortly thereafter, absent any restrictions on trade, the price stabilizes and you can buy a down coat in the US just the same as you can in Jamaica. Funny thing that capitalism.

[sailaway21]

and foreign investment in the US.
http://www.realclearpolitics.com/art...n_america.html

[bestfriend]

I have to agree with you there SA, although what is really amazing is that I am actually starting to understand what you mean. Those analogies in crayon you have been sending me seem to be paying off.

[tdw]

I like PJ, always have, which is strange given my leanings. He always makes me smile and that's nice.

One of things to consider is the exchange rate. Think Japan. Back in the days when they where the place where all the cheap crap came from you could buy a gazillion yen for a dollar and that was one of the major reasons why their goods where so cheap. Of course as they became more and more successful their currency appreciated and lo and behold one day they were no longer so cheap and the world moved on to Taiwan, then China, Korea, India and even Vietnam. Yes, labour rates also come into it as well but the international value of a currency has a major bearing on the issue.

In Japan's case they moved from quantity to quality and while they still have a way to go, that bodes well for their future.

Ulitmately China will have to float the Beijing Buckazoid, they will become less competitive and it all starts to even out. Also of course as they prosper wages will rise, property values will increase and their goods will inevitably become more expensive.

Down here the South Pacific Peso (AUD) was at one time down round 50c to the USD. At that time absolutely bugger all was being exported to Australia from e.g the US but now with the AUD up around 85c US , many more US products are appearing on our shores. Damn, they are even going to start importing bloody Cadilacs next year and Chrysler of all people are making a serious impression amongst those who lust after such rubbish. Shoot, you can even buy a bloody Hummer if you want one.

It is now quite worth my while to order CDs, DVDs and Books from the US. A year or two back I had to stop cos it simply didn't make any sense.

It's swings and roundabouts peoples. Where it all gets cocked up is when governments interfere in the process and try to artificially protect the unprotectable. They tried it in OZ in the 50's and 60's and we damn near went belly up so it does not seem wise to simply keep pouring government (read yours and my ) money into propping up inefficient industry. You have to play to your strengths and let your weakspots go the way of the unevolved. Yes it's unfortunate that auto workers and farmers for example suffer but it is simply unavoidable if such industries fail to meet the challenges of a changing world.

For me, the one thing governments desperately need to do is allow this all to happen slowly so that the people can learn to adjust at a pace that does not leave folk with nothing to do but eat dust.

ps - Sway, have you read PJ's new book yet ?

[sailaway21]

Wombat,
The last I read was his take on Adam Smith's Wealth of Nations which I found better than reading the original but not quite his best effort. I'm not aware of anything since, but then, I'm frequently in an unaware condition. Please advise.

I think you are spot on with your comments re: Japan and the Asian tigers. My only quibble would be that government, rather than making the transition you speak of more gentle, make's it far more abrupt by inevitably propping up and supporting business and industry that are on the inexorable slide already. When the end inevitably comes, it's that much more precipitous. The subtle crime of government is the propagation of the idea that, with just a little government help, we're going to make it all better and things will go back to the way they were.

Regarding the auto-rubbish being exported I'd mention a few kernals worthy of the Wombat's interest. Cadillac has become far more performance oriented and, if not challenging BMW, is certainly giving pause to over-priced M-B and Lexus. Chrysler is again struggling but does fill some niche markets in ways that others do not. I'd see your niche being amply suited out by the Dodge Viper in an understated blue. For a more spacious and less conspicuous ride, where creature comforts are more an issue, the Chrysler 300 is a very fine ride as well as a brutally tough looking sedan, it's got Dick Tracy written all over it. If one's marsupial mate finds that the personal pouch doesn't quite meet the varied demands of crew and cargo, there's no better a minivan than the Chrysler Town & Country. I kind of liked the looks of that Crossfire but know very little about it and it's out of production in any event.

"Giving money and power to government is like giving whiskey and car keys to teenage boys." "A little government and a little luck are necessary in life, but only a fool trusts either of them." PJ in, Parliament of Whores

[sck5]

Sailaway you are talking about "labor value" !!! I would never have pegged you for a Marxist - they are the ones most fascinated with that concept.

Well I guess you cant always tell. And here I thought marxism was in the dustbin of history.