[porc doesn't know the answer, but that usually does not overly inhibit him from responding anyway. One and all may feel to confront him with the actual facts of the matter.]
porx sense is that there are three major loci of the U.S. Trade deficit:
1. East Asia
2. OPEC
3. NAFTA
NAFTA, in particular Mexico, is a situation where U.S. based companies run up the U.S. "trade deficit" by manufacturing components there and then "exporting" them to the U.S. for final assembly and distribution.
This is consistent with the fact that NAFTA was opposed by U.S. unions and Mexican businesses, and supported by U.S. businesses and a lot of Mexican workers.
Also, there are U.S. oil companies that are exploring, extracting, and refining in OPEC nations.
There are other, analogous, anomalies that raise questions as to whether the U.S. trade "deficit" is an accruing of liabilities to other nations, or an accruing of U.S. assets that are located off shore.
For 20 years, porc has been repeating the commonplace orthodoxy that foreign nations will not forever lend the U.S. money to live beyond its means. Now, porc is starting to wonder if this 20 year "lag" between deficits and payback time is really lagging anything at all.
porc recalls that, in the early 80's, Milton Friedman dismissed the notion that the deficit was a problem at all. His position was that if other countries wanted to ship us cars, clothing, oil and electronic goods, in exchange for our pieces of paper, that was all the better for us. At the time, porc went into shock. Was Milton Friedman, of all people, saying that there was a free lunch!
but, porc was not as farsighted as Dr. Friedman. Just as statists realize that statism tends to beget more statism, Dr. Friedman realizes that freeing one market sets in motion forces that tend to free others.
And, as always, this brings us back to (the original) Adam Smith. (Wayne, it's time to cover your ears.) The thesis of Adam Smith's monumental blueprint for economic liberty, The Wealth of Nations (1776), is that the true source of national wealth is not in capturing through trade surpluses the maximum quantity of other countries' currency (and remember, in those days other countries' currency was primarily gold). Instead, Smith boldly asserted in the face of all conventional wisdom (then and now), that the wealth of nations is derived from the efficiency with it employs the capital it has, not the quantity of assets it imports from others.
In accountancy terms, Smith argued that high return on assets and high profit margins derived from local competitive advantage meant greater wealth than mere asset size. (Perhaps, this is the Buffett connection?)
This brings us back to the U.S. trade deficit. Up until now, porc has been focused on the hole in the doughnut, but now he's beginning to shift his attention to the dough. Is there too much U.S. demand for foreign goods (U.S. trade in services are in surplus), or is there too much foreign demand for U.S. dollars? This is not a facetious question. Perhaps the reason why thirty years of persistent dollar export has not led to a devaluation in dollars and inflation in U.S. prices of comparable magnitude is that a relatively free market for foreign imports has forced domestic manufacturers to be more efficient than foreign manufacturers. Hence, rather than exchanging dollars for U.S. goods (and driving up U.S. prices), foreign countries (which are already producing more goods than they can afford to consume), instead use those dollars to purchase assets that earn higher returns than can be earned with local currencies.
And thus, at the dawn of the new millennium, the stage has been set for the final showdown between free markets and statism. Can economies that increase output at any cost, regardless of profit, by using artificially high savings rates and artificially low interest rates drag the U.S. economy down into bankruptcy with them? Or, will this very dynamic drive the U.S. economy to keep ratcheting up efficiency until the last statist barrier to free trade falls?
Here is where the AS comes in. Of course the AS is correct to assert that artificially cheap financing will launch projects that are inefficient, and worse, keep projects afloat that would otherwise sink. But, this would be true at any level of investment: most new products, new movies, new MBA's, etc., fail to justify the capital they consume. But, the winners more than make up the difference -- or there would be no net innovation. The bottom line on efficiency, though, is not how many projects get launched, but whether or not they have to sink or swim, regardless of interest rates.
Thus, in economies that are protected from direct competition from U.S. imports, Central Bank rigging of interest rates removes the last incentive to efficiency. Whereas, in the U.S., though the Fed keeps the lights on and the engine running for the overall economy, companies that fall too far behind in the race with foreign imports get removed from the race track.
porc --''''> |
