LiveWire

A rambling, meandering economic post by Maynard

As America goes broke, China is selling us more stuff than ever.

A surge in Chinese exports and rising anger in the US Congress will put renewed pressure on China to allow its currency to rise against the US dollar.

Chinese trade figures showed exports leaping by 48.5 per cent in May over the year before, way ahead of analysts’ forecasts. Data released in the US showed America’s trade deficit widening slightly in April, with some economists arguing that the improvement in net trade and its contribution to US growth appeared to have stalled.

Meanwhile, as you’ve probably heard, Obama is apparently preparing to double down on his stimulus binge with another $50 billion package. This is deemed necessary because the first stimulus spending didn’t perform as advertised, and an election is coming up.

It seems that ever-increasing authority is being seized by ignoramuses who claim a monopoly on wisdom and morality. Anyone that raises sensible objections to the lunacy is dismissed as a scoundrel or a tool of scoundrels.

Time for a lesson in Ec101. In a nutshell, here’s how an economy works: You invest to enhance your productive capacity, and ultimately produce more goods and services than were invested in the creation of your infrastructure. This creates a cycle of increasing prosperity. The three legs of the economic stool are investment, production, and consumption.

Example: You convert raw land into a farm. This requires an investment of labor and capital. Then you plant your first crop. This requires further investment. If you plant a hundred pounds of seed, you’d better harvest a lot more than a hundred pounds of crops. Maybe you harvest three hundred pounds of crops. So your surplus is two hundred pounds. This is a profitable enterprise if you didn’t have to eat those two hundred pounds in order to survive while you were working the farm. You’ve got to produce more than you planted and ate, and that’s your true profit. In the long term, you’ll have to pay off the cost of building the farm in the first place.

If your farm is productive, you’ll stay in business. On the other hand, if you can’t produce more than you consume, you’ll go broke. Thus a business proves its worthiness by its existence.

If subsidies enter the picture, we lose touch with reality. Imagine that a farm is struggling, so the government gives it a hundred pounds of seed. Now the farm becomes viable, and on the surface it seems the government has done a good thing. The problem is, this farm is now consuming more resources than it produces. So the overall economy is actually poorer than it would have been if this farm had closed down and the farmer had found something else to do. The economy is dragged down by farms that consume a hundred pounds of seed and produce eighty pounds of crops.

I wouldn’t go so far as to say that a subsidy is always bad. There are various reasons a subsidy might be useful. One is to help a business get across a rough spot, because it will be productive in the long term. It would be a pity to lose the working infrastructure due to a short-term dip. However, if that’s the case, private capital should be willing to take the risk. Another situation is when there’s a national security need for a domestic industry. Maybe it’s better to subsidize local inefficiency rather than become vulnerable to a foreign enemy. Paying extra for a reliable source of food might be considered part of the defense budget (in which case the decision is a military rather than an economic one). Proponents of “green” domestic energy (such as windmills or ethanol) don’t often mention this factor, but it carries weight with me. But on the whole, subsidies are a distortion of the market that do more harm than good.

This gets us to these damnable “stimulus” programs. Remember what I said about investment + production + consumption? Well, a stimulus is consumption. The idea is that the government consumes. Therefore, we will invest and produce in order to meet the government’s demand. As we hustle and the government relieves us of the fruits of our labors, prosperity will return. That’s the theory, anyway.

In practice, the government borrows money from China and spends it on the politically favored classes. This “stimulates” production in China, which increases its trade surplus. The local consumption is politically popular, but the investment and production goes abroad. The debt stays here, to be paid off by the next generation.

Of course I’m oversimplifying, but the foregoing description is fundamentally accurate. That’s why we can’t, as the Democrats have argued, “spend our way out of the recession”.

By the way, note the difference between the Bush stimulus and the Obama stimulus. Both solved nothing and pointlessly ran up the debt. But at least George Bush tried putting the money in our own pockets by sending us checks. Bush, in his error, at least gave us choice. Obama doesn’t trust us. He’s going to spend the money himself.

Our underlying problem is the economy is out of balance, and has been for some time. America is living beyond its means. To address the true cause of our woes, we must either invest and produce more, or consume less. Until we turn that ship around, we’re merely juggling bubbles and moving from catastrophe to catastrophe.

The problem of overconsumption is politically awkward. Every politician, whether D or R, wants to assert that you’ll be getting more. He knows that if he doesn’t promise more, he’ll be replaced by someone who will. So, aside from the politicians being morons, dysfunction is built into the system. It’s a problem. (Some politicians attempt to address this by telling us they’re not “spending” our money, but rather they’re “investing” it. Bulsh!)

There are indeed a few politicians that tell us we must do with less, but their approach is generally one of micromanagement. That is, they shun market forces and any sort of natural correction based on personal economy, and instead tell us what to drive or how to drive or what sort of toilet to have and when to flush it. They figure all of our issues could be addressed if only they were given enough power. Just one more tax, one more regulation, and we’ll get our utopia. The problem is this sort of excessive control and regulation crushes the human spirit and, as a collateral casualty, destroys our productive capacity. People that do only what they’re told will not build the future. Prosperity is not produced by serfs; neither can it be commanded by mandarins.

You may have noticed a conflict in the foregoing paragraphs. On one hand, I noted the debt bubble that America faces because we consume more than we produce. On the other hand, the politicians address our economic woes by the stimulus, which artificially increases consumption. So, as usual, the political “solution” actually exacerbates the underlying problem. But it’s an excellent excuse for politicians to do what they love to do, which is give away goodies to their supporters and control the people.

When politicians acknowledge our trade imbalance as a problem, their knee-jerk reaction is to seek tariff protection. This sounds good but, like this stimulus, it isn’t a sound solution. You can’t cut yourself off from the world; not if you want to compete globally. There are also treaties regarding tariffs, and pushing for tariffs tends to ignite a global trade war.

To properly address the trade imbalance would involve asking the tough questions of why it’s not cost-effective to manufacture in America, and what can realistically be done to level the playing field. There are factors such as currency valuations and union monopolies to be honestly discussed. However, rather than do that, the government has become the perennial enabler of bad behavior. Policies are implemented to mask the symptoms rather than cure the disease. If the nation is really going broke, you might reasonably expect that money would run short, so the problem would be self-correcting. Just like you have to tighten your belt when income drops. So why can we as a nation keep buying stuff we can’t pay for? Certainly our monetary policy has a lot to do with creating an impression of wealth that doesn’t really exist. We create dollars that we really don’t have, and then we spend them. Over the course of my lifetime, we’ve invented wonderful new ways to debase the money supply and get ever-deeper into debt. This is true of individuals and businesses and governments. For example, when I was young, it was actually quite difficult to get a credit card. My first credit card, which took some serious work to acquire (although I was in my 20’s and had a job), had a limit of $300.

The dollar’s status as a global reserve currency has played a big role in enabling our fiscal irresponsibility. Other countries cannot leak their currencies into the world, because the world won’t accept mismanaged unsound monies. But since the dollar is used for global transactions, we’ve been allowed to spend cash we don’t have. But there’s a limit to how much of that we can get away with.

At this point, Obama is making America more and more beholden to China for the financing of his failed programs. This is pretty scary when you think about it. China can now tank our economy without firing a shot. All they have to do is dump dollars and stop buying our debt, and we’re in deep trouble. This means, as a practical matter, that we can’t do anything unless China lets us. It’s not a good position to be in. The only reason China doesn’t pull the trigger is their investments here would be hurt. I guess that’s the upside to being owned by our enemies: They won’t want to blow us up.

In essence, Obama has colluded with foreign tyrants for the purpose of consolidating his power over the American people. The current dynamic is no longer government of the people; it’s the people versus a Washington that has allied itself with China and various other international and domestic special interests. As a result, America’s influence in the world has waned. George Bush was in a better position to push China and a worse position to control the American people. Obama has reversed that situation. If you look at the totality of their policies and listen to their rhetoric, it’s apparent that the modern Democrats regard their political opposition as a greater threat and more evil than the world’s tyrants. That’s how we get our State Department acknowledging a moral equivalency between China’s abuses of human rights and an Arizona law enforcing American citizenship.

Maybe this will all work out somehow. As I said, if the world owns America, then destroying America becomes a self-destructive gesture. Maybe I’m being old-fashioned with my quaint notions an independent nation that isn’t up to its eyeballs in debt, or my warning that a day of reckoning is coming. But I just don’t believe we’ve invented a future in which dollars grow on trees and debts need never be paid. Somebody is going to pay for this, one way or another. That’s why I think I perform a service by reminding people of economic anachronisms such as balanced books and sound money. It’s a thankless job, but someone’s got to do it.