Thursday, February 10, 2005

Rant by Proxy: The Trade Deficit

Thems that know me know I tend toward the wonky. Reeeeely wonky. So much so that simple rational thought depresses me. If I'm yang, then my beautiful bride Celine is Bruce Lee foot up your yang yin. Fun loving, sweet, and foxy. She's been around Bono (the U2 guy) four times, of which he's availed himself of a kiss three times. Twice smack-dab on the lips in front of tens of thousands of screaming fans and once a chaste schmooch at the King Center here in Atlanta. One of the lip jobbers made it as a centerfold in USA Today -- full color, and everything. So imagine my surprise when I get a lunchtime email from Celine complaining about Pam Martin's coverage of the trade deficit on Atlanta TV WSB. To paraphrase "the trade deficit is caused by people buying too much oil, wine and cheese."

Huh?

WTF?

Wine and cheese?

Now, I can bring rational analysis to any kook-ass conspiracy theory you might have. Celine speculates that WSB is trying to jump in on the Fuck France! bandwagon. I must concur. Knowing what I know about the NSGSOG, I can tell you that Celine's suspicions are well-founded and non-conspiritorial. Jesus Food Machinery Corporation! I would hope that our (collective, certainly not personal) irrational hatred of the people kind enough to finance our revolution and give us the words Liberty, Equality, and Fraternity (not the leather couch kind, Mr Limbaugh, you dumbass) would be passe. Alas, not on WSB. So Celine was naturally curious about what were some of the top sources? Well, the World Bank (no links now, all from memory) had a big three list containing oil, autos, and consumer electronics. The top five trading partners, in order (if memory serves) was Canada, Mexico, China, Japan, and Germany. France was way down the list, barely a blip. Wine and Cheese French Conspiracy to Topple American Capitalism indeed!

WARNING! Wonkiness Alert!

One of the things that popped up on the way to trade deficit factoids was an open letter to Warren "the stock market thing is now a house of cards built on a foundation of sand by palsied crack addicts so I'm getting into the insurance business" Buffet poo-pooing his consternation about the ever-increasing trade deficit. I provide no link because it's not worth reviewing, but I would like to dispense with some myths. This fool tried to say it didn't matter because the dollar didn't represent debt. The assertion is true enough, but doesn't have a whole hell of a lot to do with the trade deficit. Here's the problem. Americans pay Japanese, say for Hondas. We get Hondas, and they get a bunch of dollars. Dollars can buy you three things: oil, US Treasury notes, and Mayor McFartknockers from the Golden Arches. There is only so much oil that you can buy, process and store. 99 cents will by you a Mayor McFartknocker, and one is more than you should ever have in a lifetime. This leaves you with Treasury notes. Since they've got nothing better to spend it on, why not buy something with which you can buy oil in the future? For Congress, this is a great way to pass the future earnings of your grandchildren along to their friends in the build a boondoggly widget in the name of defense of the homeland, Jesus, and Mom's apple pie bidness and look good doing it. Imagine passing out credit cards with no limit that never have to be repayed to people who stay alive by giving other people money. That's the dynamic. So if any supercalifragilistic dumbass tries to tell you trade deficits don't matter because dollars aren't debt, tell them it's a mite more complicated than that, and they might consider a career in burger flipping, er, sorry, "the fabrication of Mayour McFartKnockers (pseudo-UK spelling can bring a premium!)" rather than anything that requires more than two seconds thought.

5 Comments:

Anonymous Jeff "Your Daddy" Harmon said...

When I hear people crying and moaning about the trade deficit, I usually write a big "I" on their typically large sloping forehead with indelible UV ink so that those of us who wear special UV indicating glasses can be reminded not to listen to anything they might say.

There is no such thing as a trade deficit. If I sell you something which costs $100 bucks, and I buy a pack of gummy bears (large pack) for $60 bucks and I tell you to keep the other $40 and invest it in your business, that is not a deficit. I've purchased a $40 dollar note in your business.

Trade Deficits are really only interesting as an accounting term in that they indicate how many notes were purchased by foreign companies. And this is not unusual because our banking industry is better than most, our currency is more stable than most of our trading partners. If you are in Mexico, where would you rather your money be?

But Jeff Daddy, what happens when they want their money back. Well, they'll get it back, but in the meantime we get to use it and their investment means lower interest rates in this country.

People! Wealth is measured in goods, not money. If the world wants to send us goods and take green paper, or really a promisory note for green paper, that's their problem.

12:37 PM  
Blogger g said...

Ahh... Jeff Harmon! One thing I would never accuse you of is reducing something beyond simpler than it really is, which is the point of my discourse.

Riddle me this: what is it about green pieces of paper that are so very attractive that Honda is willing to swap cars for them?

That would be oil. What if oil is denominated in something other than dollars? Value of the dollar collapses. What would have been a good Real Politik reason to whoop Saddam's butt, rather than the specious pack of lies the proffered by the Administration, would be that by converting a good portion of his reserve currency to Euros and accepting same in exchange for oil threatened the US economy.

People, listen to Jeff. He's right about most things, especially monkeys.

1:10 PM  
Anonymous Jeff "Your Daddy" Harmon said...

But oil is only one commodity in a long line of commodities necessary for happiness and prosperity in the modern world. Certainly, oil is a critical element but medicine and other technologies are also important. Oil producers don't want the oil, they only want the products they will get for the money the sell the oil for. Those products require oil to be produced.

Money supplies just don't collapse because a particular commodity increases or decreases in price or is denominated differently. Money is only an indicator of energy transfer. To that extent, all money supplies are inherently linked together because they both move in the same markets. Exchange rates only change because governments inflate their money supplies to pay for debt. Some, like the Italians, are worse than others. If you normalize different monies to account for supply inflation, you'll find that they are all the same.

People link commodities to the dollar because there are more of them and it is relatively more stable than most other currencies AND because the US can be trusted to not inflate too much (on average we inflate 3 % a year).

Saddam could have linked his oil to Gummy Bears and all people would have done is convert Gummy Bears to dollars. It would have done nothing.

The only thing that makes the dollar collapse is when the normal flow of trade is interrupted, like when Hoover and other world leaders enacted a whole list of tariffs which caused trade to grind to a halt. Ignorami everywhere blamed all kinds of things and it wasn't until the war, when restrictions had to be lifted, that energy flow returned to normal. Economists all over knew this to be the reason which is why the General Agreement on Tariffs and Trade started directly after the war. The interesting thing about trade barriers is that they affect both trading partners. “If goods can't cross borders armies will.”
–Frederic Bastiat

The real politik reason for striking Saddam, IMO, is that he was the best target to send a message to the Arab world. At the time, he represented to the average Arab the hope that they might somehow be able to defeat the US and destroy Israel and thus assuage their feeling of insignificance in the world. However, Arab pain is not caused by Israel or Jewry in general (as Germany once thought). It is caused by their own backward policies and their own adherence to medieval traditions. Arabia is the last bastion of Fascism. It was defeated in Asia and Europe, but the Arabs never let go of this self-absorbed, self-defeating world view. Saddam was head of the Ba'ath movement and the largest figurehead of those people who have no stomach for introspection.

Why do they hate us? Because if they didn't hate the one country that exposes the sickness in their culture, they'd have to hate themselves. And when someone is continually an asshole, you sometimes have to kick their ass until they try something new.

5:39 PM  
Blogger g said...

You're being just a little disingenuous when you say that oil is only one commodity in a long line. You know better than most that oil is unique: highly concentrated, easily exploitable energy. Moreover, our economy right now is completely dependent on oil being cheap and available. It completely underpins our farming and logistics. If you invented, say, cheap cold fusion, it would still take decades to revamp our infrastructure to take advantage of it, and you'd need lots of oil to pull it off. Well, I'm not holding my breath for cold fusion, but that's no reason to start developing a less oil dependent infrastructure while oil is cheap and plentiful.

8:39 AM  
Anonymous Jeff "Your Daddy" Harmon said...

Did I say differently? Not really.

In the long chain of processes that lead from oil to gummy bears, not a single one of them is expendable if you want gummy bears. Oil is the beginning of the chain but no more important than advanced gummy bear technology, without which you do not get gummy bears.

Oil is, after all, a poor substitute for GBs.

The Arabs don't see or wish to see that oil leaves their wells, goes out to various countries where it is mixed with other materials like metals and chemicals and turned into TVs, Cars and those goddammed gummy bears.

The value of oil lies inherently in those processes which convert oil. And those processes all depend upon each other, intertwined in this huge network of energy and material flow.

If the Arabs want to start monkeying around with oil, and you know how I feel about monkeys, then they will hurt themselves as well as others. So if they denominate oil in Euros, it won't do anything because oil will still flow to those processes. The dollar will remain unchanged.

Of course, if they did that, and then nothing happened, it would just add to their feeling of insignificance in the world. Maybe they'd realize that, in actuality, no one really likes them or wants to live like them. That most of the west finds their culture pretty unattractive. Maybe they'll notice even more that the only thing they contribute to the world is terrorism. Japan produces people who invent robots, whereas Saudi Arabia just turns people into robots.

1:37 PM  

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