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Thread: weekend commentary - hmmmmm 'Lets Make Nothing'...

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    Banned Melonie's Avatar
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    Default weekend commentary - hmmmmm 'Lets Make Nothing'...

    (snip)"Let's Make Nothing!

    On the Fox business block airing Saturday January 6th, Dr. John Rutledge of Rutledge Capital stated that America would be better off if we manufactured nothing and imported 100% of our goods from abroad. This is one of the most egregious arguments an economist can make. Having an economy where manufacturing is zero percent of G.D.P. (Currently manufacturing is less than 14% of America's G.D.P.) guarantees two pernicious outcomes. First, our already huge trade deficit would explode, putting greater pressure on the U.S. dollar as we send yet more of our country's wealth into foreign hands. Next, our very sovereignty would be in greater jeopardy as we would find ourselves at the mercy of erstwhile exporting countries; if they one day turned hostile, they could shut off our access to the tangible goods that are necessary for running our national defense and economy.

    Imagine if you and your neighbor entered into a trade agreement in which he agreed to supply all your tangible goods and in return you agreed to send him pieces of paper with numbers on them (dollars) that were only redeemable within your domicile. This would be a grand deal for you as your neighbor toils, producing things of real value while you effortlessly print currency without backing or intrinsic worth. Your neighbor uses the dollars you send him to purchase pieces of your home and contents thereof. Everything appears fine until eventually your neighbor accumulates a concentrated position in your assets and/or you no longer maintain ownership of your possessions. Your neighbor then decides to consume more of his manufactured goods inside his increasingly wealthy household and sell his dollar denominate holdings of your home to the highest bidder. The problem is the market is already saturated with your currency and the value of your pieces of paper and assets plunge.

    Our trade deficit will one day be subject to these same machinations. Our fiat currency system allows for the process to be protracted over many years, allowing some economists and politicians to blissfully proclaim that deficits don't matter. If the U.S dollar was backed by gold reserves the trade deficit would be a self-correcting process, one which would not allow for such imbalances nor the unnaturally low interest rates we see today."(snip)

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    Default Re: weekend commentary - hmmmmm 'Lets Make Nothing'...

    These are the same people who work in the abstract world of derivatives and come up with ideas like options... in short - they are the "academically out-of-touch" in this world and our great worship of anyone with the "many of the almighty dollar" is blinding us to this fact.

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    Default Re: weekend commentary - hmmmmm 'Lets Make Nothing'...

    I don't think the US dollar is in a position to recover from the current trade deficit. It's kind of just too late to catch up now. Personally, I think the US dollar is heading for an inevitable crisis...

    I mean, from a purely logical standpoint, if the US keeps running current deficits, they will have to borrow more and more money. Because foreign funds are finite, it is inevitable that the situation is unsustainable.


    Practically...

    In considering the likely resolution of the unsustainable situation, it is important to note the privileged position of the U.S. dollar as the world’s reserve currency. There will be a tendency for the world to finance large U.S.. trade deficits for too long. Ostensibly, investors in US financial market (bonds) are acting somewhat irrationally, financing the US despite low interest rates - the return is insufficient to compensate for the risk. Alternatively, you could say there are better returns to be made elsewhere (Australia, for example with higher yield on bonds) for about the same risk (not high, yet).

    Asian reserve banks are keeping large amounts of U.S. dollars as foreign currency reservess to sustain their fixed currency regime.

    Countries also recognize the impact upon world economics of the USA. Given the importance of the United States as a foreign export market, it is difficult to imagine that it would be in any country’s economic self-interest to take a step that could potentially precipitate a U.S. economic crisis.

    I believe countries will continue to acquiese to the USA’s huge deficits. Then there will be a shock, likely to be brought about by some military or political conflict and creditors to the U.S. suddenly decide the risk is too great. The writing will suddenly appear on the wall that devaluations and interest rate rises is certain in the short run… and this would cause U.S. bonds to lose value. So they sell dollars for another store of value. Countries will ask for payment upon maturity of bonds, and try to sell the dollars immediately. Nobody will finance new bonds. There will be a ‘run’ on the U.S. currency.

    In a worst case, the U.S. will default on its loans and refuse to pay, based on their military might, leading to armed conflict or a huge worldwide financial crisis as the U.S. economy collapses. A less extreme outcome would be the U.S. finally realizes the creditors won’t privilege the U.S. dollar any more and agrees to large-scale deficit and higher interest rates (to attract the now 'sensible' foreign investors) addressing policies at the cost of a massive economic downturn.

    Of course, I'm totally ignoring the real possibility that one of the big exporters like China might just wake up and say "man, I just don't like Bush. I'm gonna try to cause some damage to the economy". With China's reserves, if it wanted to hurt the US economy it could. Again, right now China would hurt themselves in the process... but who's to say some madman couldn't take charge and say "fuck it let's fuck everyone up"


    LOL @ "let's make nothing". Melonie, what are your thoughts on the state of the ever-growing US deficit? I haven't read this article beyond the snip you posted, but I do teach part of a course @ my university on currency markets

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    Default Re: weekend commentary - hmmmmm 'Lets Make Nothing'...

    LOL @ "let's make nothing". Melonie, what are your thoughts on the state of the ever-growing US deficit?
    I see it boiling down to America having two choices. If the 'powers that be' want to operate at a deficit forever in a scenario of 'let's make nothing', then America truly has to become just a cog in the wheel of a global economy. America would continue to consume products and commodities from other countries, and America would supply financial services, IT infrastructure, leading edge tech research etc. Unfortunately, such a scenario would also truly globalize the 'relative worth' of citizens of all countries with similar skills. This would leave America with tens of millions of low skill residents for whom the American economy had little more to offer than washing dishes, mowing grass, tending counters and cash registers, schlepping boxes etc. at pay rates representing the 'global worth' of those low skills. Similarly, more tens of millions of Americans with intermediate level skills would also find themselves in direct competition with citizens of all countries with similar intermediate skills, at pay rates that represent the 'global worth' of those intermediate skills. It would really only be the 'upper level' players i.e. the investment bankers, LBO dealmakers, stockbrokers, patent holders, lead researchers, corporate officers etc. who offer a UNIQUE service that is not subject to direct global competition. Therefore it would really only be the 'upper level' players whose incomes would benefit from such a scenario.

    On the other hand, if the 'powers that be' want to stop operating at a deficit, in order to truly do this they would need to reintroduce the entire economic 'pie' back into the American economy. By this I mean that America would need to become self-contained again in regard to production and consumption on all levels; a situation which has not existed since the mid 1960's. Doing so would allow those tens of millions of low skill residents to A. have jobs and B. get paid at rates which were decoupled from their actual 'global worth'. Same situation would apply to more tens of millions of medium skill residents. However, in order to sustain the ability to pay 'above global market' wages to low skill and medium skill Americans, two things would be absolutely necessary. The first is the massive transfer of wealth from the 'upper level' players to the low skill residents. The second is the de-facto locking down of the US borders both in terms of human entry as well as in terms of the entry of lower priced foreign produced goods and services.

    There would also be a potential third option available to the 'powers that be' of destroying the capacity of foreign countries to supply products and services for 'export' to America thus crippling the global economy, with the de-facto result being the removal of lower cost foreign competition at its source (rather than blocking it at the US border). This was arguably the true objective and definitely the resulting aftermath of US entry into WW1 and WW2. However, it would appear that between today's US media and today's US political sensibilities that such a third option is no longer a realistic possibility.

    Obviously, at the moment America is experiencing the worst aspects of both options ! The deficit spending i.e. consumption by Americans who do not have the ability to generate sufficient 'global worth' to balance the value of the foreign goods and services that they are consuming, are making up the difference via a slow motion liquidation of assets. This slow motion liquidation is made possible by the continued cooperation of foreign lenders to provide an injection of their surplus 'global worth' into the US banking system that American consumers may then borrow at low interest rates. Americans basically now lack the ability to ever get out of debt to foreign lenders in 'global worth' terms, but seem content to simply forge ahead as long as they are able to keep up with the interest payments (with those very interest payments increasing the earnings of the 'upper level' players i.e. a de-facto reverse transfer of wealth mechanism from the poor to the rich !).

    The 'tin foil hat' crowd is of the opinion that, either by a change in risk evaluation by the foreign lenders or by a change in circumstance affecting the ability of Americans to keep up with the interest payments, today's 'devil's compromise' between American consumers and foreign lenders is going to come to a halt. When that happens, with Americans lacking any source of 'global worth' to actually pay off their debts and avoid foreclosure, the US gov't / Federal Reserve Bank will resort to a legal trick ... rapid devaluation of the US dollar ... such that the dollar denominated debts can be legally paid off with future dollars that are worth much less than the past dollars loaned to Americans by foreigners. Foreign gov'ts will of course try to avoid being legally shafted in this manner, and will move to acquire US assets with their massive piles of reserve dollars before the dollar's value disappears entirely. At the same time, any financial assets (i.e. investments, retirement funds, savings) which have actually been accumulated by Americans with medium skill levels (i.e. the 'middle class') will be devalued right along with the US dollar devaluation.

    The confluence of these two moves will very likely make Thomas Jefferson's warnings a reality.

    ----- "I believe that banking institutions are more dangerous to our liberties than standing armies. Already they have raised up a money aristocracy that has set the government at defiance. This issuing power should be taken from the banks and restored to the people to whom it properly belongs. If the American people ever allow private banks to control the issue of currency, first by inflation, then by deflation, the banks and corporations that will grow up around them will deprive the people of all property until their children will wake up homeless on the continent their fathers conquered. I hope we shall crush in its birth the aristocracy of the moneyed corporations which already dare to challenge our Government to a trial of strength and bid defiance to the laws of our country" Thomas Jefferson, 1791 ------

    It is also very likely to result in the US economic strata rearranging itself into a country of a small percentage of extremely rich and powerful 'upper class' i.e. the bankers, brokers, patent holders, corporate execs, gov't officials etc., and with a large percentage of essentially powerless 'indentured servants' who no longer actually own anything of value. Those 'indentured servants' will then perpetually go throught the motions of spending 100% of their paychecks to pay for rent, food, and interest payments ! This of course would mean the end of the 'American Dream', the end of the US 'middle class', and the evolution of a US economy that very much resembles that of most 'third world' countries.


    Bill Bonner, The Daily Reckoning Commentary, 01/16/07

    “…Most people are not getting rich. Most people are barely making ends meet, because the great boom is a fraud. It does not lift up all boats; it lifts up only the luxury yachts. Why is that ? Because it is an asset-price boom, not an economic boom….”


    Of course, the vast majority of the American public never stops to think about such fundamental economic issues ... they just continue borrowing, spending, and making interest payments, with a long term financial planning horizon focused on next month if not next week !!!

    ~
    Last edited by Melonie; 01-28-2007 at 08:44 AM.

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