China Wants International Supervision of U.S. Economy

April 19, 2009

http://www.reuters.com/article/newsOne/idUSPEK33230620090418

If you’ve followed this blog, you know that one of the negative consequences of our trade deficit that I’ve repeatedly harped on is that with ownership comes control.  Our trade deficit is financed by a sell-off of American assets, both public – in the form of treasuries – and private – in the form of corporate stocks and bonds.  With ownership comes control of those assets – both in the form of actual control of our corporations and in the form of influence on public policy. 

The link provided above takes you to an article reporting on a speech by Chinese Premier Wen Jiabao in which he calls for international supervision of America’s economy:

“We should strengthen the supervision of the economic policies of the main reserve currency economies and push forward the establishment of a diversified international monetary system,” he said in his opening address to the Boao Forum for Asia, held annually in the Chinese island province of Hainan.

It was the second time this month that China has made such an appeal, following President Hu Jintao’s call at the London G20 summit earlier this month for the International Monetary Fund to strengthen its oversight of reserve currency-issuing economies.

No doubt, some better supervision of our economy is in order, but not from the global community.  Constitutional amendments that mandate a balance of trade (See “28th Amendment to the Constitution of the United States“) or even a balanced budget would be a good start.  But restoring America’s economy to health isn’t what Jiabao has in mind.  His only interests are that the U.S. not adopt any protectionist trade measures and that the value of its dollar-denominated reserves be preserved. 

Evidence of such international control of U.S. policy is already manifesting itself.  Obama went to the G20 with one goal in mind – to get the European Union to boost its own economies with stimulus plans similar to what he had recently enacted.  He got none of it.  Instead, Europe got a boost from the International Monetary Fund and America got the bill. 

During his confirmation hearing, Treasury Secretary Tim Geithner said that China was manipulating its currency, a move that would open the door to tariffs, restoring a balance of trade with China.  But now that the economic realities of being literally owned by the Chinese have settled in, he now refuses to label them as such, fearing the consequences of China dumping its mountain of U.S. treasuries. 

Though still a neophyte clinging to the apron strings of the World Trade Organization, China has become an economic know-it-all, believing that a decade of being lavished with American wealth through dumb trade policy has made them some sort of economic experts qualified to lecture the U.S., like a freshman quarterback swaggering onto the field and telling the coach how to run the team.  The situation would be comical were it not such a pathetic spectacle for the U.S. 

What Jiabao needs is a swift kick in the ass, a healthy dose of gratitude for America’s role in pulling his economy out of the third world cesspool and a hefty tariff bill for any future exports.  After a decade of balanced trade with the U.S., then let’s evaluate which economy might need some supervision.


Global Economy Locked in Schizophrenic Tug-of-War

March 31, 2009

The global economy is locked in an unprecedented tug of war of ideologies, between those commited to propping up the failed free trade model and those who recognize the role of the global trade imbalance in collapsing the economy.  The following linked article is a perfect example of the former contingent.

http://www.reuters.com/article/topNews/idUSTRE52U1YY20090331

The World Bank, led by Robert Zoellick, has announced a paltry $50 billion program aimed at restoring global trade.  Such a feeble attempt is laughable but not surprising, given that Zeollick, America’s Trade Representative from 2001 to 2005, was completely ineffective  and presided over the worst run-up of the U.S. trade deficit in history. 

But the following is an example of new thinking that is emerging.  It seems that the International Monetary Fund sees global trade transitioning to a reduced level and, in some cases, vanishing altogether.

http://www.reuters.com/article/ousiv/idUSTRE52T2D420090330

Marek Belka, director of the IMF’s European department, said … some export-dependent countries would need to find other sources of business when the dust settled.

“What we are seeing now is the sheer implosion of international trade. I think it’s transitory.

Belka said that if the downturn caused U.S. consumers to save more of their money, and buy fewer goods from abroad, exporters around the world would feel the pinch.

“There will be less trade between the United States and China, … there will be less trade everywhere,” Belka said.

“We have to be prepared in our trade policies to look inside and in our immediate neighborhood,” he told the U.N. Economic Commission for Europe meeting.

“I think that domestic economy and intra-regional integration will play a larger role than before. We should not count on global trade to such an extent as we are counting now.”

I believe it’s this new thinking that Obama is counting on to help the U.S. restore a balance of trade.  But I also believe it’s naive to expect it to work.  You can be sure that if customers walk into a Toyota, Hyundai or Mercedes dealership tomorrow or next year, they’ll be just as eager as ever to sell that customer a new car.  Walmart will be just as eager to maximize profits by offering cheap products from China.  Drug companies will be just as eager to maximize profits by taking advantage of tax breaks in Ireland.  Nothing is going to change by itself.  If that’s what Obama thinks will happen, he’ll be sorely disappointed.

At the same time, there’s a schizophrenic approach to the dollar.  Foreign holders are worried about their dollar-denominated investments, like treasuries, but can’t unload them out of fear of driving down the dollar, eroding their export market.  The administration would like a weak dollar to help restore a balance of trade, but fears the resulting rise in oil prices and the prospect of rampant inflation. 

The outcome of this tug of war is clear – the U.S. will move toward a balance of trade.  Whether it happens sooner or later, or whether it’s done through some kind of global cooperation or through the imposition of tariffs or other protectionist measures by the U.S. remains to be seen.  Regardless of whether or not economists and world leaders ever come to understand the root cause of the imbalance in global trade that collapsed the economy, most now understand that such an imbalance can’t be tolerated forever.


IMF Chief Concerned by U.S. Trade Deficit

July 9, 2008

http://www.reuters.com/article/ousiv/idUSTKM00296220080709

IMF (International Monetary Fund) chief Dominique Strauss-Kahn today, while expressing concern about the deepening global financial crisis, also took note of the role of the trade deficit in the demise of America’s economy. Of course, he would never suggest that America reduce its imports and produce more domestically, since that would drag down the parasitic economies that feed on America’s trade naivete. Rather, he suggested that America needs to export more. In other words, the world’s parasites – those grossly overpopulated nations that are dependent on exports to sustain their bloated labor forces – need to start buying more American products.

… the United States needs to boost net exports to offset weakening domestic demand, Strauss-Kahn said …

It ain’t gonna happen! They don’t have the capacity to consume even their own domestic productive capacity. How will they start consuming more from America?

And now one of the world’s leading economists is scrambling to explain why America’s trade deficit hasn’t responded to the plunging dollar, contrary to their predictions.

… Strauss-Kahn said a competitive exchange rate was not the only driver of exports.

“Prices are important, of course, but quality, service and other things that go with exports are more and more important,” he said. “It’s not only a simple mechanical question of the exchange rate.”

Anyone who understands the new economic theory I’ve proposed in Five Short Blasts would be amused at economists’ disillusionment at the failure of their theories about trade and exchange rates. Of course the trade deficit isn’t responding to the falling dollar. The trade deficit has nothing to do with currency valuations! Rather, it’s a result of giving away access to a healthy market and getting no equivalent access in return when we deal with overpopulated nations like Japan, Germany, Korea, China, India and so many others.

America needs to stop blaming others for its problems, acknowledge that the real problem is our own trade policy, and begin taking positive action to achieve the trade results it wants and needs. The time for trusting our trading “partners” to boost demand, stop manipulating currencies and, in general, to keep all of the old promises they’ve been making for decades is long past. It’s time to take our fate into our own hands and implement the population density-indexed tariff structure recommended in Five Short Blasts.