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54anickel Donating Member (1000+ posts) Send PM | Profile | Ignore Wed Apr-07-04 08:41 AM
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11. Politics, Jobs, Trade War

big snip>

Look for misguided trade protection coming this autumn. Economic good sense is hardly the likely outcome. Historical accounts from decades past will continue to bend to political opportunism. The obstruction of Chinese imports will lead to importation of similar products from other low-cost Asian sources. After two to three years of severe cost competition, much US mfg has been gutted, with thousands of plants shut down. Advisors cling naively to the notion that jobs can be restored by either currency shifts or trade protection. They will not.

Jobs will not so easily return to our economy if we thwart the Asian flow of finished goods. Instead, we risk very serious retaliation by our Chinese credit masters. A politician who urges blockage of Chinese goods overlooks the consequent reaction by distant leaders in Beijing. The People's Bank of China owns $400 billion in foreign reserves, almost $150 billion of which rests in the form of US Treasury Bonds. The Bank of Japan possesses nearly $700 billion in USTBonds. China is a major ongoing purchaser of US Treasurys. If Chinese leaders are angered by near-sighted and angry trade sanctions, we will feel the impact of either reduced govt & agency bond purchases, or outright selling. Their foreign reserves are at risk due to currency exchange. Diversification away from US$-denominated securities might broaden. The result would be higher interest rates during a fragile and lopsided economic recovery. Our dependence on low interest rates is grim.

The leaders of the United States had better be careful. Frustration over job losses is building to a fever pitch. Voters will continue their appeal to political leaders for action. Their responses are not likely to be successful, because a real solution involves a lengthy recession and cleansing of massive debts. Our entire cost structure must be reduced, which requires a sizeable USDollar devaluation and a closure of the wage gap between the US and Asia. The solution will be painful. Trade protection and its many sanctions are certain to occur. Higher prices are the inevitable result. If Americans are forced to purchase domestic goods, then our rising material costs, higher labor costs, and higher overhead costs can result only in end products at an elevated price. Asian retaliation will come in two ways. They will be less willing to support our credit markets, now the object of truly monstrous subsidies. Thus we face higher interest rates within our entire economy. FOREX markets will join the Asians in USDollar selling, if not gradual abandonment. Thus higher import costs inside American shores. Tariffs will also raise prices for imported goods in direct fashion, but in select product groups.

Curtailment of free trade carries with it horrible geopolitical risks. Higher price levels are but one consequence. Early in the 1930 decade, retaliation raged among nations in trade protection intended to save domestic jobs. They failed, as unemployment rose to 25%. Politics and ignorance drove the process. In just four years, from 1929 to 1932, world trade went into a tailspin by fully two thirds. History teaches us that armed conflict (i.e. military war) often follows in the wake of trade war gone amok. When nations do not obtain what they need through peaceful negotiation, they tend to seize by force. Amidst the chaos, old scores are settled. The most famous quote to this effect is from Frederic Bastiat, who posed "When goods are not allowed to cross borders, armies will."

Much hubbub has been made of "comparative advantage" and how the United States benefits in evolutionary leapfrog fashion from round after round of creative destruction. The message rings hollow that in free global trade, both sides win. As the work of John Maynard Keynes has been misapplied (ignoring debt), so now the work of David Ricardo is being misinterpreted. Expect the entire topic of job export and its misconstrued benefits to become a raging explosive issue. Our national leaders are flying blind. The crew of US economic experts in our nation is the most inept in the entire world. They extend micro-economics to a national level, and deem it valid macro-economic analysis. Macro-economics is our enormous defect among the brain trust. A clear view is missing of the minefield ahead, as insufficient income will be available to service rapidly growing debt. See a Richard Benson article, wherein he justifies how we have passed the point of no return. Discussion of these important topics will be continued in next newsletter issues.

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