Sinking Currency, Sinking Country

by Patrick J. Buchanan - November 2, 2007

The euro, worth 83 cents in the early George W. Bush years, is at $1.45.

The British pound is back up over $2, the highest level since the Carter era. The Canadian dollar, which used to be worth 65 cents, is worth more than the U.S. dollar for the first time in half a century.

Oil is over $90 a barrel. Gold, down to $260 an ounce not so long ago, has hit $800.

Have gold, silver, oil, the euro, the pound and the Canadian dollar all suddenly soared in value in just a few years?

Nope. The dollar has plummeted in value, more so in Bush’s term than during any comparable period of U.S. history. Indeed, Bush is presiding over a worldwide abandonment of the American dollar.

Is it all Bush’s fault? Nope.

The dollar is plunging because America has been living beyond her means, borrowing $2 billion a day from foreign nations to maintain her standard of living and to sustain the American Imperium.

The prime suspect in the death of the dollar is the massive trade deficits America has run up, some $5 trillion in total since the passage of NAFTA and the creation of the World Trade Organization in 1994.

In 2006, that U.S. trade deficit hit $764 billion. The current account deficit, which includes the trade deficit, plus the net outflow of interest, dividends, capital gains and foreign aid, hit $857 billion, 6.5 percent of GDP. As some of us have been writing for years, such deficits are unsustainable and must lead to a decline of the dollar.

A sinking dollar means a poorer nation, and a sinking currency has historically been the mark of a sinking country. And a superpower with a sinking currency is a contradiction in terms.

What does this mean for America and Americans?

As nations realize that the dollars they are being paid for their products cannot buy in the world markets what they once did, they will demand more dollars for those goods. This will mean rising prices for the imports on which America has become more dependent than we have been since before the Civil War.

U.S. tourists traveling to the countries whence their ancestors came will find that the money they saved up does not go as far as they thought.

U.S. soldiers stationed overseas will find the cost of rent, gasoline, food, clothing and dining out takes larger and larger bites out of their paychecks. The people those U.S. soldiers defend will be demanding more and more of their money.

U.S. diplomats stationed overseas, students and businessmen are already facing tougher times.

U.S. foreign aid does not go as far as it did. And there is an element of comedy in seeing the United States going to Beijing to borrow dollars, thus putting our children deeper in debt, to send still more foreign aid to African despots who routinely vote the Chinese line at the United Nations. {Funny how they never mention aid to Israel} (Administrator's comment)

The Chinese, whose currency is tied to the dollar, and Japan will continue, as long as they can, to keep their currencies low against the dollar. For the Asians think long term, and their goals are strategic.

China – growing at 10 percent a year for two decades and now growing at close to 12 percent – is willing to take losses in the value of the dollars it holds to keep the U.S. technology, factories and jobs pouring in, as their exports capture America’s markets from U.S. producers.

The Japanese will take some loss in the value of their dollar hoard to take down Chrysler, Ford and GM, and capture the U.S. auto market as they captured our TV, camera and computer chip markets.

Asians understand that what is important is not who consumes the apples, but who owns the orchard.

Other nations that have kept cash reserves in U.S. Treasury bonds and T-bills are watching the value of these assets sink. Not fools, they will begin, as many already have, to divest and diversify, taking in fewer dollars and more euros and yen. As more nations abandon the dollar, its decline will continue.

The oil-producing and exporting nations, with trade surpluses, like China, have also begun to take the stash of dollars they have and stuff them into sovereign wealth funds, and use these immense and growing funds to buy up real assets in the United States – investment banks and American companies.

Nor is there any end in sight to the sinking of the dollar. For, as foreigners demand more dollars for the oil and goods they sell us, the trade deficit will not fall. And as the U.S. government prints more and more dollars to cover the budget deficits that stretch out – with the coming retirement of the baby boomers – all the way to the horizon, the value of the dollar will fall. And as Ben Bernanke at the Fed tries to keep interest rates low, to keep the U.S. economy from sputtering out in the credit crunch, the value of the dollar will fall.

The chickens of free trade are coming home to roost.

Blinded by Ideology

By PAUL CRAIG ROBERTS - Oct 9, 2007

On August 28 the Cato Institute in Washington DC published a report, "Thriving in a Global Economy: The Truth about US Manufacturing and Trade." The report confuses a company's offshored products with its import competition and wrongly concludes that US companies with the most import competition are the companies that are thriving.

The Cato report never mentions the practice of US corporations of offshoring their production for US markets. Consequently, the report conflates offshored inputs and final goods of US corporations with imports from competitive foreign firms. The report thus confuses corporations or industries that offshore their manufacturing with those most exposed to import competition.

This extraordinary mistake results in an incorrect conclusion. The Cato report finds that revenues, profits, and value added rose most for industries most exposed to import competition and mistakenly attributes this result to the beneficial workings of free trade.

In US trade statistics, offshored US production is counted as imports. Offshored production comprises a substantial percentage of manufacturing imports. Let's rewrite Cato's conclusion to take account of these facts: "Revenues, profits, output, and value added rose the most for industries that offshored manufacturing, and they rose the least for those industries that produced their output domestically."

Obviously, corporations that arbitrage labor and replace their US employees with less expensive foreign labor are going to enjoy greater growth in profits and value added.

The Cato report did not set out to prove the benefits to corporations of offshoring. The goal of the report is to combat protectionist sentiments in Congress that might result in trade restrictions. Thus, a report that attributes the health of US manufacturing to import competition.

In January 2004 in the New York Times and at a televised Brookings Institution conference, Senator Charles Schumer and I attempted to create a new discussion around a new and unrecognized problem. The problem is that the collapse of world socialism and the rise of the high speed Internet made it possible for domestic corporations to arbitrage labor across national boundaries in pursuit of absolute advantage.

In the years since, I have written extensively on this issue. Labor arbitrage is not trade and does not meet the Ricardian conditions for comparative advantage upon which the case for free trade is based.

Few economists have bothered to think about the issue of offshoring, preferring to dismiss concerns about it as manifestations of the old protectionist fallacy. They learned in graduate school that free trade is always mutually beneficial and ceased to think when they passed their exams. This is especially true of "free market economists" who believe that economic freedom, which they identify with the freedom of capital, is always good. Thus, most economists mistakenly believe that offshoring is protected under the authority of free trade doctrine.

However, free trade doctrine is based on the assumption that domestic capital seeks its comparative advantage in its home economy, specializing where its comparative advantage is best and, thereby, increasing the general welfare in the home economy. David Ricardo, who explicated the case for free trade, rules out an economy's capital seeking absolute advantage abroad instead of comparative advantage at home.

Jobs offshoring is not only a problem for displaced US manufacturing employees--displacement that Princeton economist and former Federal Reserve vice chairman Alan Blinder says will also impact 30 to 40 million high-end US service sector jobs as well-- but also a problem for economic theory.

Economic theory assumes that capitalists pursuing their individual interests are led to benefit the general welfare of their society by an indivisible hand. But offshoring, or the pursuit of absolute advantage, breaks the connection between the profit motive and the general welfare. The beneficiaries of offshoring are the corporations' shareholders and top executives and the foreign country, the GDP of which rises when its labor is substituted for the corporations' home labor. Every time a corporation offshores its production, it converts domestic GDP into imports. The home economy loses GDP to the foreign country which gains it.

Recently, Ralph Gomory, co-author with William Baumol, of Global Trade and Conflicting National Interests, the most important work in trade theory in 200 years, pointed out that traditional trade theory has broken down because companies are no longer bound to the interests of their home countries. Offshoring has de-coupled the link between a company's motivation for profit and a nation's desire to improve the wealth of its citizens. "Most economists," Gomory observed, "have not acknowledged this fundamental change and its implications for economic theory."

The Cato report shows no awareness of the problem for economic theory when the profit motive becomes disconnected from the general welfare, and the report does not appreciate the restraint placed on traditional protectionist legislation (tariffs and quotas) by manufacturers that offshore. The traditional purpose of trade protection is to shield domestic producers from foreign competition. Neither manufacturers that offshore production nor their trade associations favor any tariffs or quotas that would reduce their profits from offshoring by treating their offshored production as the products of foreign competitors. The Cato report is worried about a protectionist policy for which there is no organized constituency.

Congress and most economists are as confused about the issues as the Cato report. Today the profit motive causes capitalists to create job opportunities and GDP in low-wage foreign countries instead of their own. Every job that does not require a "hands-on" presence can be offshored. Charles McMillion and I have pointed out for years that the nonfarm payroll jobs data from the Bureau of Labor Statistics show that the US economy can only create net new jobs in domestic non-tradable services.

The Cato report does not acknowledge that the financial prosperity of US capital is at the expense of US labor. The report does not explain how an $800 billion trade deficit can be closed when domestic corporations face powerful incentives to offshore, and it shows no awareness of Susan Houseman's findings that productivity gains and output growth that result from offshoring, and which occur abroad, are mistakenly being counted as US GDP and productivity growth. This phantom US output and productivity growth would explain the disconnect between rapid productivity growth and US real median family income, which is lagging far behind.

The financial prosperity that US corporations are enjoying from offshoring increases the US trade deficit and makes American consumers increasingly dependent on imports. In 2006 (the most recent annual data) the US trade deficit in manufactured consumer durable and nondurable goods was 3.4 times greater than the US trade deficit with OPEC. The US "superpower" has a massive trade deficit in consumer manufactured goods and even has a deficit in capital goods, including machinery, electric generating machinery, machine tools, computers, and telecommunications equipment.

In 2006 The US trade deficit with Europe was $142,538,000,000. With Canada the deficit was $75,085,000,000. With Latin America it was $112,579,000,000 (of which $67,303,000,000 was with Mexico). The deficit with Asia and Pacific was $409,765,000,000 (of which $233,087,000,000 was with China and $90,966,000,000 was with Japan). With the Middle East the deficit was $36,112,000,000, and with Africa the US trade deficit was $62,192,000,000. The trade deficit with OPEC was $106,260,000,000.

The more US corporations prosper by offshoring, the greater the US trade deficit will grow and the more unbearable the pressure will be on the dollar's role as reserve currency.

At some point crisis will force Congress, economists and think tanks to deal with the real issues.