THE CHINESE CURRENCY: A BIG SHOE THAT COULD DROP!

For over a year the U.S. economy has been just chugging along without any apparent stresses. I mean, nothing has happened within our economy to cause panic or increase the level of fear people are feeling. Certainly, the economy is far from healthy. It is not growing to speak of. Unemployment is very high and few jobs are being created. Some communities appear to be in depression, while others are only marginally affected.

In the political area, the focus related to the economy is all of the promises made and no results. The current administration isn’t being blamed for making things worse, just not making them better. The government has declared that the “big drop” is over, the recession has ended, but the signs that growth is occurring or may happen in the future are muted at best.

My own mood is that of waiting for the other shoe to drop. Well, there are many shoes that could drop. And any of them could be more disastrous than the big dip of 2007. Which one will it be? Or perhaps the question to ask is which one will be first? Only time will tell. Let’s think about one potential shoe, the push to have the Chinese revalue their currency.

One issue that the politicians are focusing upon is the international value of the Chinese currency. It is contended that if the Chinese currency is valued more in line with real relative national purchasing power, the U.S. dollar would be stronger and the U.S. would benefit from a greater demand for its products. There are several things that are difficult about this. It is true that China’s approach is the old, thoroughly discredited view (among those who are aware of the history of economic ideas) that a nation’s wealth is achieved by hoarding valuables. At the beginning of the exploration of the New World, for example, countries would scour for gold and silver in the Americas, bring it home, and put it in a vault and declare that they were wealthy. So, several Asian countries, including Japan and China, insist on controlling the exchange rates (although Japan is trying counter balance that now) and hoarding the dollar and the Euro (China has a large surplus with the Euro Zone as well).

Of course, hoarding anything is not wealth. A dollar, or any currency is only as valuable as what it will buy. A currency, especially a fiat currency, in international trade is a claim on that country’s production.

On the other hand, a country does need reserves (speaking within today’s structure), i.e., a stash of cash available when and if needed to settle international debt or payments. What cash is available? Well, they aren’t going to begin using gold, if for no other reason than that the process of beginning to use gold would cause the value of the dollar to die. The same problem holds for any other currency that could be chosen other than the dollar. If the process of changing to another currency was done slowly, perhaps the dollar wouldn’t collapse. Unfortunately, such a process should have started a couple decades ago.

As it is, the international system is stuck with dollars into the foreseeable future. Okay, but there is no need for countries like China and Japan to continue accumulating dollars. They have more than they need, and they are worried about the constant flow of dollars and what that means for the future. What they could do is to turn around and begin buying stuff from us with the dollars that they would have hoarded, the current cash flow. Sounds good, right?

We will even ignore the probable, immediate consequence that the dollar would lose significant value just because it wasn’t being hoarded as before. Forget that. Forget that immediately, foreign goods would be significantly more expensive. Let’s just concentrate on our own goods.

The mainstream economists think that to create growth, what is needed is consumption, more spending. That is why they set things up to expand the money supply. More money, more spending, more wealth, they think. Great, huh! So, these same economists would be happy for foreigner to be spending more in the U.S. It means more demand. They felt the same way years ago when the economy seemed to be humming right along, with very high employment, and very low unemployment. We had what some called “full employment”. I always wondered what they thought was going to happen. The unions, progressives, Keynesian economists all thought that more money running after our goods was going to be good, when there was no one to produce them.

Today things are a little different. We have a large number of people unemployed and lots of capacity that is sitting idle. It is not the most efficient capacity, but it is there. What we don’t have is a significant amount of raw material sitting around. Nevertheless, as foreigners began to send those dollars that they don’t hoard back to the U.S., we will now see more dollars running around. At first, the new demand will cause some shortages, and prices will begin to rise, since the actual stock of good will be unaffected, at least for a while. Then, over time, more capacity will be used, more people rehired, more produced. But, then the real bottleneck appears. Or rather two bottlenecks. One will be the need for raw materials for the higher level of production. Costs will have to rise to compensate for the higher costs of materials as users bid for the material available. The other bottleneck is that some new investment will be needed, but the government has soaked up all available savings for its deficit. To get loans or attract investors, businesses wanting to expand will have to bid against the government for savings. That will also tend to raise costs, and the cost of government borrowing will also increase.

What this really means is that the return of all of the money we send out in a year for foreign trade will result in higher prices, both for domestic goods and much more so for foreign goods. It is unlikely that we would see the “gentle” 1-3% inflation we have seen with few exceptions over the last couple of decades. It will be higher.

Now why would we see higher inflation just because foreigners spend the money that we sent for goods? It certainly wasn’t the case throughout our history, right? Wouldn’t it make sense for there to be a balance? Well, yes. But our situation over the last decades is very different. It is hard to understand, apparently. Some supposedly free market bloggers don’t accept my thinking here.

For decades we have had not only a trade deficit, but a cash-flow deficit, called a current account deficit. While the trade category covers trade, obviously, it doesn’t include investment flows between nations and government transfers. Normally, if a country has a trade imbalance, the difference is made up by the return of the deficit in investment, or the purchase of government bonds, for example. Even then, if the current account is not in balance one year, it swings back the other way the next, or at least over time a country’s current account will balance out. This has not been the case for the U.S. for a long time. The current account deficit will be less than the trade deficit.

One way to understand what is happening would be to imagine that you are a country and buying from other people – countries – often. Your purchases are all made by check. You send out many checks and everybody honors them and sends you the merchandise you want. But, you find out, by analyzing your checkbook that some of your trading partners are not cashing your checks. They are just keeping them (for some strange reasons – your crazy cousin has all kinds of weird theories as to why, saying that they want your checks as reserves, that your partners use them as cash with other people, etc.). So, you have both the things you bought and the money you with which you thought you bought them. Sounds like a good deal. It is sort of. But, if your honest, and know that there is a future, you might be somewhat worried about what happens when all of those checks come wondering back, especially if they all come back at once!

Let’s take 2009. The U.S. bought more stuff than it sold by $374 B. The current account difference was $378 B (usually, the current account deficit is smaller than the trade deficit). You can look at the history of the U.S. current account here. So, there have been billions upon billions of dollars that have left the country and not come back, not even as loans to our government. My discussion in this post is limited just about this year’s money not returning. (Think how bad things would be if the money from past years returned as well!)

Under a gold system, if money left every year and didn’t return, the money supply would continue to shrink and there would be a corresponding drop in prices. There would be ramification of a continued outflow of dollars. There are ramifications under the present circumstance, just not the ones that would occur in a rational economy. In the present circumstance, the U.S. price level actually continues to creep up. That is because the money supply continues to creep up. The money supply creeps up in spite of billions of dollars being lost every year to foreigners. Where is the money that is being lost coming from? I am sure that you know the answer. It is the Fed., the official U.S. money maker upper!

One key fact to remember about international trade is that it functions completely on credit. When an importer buys, he sends a letter of credit, which does not pay the exporter until the goods are received and accepted by the importer. The letter of credit is a bank document, and is what it says it is, a credit, a loan. Purchases by U.S. importers are financed by bank credit pushed by the Fed. We see that even though banks in the U.S. are not making loans to businesses for new production, they are making loans for importing, i.e., we still have a big trade deficit. The money we have been exporting for years is all made up, Fed. produced money. So the Fed increased the money supply, we sent it overseas to buy stuff, and those people kept the money, just like the example with your checks. (Why? See my discussion of Schiff’s book, Crashproof. The “Why?” is even more a big question after they have kept so many dollars after so many years.)

The situation is not good for the Chinese and other countries that have built up big surpluses of foreign money (which is mostly in digital form). Recently, there was a push to move away from dollars toward a “basket” of currencies, including Euros. The wisdom of that idea was demonstrated this summer as many of the Euro Zone countries have been shown to be in financial difficulties. Maybe people will begin to realize that fiat currencies of any stripe will not stand up to normal, mixed economy political processes. The dollar became strong, i.e., higher priced against the Euro, for a while because the dollar again looked like the strongest, safest currency. That view will fade. So the Chinese, to use them as the example because they have the biggest hoard, are sitting on vast sums of dollars, some of which are “invested” in U.S. government debt, a little of which is invested in other countries, both real assets and government debt, and some of which is sitting as reserves, as gold would sit. If and when the dollar falls, the value of these massive holdings will fall, which would not be good for the Chinese economy. Thus, the Chinese are walking a tight rope, trying to keep the dollar from a death dive, which also means their currency at a lower price, and make small moves to reduce their dependency on the dollar. Everyone is watching them. They have to be careful.

Which also means that they are confused by the U.S. political leaders constant demands that they increase the value of their currency. The Chinese realize to some extent the consequences of that action. They can only be astounded by the U.S. politicians. Those fine people, the Congressional leaders don’t seem to have much understanding of international economics (not surprisingly, since they don’t have much understanding of domestic economics, either). They do understand that the jobs issue plays very well in this country. They see that demanding that the Chinese buy more U.S. stuff there might be more U.S. jobs, and play it for all they can. Real consequences are far out weighted by political appearance. They can always blame someone else for the unexpected consequence.

But if the Chinese, and the other Asian countries begin spending those dollars on U.S. goods, we begin to see those made up dollars running after the few goods we have purchased and prices begin to rise, interest rates begin to rise, and the quiet calm that we have had, a quiet calm in which we have been able to have good fight for our lives, will end and who knows what could happen then.

Update: Treasury Attempt to Control Retirement Assets

The Labor and Treasury Departments have announced hearings that are the next step in their attempt to control and probably divert individual retirement savings. These hearings are next week.

There is nothing new here particularly. The wondrous workings of bureaucracy require many obtuse steps working toward making recommendations to the legislature. The hearings are that next step. At this point the apparent goal is still just requiring employers of offer a lifetime income option as part of a 401(k) plan. A lifetime income option that is not a pension is called an annuity. (Most non-government pensions are effected by the employer buying an annuity for the pensioner.) The step to government seizing or controlling retirement savings is contained in the justification for beginning this process: retirees are not adequately managing their retirement assets to provide for their entire lives. (I won’t go into the entire discussion on this point. For that discussion see my original post and this for background .)

The only comments of the government’s interest in this issue that I have seen is in the far right blogs and in a couple liberal think tanks. The right has immediately jumped to the conclusion that the government intends to grab the assets, which isn’t irrational. They also propose that this is BO’s idea, which I tended to endorse in my earlier posts. I wonder. I think that the Labor Department is quite capable of thinking this one up on its own.

The blogs ranting about this issue have included IRA’s as threatened by the Labor Department’s intensions. At this time IRA’s have not been mentioned.

The interesting question now is will this process continue if the Dems lose control of the legislature this November. I bet that it will. I think that the process has just as good a chance of succeeding with the Republicans. They are just as paternalistic as the Dems, just as eager to show concern for people’s retirement. After all, Social Security reform was a Republican “achievement”.

The initial legislative step would be to pass a law requiring employers with standard 401(k) plans to offer a lifetime income option. At that point the lifetime income option would probably be an annuity provided by an insurance company. The bad thing about this law would be the added expense and waste of time needed to meet the requirements, plus the fact that the new option would add another bad element for the participant from which to choose.

Soon, the Labor Dept. would discover that few people were choosing to put their money in the annuities, and that, in the opinion of the Labor Dept. the population was still failing to adequately manage their retirement funds. It would also be determined that the insurance company annuities were too expensive (dirty capitalist, profit mongering, insurance companies). Something more would need to be done. Then they would start the hearing, etc. process over again to come up with the need for the government to offer the annuity and that at least a certain percentage of retirement fund contributions be placed in that annuity.

There we are, a large new source of government financing.

(I edited the title because people were getting the wrong idea.  The Treasury & Labor Depts will want to control where you can put the money and fund the U.S. debt, but there is no evidence that their intent is to steal those assets.)

Combating Altruism

In a previous blog posting I argued that it is important for the supporters of capitalism, freedom, and reason to know what capitalism is from the economics standpoint and to understand the economy in which they live. If we want people to support it, we must be able to explain it. That position is still a correct one. Many supporters of capitalism do not know the economics and certainly do not know what is happening in today’s economy.

Recently I reread Ayn Rand’s 1960 speech, “Faith and Force: The Destroyers of the Modern World” and had the opportunity to deeply examine chapters 2-5 of Andrew Bernstein’s The Capitalist Manifesto. These writings have again underscored to me the importance of the moral arguments. The central point in both works regarding the morality of the altruist is that altruism is independent of reality, of reason. Pointing out the necessarily disastrous consequences of the policies proposed by an altruist will not influence his commitment to the irrational.

In recognizing that position, we must realize that the altruist politician and policy maker and their supporters are somewhat immune to our direct, pointed statements about the consequences of those policies. That group of people includes many of their supporters in the electorate. We must recognize that that we need to attack their own closely held beliefs. I don’t think that they will be influenced by our arguments, but they will be harder for them to ignore, perhaps. They seem to be able to ignore nearly anything.

More useful will be making those attacks when arguing publicly, i.e., articles, editorials, and lte. I don’t think that a philosophical discussion of altruism is helpful. Generally there isn’t enough word count to do so and readers might not stay with you. I propose that instead we use the consequences, that is, we spell out the “human” cost of these policies in the context of morality: We talk of the suffering of countless Americans. We talk of the loss of the ability to acquire the items that make our lives better or even comfortable. We talk of the potential of depression and hardship. We talk of the recent dire recession we are living in. We talk of human sacrifice. We spell out how these policies are going to make life harder and worse. We talk of how the politicians do not care about the consequences of their policies, only that they fit with their morality of human suffering. We talk about the disconnect between reality and their policies. But these consequences must be discussed within a moral perspective. The discussion has to focus on specific consequences of the morality being used. It seemed to me that the accusation that ObamaCare included “Death Panels” was effective. It carried the idea and the real meaning of ObamaCare. This type of tactic needs to be carried further. We must not mince words or be “nice” or polite. Being nice and polite allows the evader wiggle room.

Clarity and the relation between the altruist’s policies and the welfare of the reader are what are important. We don’t talk about their rational self-interest, but the values that are rational that they have, for example, their families. We talk about how these anti-man policies are going to impact their families. How their hopes for their futures and the futures of their children are being destroyed by the specific, destructive policies being offered and made into law. We talk about how their children will not have their parents around as long as they expected. We talk about how their children are not going to have a better life. We talk about their children’s shorter life span. We talk about their children’s not receiving the inheritance either expected. We talk about the lower standard of living that their children will have. We talk about the fact that this will be the first American generation to leave their children worse off.

Offer real images to the reader contrary to their general morality, i.e., what are they going to say to their child when they complain about their illness and the government run health plan won’t help? Are they going to tell them that morally it is good for them to suffer? Are they going to give them stories about helping poor people when in fact they themselves are now poor and there is no help for them? Being too nebulous will not bring the point home. Talking about paying back the current debt will not be useful mainly because these predictions in the past have not had an impact on the current economy (at least that people have realized).

What we must keep in mind is that the explicit or implicit holder of the morality of altruism does not regard consequences of his actions as pertinent. That is why Congress rarely examines the consequences of the laws it passes. Consequences are not important. What is important is taking actions consistent with altruism, “helping others”, sacrificing for the good of others. We know that this cannot be practiced successfully. We know that individuals cannot and do not practice this morality personally. They just support their government’s actions. What can only break through this compartmentalization by concretizing the consequences they will connect to themselves. Using concretization in a directed manner, utilizing our reader’s own values will help bring the real meaning home.

It will help you to also keep clearly in focus the consequences of failing to stop the direction of the federal government. Too often we are seeing the future in terms of economic consequences, i.e., reduced standard of living and opportunity. We are thinking in terms of loss of being able to state our views. These images are too peaceful and mild. This is the most complex, interconnected economy in mankind’s history. It will not be able to maintain its cohesion if several parts come apart. In Atlas, the trains stopped. Food could not reach New York City. Food shipments stopped. In our world, oil deliveries will be imperiled and food deliveries will become undependable. What will happen in our cities if food is not readily available, not to mention other requirements of living? Digital systems will prove to be fragile. As the economy comes apart, so will the society. There is much more anger, fear, and resentment today than during the 1930’s, for example. We have riots today over court cases. Just think about food riots. Just think of a lack of food and starvation in American cities. This is what human sacrifice looks like in practice. That’s right, human sacrifice. Not ritual sacrifice, but the human sacrifice that results from the government’s practice of altruism.

I am not trying to be alarmist here. I am not projecting a crash within the next few months, or even the next couple of years. The election coming up will give us a good indication of what our immediate future holds. I am only saying that our arguments must keep in mind the fact that holders of the morality of altruism (or the god oriented version) do not consider consequences to be an issue. To be effective and meet the threat, we must shape our arguments accordingly. The moral context and the real consequences have to be pared and driven home.

If in the next election we have a Republican Congress, we will then talk about the Christian right and that they have the same mind frame. They are not interested in the welfare of individuals. They are interested in making their god happy. Human happiness doesn’t help. They require suffering, just as the progressives do.

To reduce the role of altruism as the dominant political philosophy and replace it with reason and capitalism, we need to make our arguments as effective as possible.