(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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