CHAOS-ONOMICS: Strangely Attracted to the Truth
Apr 21
chaos-onomics.com
yet truth, which only doth judge itself, teacheth that the inquiry of truth, which is the love-making, or wooing of it, the knowledge of truth, which is the presence of it, and the belief of truth, which is the enjoying of it, is the sovereign good of human nature.
Francis Bacon
I've followed the emergence of Bill O'Reilly on the stage of popular opinion ever since my return to the US in 1999. Over that time his following has even outpaced that of the network itself, which is no small feat. This large and growing following has, as is usually the case in our commercial society, brought him fortune and, in my view, validated his sense of the world to him. While his "No-Spin Zone" purports to present the unvarnished truth, at times his views remind me of the adage, a little knowledge is a dangerous thing. This past weekend, I caught Mr. O'Reilly, who has been known to excoriate Greenspan at any dip in the equity market, basking in the glow of a 'successful' boycott of French goods and advocating similar actions against China and Canada. As illustration of economic balance, let's analyze these policy recommendations of Mr. O'Reilly.
The following excerpts are from his "Talking Points memo":
The most powerful weapon in the world is the U.S. Military machine. And the second most powerful weapon is the American consumer, you. Saddam Hussein now knows about American military power, and France is finding out about your consumer power right now.
As we reported last night, The Factor-led boycott of French products is crushing the French wine and tourist industries, among others, and the Paris business community is not real happy with Jacques Chirac right now.
Americans have the right to buy whatever they want, and Talking Points believes we can use our dollars to influence those who are working against the USA in the war on terror. Take China, for example. The United States needs that country to persuade North Korea to drop the nukes. China provides North Korea with energy and food and can absolutely destroy Kim Jong-Il's government if it wants to.
Americans buy $125 billion worth of Chinese stuff every year, $103 billion more than they buy from us. So, if Americans stop buying Chinese goods, China sinks into economic depression, and the way to encourage China to help stabilize the world is obviously economic.
While the view plays to the chest beating crowd who, having removed Saddam Hussein, feels they can do anything with little or no negative consequences, as economic policy, these boycotts would probably not produce the effects for which Mr. O'Reilly hopes. Yes, it is true that we buy more from China than they buy from us, but in the main, this is due to their goods being cheaper at current exchange rates. Thus, while China would be 'hurt' by such a move, most likely in the form of higher unemployment, another effect which would flow from a China boycott is higher US goods prices. Further, and far more destabilizing, a boycott would stem the flow of funds so key to keeping our equity markets afloat.
In a sense, the $103B gap to which he refers is a loan from the Chinese to America. This loan is 'collateralized', if you will, by the strength of the US$, i.e. the faith that these pieces of paper, or numbers in an account, will prove valuable at some point in the future. So long as we keep taking advantage of China's cheaper labor markets and China keeps accepting our promises to pay in the future, whether in the form of US denominated cash, bond or equity security, our markets will trade higher than they would if a boycott or other adjustment reduced that gap. Indeed, American ability to wage war is dependent, in part, on continued financing of this gap. This is to argue that the ability of the US to borrow production from the world, to the tune of half a trillion $ per annum is the main prop holding US markets aloft.
From a more general perspective, Mr. O'Reilly has touched on the key issue for the global economy. For the past 6 years, each time commerce slowed, US consumers were given bargain basement rates in hopes of inspiring 'growth'. Initially, these rate cuts, and consequent expansions in debt, were sufficient to forestall the impending and necessary rationalization of debt stock to income, or as the Fed calls it, deflation. Now, however, neither fiscal stimulus nor rock bottom rates appear to be effective in keeping the flow of funds sufficient to service the debt. Such is the nature of an economic imbalance. What at first seems a wonderful boon, like a tired pilot popping his first speed pill and thereby extending his ability to fly, becomes a lodestone around the neck. As the tragic bombing of Canadian soldiers by an American pilot on speed attests, accelerators can cloud judgment, eventually costing more than the savings gained by their use.
Of course, just people on speed often need to "crash" to decide on a new course of action, so too do economies on accelerators rarely change direction without nasty consequences. So, I wait for the economic pain to grow intense enough to inspire a change in course. In that regard I agree with Mr. O'Reilly. Let's boycott Chinese goods and get this adjustment started. Waiting will only make the hangover that much worse. |
