The Impact of Savings on Trade

[West Dundee Hawkeye]

Even though I received my BA in Econ from the Univ of Iowa many years ago, I did not know this until a couple of years ago. It turns out that countries with high SAVINGS rates run trade surpluses.

My wife is from Oelwein and since I met her, it has dropped in size by 40%. A book was written about Oelwein called Methland. I always thought is was such a tragedy that there were no jobs in Oelwein along with many other towns in the Midwest like Rockford & Flint.

If you look at manufacturing jobs, they have fallen for decades

Manufacturing Jobs

The loss of manufacturing jobs correlates with consistent trade deficits.

Trade Deficit

It turns out the Current Account (Trade Balance) is = to the Financial Account. This is stated in the formula:

Savings-Investment=Exports-Imports

Current Account=Financial Account

It turns out budget deficits are DIS-SAVINGS. Recently, both political parties have ran up large budget deficits that increase the National Debt.

National Debt

The consistent trade deficits & loss of manufacturing jobs has made real (after inflation) median income flat for years.

Median Income

So how do you help the people of Oelwein, Flint & Rockford? The US needs policies to increase SAVINGS like reducing budget deficits by increasing taxes and/or cutting spending.

 

[Hawkize!!]

Michael Pettis is a China expect and has done some very interesting work on China-US trade incl. trade deficits and what causes savings rates in both economies.

"once we understand that the United States has little control over its domestic savings rate, we will see that the U.S. fiscal deficit is not a cause of the U.S. trade deficit as much as it is a consequence."

Should the United States Run a Trade Surplus?

carnegieendowment.org

 

[Sooner-Be-Dead]

Federal spending gets disproportionately spent on rural states, and particularly rural areas. Certainly the stimulus payments helped poor, rural areas more per capita.

Global trade (US trade deficits) have hurt those towns the most, no doubt. Hard to compete against cheap international labor.

 

[LuciousBDragon]

Even though I received my BA in Econ from the Univ of Iowa many years ago, I did not know this until a couple of years ago. It turns out that countries with high SAVINGS rates run trade surpluses.

My wife is from Oelwein and since I met her, it has dropped in size by 40%. A book was written about Oelwein called Methland. I always thought is was such a tragedy that there were no jobs in Oelwein along with many other towns in the Midwest like Rockford & Flint.

If you look at manufacturing jobs, they have fallen for decades

Manufacturing Jobs

The loss of manufacturing jobs correlates with consistent trade deficits.

Trade Deficit

It turns out the Current Account (Trade Balance) is = to the Financial Account. This is stated in the formula:

Savings-Investment=Exports-Imports

Current Account=Financial Account

It turns out budget deficits are DIS-SAVINGS. Recently, both political parties have ran up large budget deficits that increase the National Debt.

National Debt

The consistent trade deficits & loss of manufacturing jobs has made real (after inflation) median income flat for years.

Median Income

So how do you help the people of Oelwein, Flint & Rockford? The US needs policies to increase SAVINGS like reducing budget deficits by increasing taxes and/or cutting spending.

Interesting. So you’re saying MORE money is a good thing huh?

 

[West Dundee Hawkeye]

Michael Pettis is a China expect and has done some very interesting work on China-US trade incl. trade deficits and what causes savings rates in both economies.

"once we understand that the United States has little control over its domestic savings rate, we will see that the U.S. fiscal deficit is not a cause of the U.S. trade deficit as much as it is a consequence."

Should the United States Run a Trade Surplus?

carnegieendowment.org

Thank you for your reply. I think the US has control over the budget deficit/surplus. Clinton, Truman & Ike all had 3 budget surpluses. This was a conscious effort on their part.

If the US runs a budget surplus, they will auction off fewer Treasuries (Bills, Notes & Bonds). This will result in fewer Treasuries being bought by foreigners. Since the existing supply of Treasuries will be smaller, the interest rate paid will be lower.

Germany consistently has a higher SAVINGS rate than the US and consistently runs a trade surplus.

German Trade Surplus

German Savings Rate

 

[Hawkize!!]

Thank you for your reply. I think the US has control over the budget deficit/surplus. Clinton, Truman & Ike all had 3 budget surpluses. This was a conscious effort on their part.

If the US runs a budget surplus, they will auction off fewer Treasuries (Bills, Notes & Bonds). This will result in fewer Treasuries being bought by foreigners. Since the existing supply of Treasuries will be smaller, the interest rate paid will be lower.

Germany consistently has a higher SAVINGS rate than the US and consistently runs a trade surplus.

German Trade Surplus

German Savings Rate

I am suggesting that the causality runs the other way. Germany is a bad example because the Mark (or the Euro) isn't a reserve currency.

In the case of the US, since the currency is the reserve currency, there is a great deal of demand for the USD outside the US. This artificially drives up the USD exchange rate. So, the US doesn't pay a price for printing excess currency (or issuing excess UST bills, which is really alternative USD issuance).

So, in our case, the formulas you've discussed above needn't balance. Someone has historically always been willing to take the excess cash we print ... our 'exorbitant privilege' as reserve currency issuer.

We only pay the piper if this ceases to be the case.

Stanley Druckenmiller says the Fed is endangering the dollar's global reserve status

Fed policies could end up threatening the long-term health of the U.S. dollar, investing magnate Stanley Druckenmiller told CNBC.

www.cnbc.com

 

[West Dundee Hawkeye]

I am suggesting that the causality runs the other way. Germany is a bad example because the Mark (or the Euro) isn't a reserve currency.

In the case of the US, since the currency is the reserve currency, there is a great deal of demand for the USD outside the US. This artificially drives up the USD exchange rate. So, the US doesn't pay a price for printing excess currency (or issuing excess UST bills, which is really alternative USD issuance).

So, in our case, the formulas you've discussed above needn't balance. Someone has historically always been willing to take the excess cash we print ... our 'exorbitant privilege' as reserve currency issuer.

We only pay the piper if this ceases to be the case.

Stanley Druckenmiller says the Fed is endangering the dollar's global reserve status

Fed policies could end up threatening the long-term health of the U.S. dollar, investing magnate Stanley Druckenmiller told CNBC.

www.cnbc.com

Thank you for your reply.

I agree with you that the $ is the Reserve Currency of the world but that additional demand for the $ as a result of that, only exacerbates the need to run a larger SAVINGS surplus relative to Investment as the foreign flow of capital to own the $ gives the US excess $ for consumption. This excess consumption leads to excess imports. The excess imports/consumption effect on the econ. are ok for the well off but totally screw the working class.

 

[lucas80]

The US does not do enough to reward being thrifty and a saver. Speculation and reckless behavior is rewarded too much.

 

[Hawkize!!]

Thank you for your reply.

I agree with you that the $ is the Reserve Currency of the world but that additional demand for the $ as a result of that, only exacerbates the need to run a larger SAVINGS surplus relative to Investment as the foreign flow of capital to own the $ gives the US excess $ for consumption. This excess consumption leads to excess imports. The excess imports/consumption effect on the econ. are ok for the well off but totally screw the working class.

Speaking of screwing the working class ... calling what we need to fund dollar demand 'savings' is not necessarily valid - 'savings' assumes money redirected away from consumption towards investment. In normal economies, any other way to fund investment will create inflation. Again, the US is special ... it can simply print ' infinite dollars' that target them to financial asset valuations (look up Cantillion Effect) that are then sent off to feed dollar demand abroad, without necessarily touching the domestic 'real' economy. 'Inflation' is kept in check through importation of cheap goods.

So, the small capital investor class benefits from the strong dollar to cheaply buy investment assets abroad. The large 'labor' class, while benefiting from stable prices (cheap imports / deflationary technology) also sees its savings rate drop due to depressed wages.

 

[West Dundee Hawkeye]

Speaking of screwing the working class ... calling what we need to fund dollar demand 'savings' is not necessarily valid - 'savings' assumes money redirected away from consumption towards investment. In normal economies, any other way to fund investment will create inflation. Again, the US is special ... it can simply print ' infinite dollars' that target them to financial asset valuations (look up Cantillion Effect) that are then sent off to feed dollar demand abroad, without necessarily touching the domestic 'real' economy. 'Inflation' is kept in check through importation of cheap goods.

So, the small capital investor class benefits from the strong dollar to cheaply buy investment assets abroad. The large 'labor' class, while benefiting from stable prices (cheap imports / deflationary technology) also sees its savings rate drop due to depressed wages.

Thanks again for your reply.

Respectfully, I disagree with your premise that encouraging SAVINGS increases inflation. Actually, it has just the opposite effect. Encouraging SAVINGS reduces consumption which reduces demand.

You correctly state that a strong $ keeps inflation low but it also reduces exports and that hurts labor.

In the long run, it is in the investor class best interest to help labor to maintain stability.

 

[Hawkize!!]

Thanks again for your reply.

Respectfully, I disagree with your premise that encouraging SAVINGS increases inflation. Actually, it has just the opposite effect. Encouraging SAVINGS reduces consumption which reduces demand.

You correctly state that a strong $ keeps inflation low but it also reduces exports and that hurts labor.

In the long run, it is in the investor class best interest to help labor to maintain stability.

That's not what I said.

There is no need to encourage savings in the US. We can effectively print infinite 'savings', which are then captured by the 'capital class' through Fed monetary policy (again, Cantillion Effect) and exported. In this scenario, a strong dollar is only useful in that it (a) increases US capital's purchase power abroad and (b) suppresses inflation domestically through cheap imports.

In the long run, as long as the US continues as reserve currency ... the labor that needs to be maintained with stability is whatever global labor pool services US capital (which is very conspicuously NOT US labor).

For incentives of US labor and US capital to be aligned again, one quick (painful) path would be for the USD to cease its role as global reserve currency. Surely, of course, Druckenmiller is not a fan.

Edit: There's quite a bit of rethink going on re: these topics on the Twitterverse. Michael Green is a very very smart thinker of these issues as well ... this is a good recent interview.

 

[West Dundee Hawkeye]

That's not what I said.

There is no need to encourage savings in the US. We can effectively print infinite 'savings', which are then captured by the 'capital class' through Fed monetary policy (again, Cantillion Effect) and exported. In this scenario, a strong dollar is only useful in that it (a) increases US capital's purchase power abroad and (b) suppresses inflation domestically through cheap imports.

In the long run, as long as the US continues as reserve currency ... the labor that needs to be maintained with stability is whatever global labor pool services US capital (which is very conspicuously NOT US labor).

For incentives of US labor and US capital to be aligned again, one quick (painful) path would be for the USD to cease its role as global reserve currency. Surely, of course, Druckenmiller is not a fan.

Edit: There's quite a bit of rethink going on re: these topics on the Twitterverse. Michael Green is a very very smart thinker of these issues as well ... this is a good recent interview.

View embedded media

Sorry for the misunderstanding. We are going to have to agree to disagree. Printing infinite money through QE to the tune of $120 billion a month is/was done to create the wealth effect per Bernanke & help the investor class & hopefully help the econ. by increasing demand/consumption after Lehman went under.

As you correctly point out, a strong $ just needs a global working class to function, not a US working class. I am advocating helping the US working class (the Oelwein's, Flint, etc).

The idea behind increasing SAVINGS is reducing consumption. Not coming up with more $ for both. The US econ is about 70% consumption & 30% SAVINGS. China last I saw, was just the opposite with 30% consumption. Germany, the 3rd biggest econ in world is about 50% consumption.

 

[hwk23]

Canada was in a similar situation in the 90's although not as bad as our current situation. They balanced their budget by cutting government spending and slightly raising taxes (on a 6 to 1 basis). The economy actually improved in the process.

 

[cfbfan23]

So how do you help the people of Oelwein, Flint & Rockford?

More meth, maybe?

 

[West Dundee Hawkeye]

Canada was in a similar situation in the 90's although not as bad as our current situation. They balanced their budget by cutting government spending and slightly raising taxes (on a 6 to 1 basis). The economy actually improved in the process.

View embedded media

Interesting. Thanks for posting.

 

[ft254]

Interesting. Thanks for posting.

Your theory is correct but singularly dimensional. No amount of capital and reserves is relevant if labor costs deter production. Bottom line: producers will go where labor costs are cheap/er/est.

 

[West Dundee Hawkeye]

Your theory is correct but singularly dimensional. No amount of capital and reserves is relevant if labor costs deter production. Bottom line: producers will go where labor costs are cheap/er/est.

Bingo! You are correct.

A nation with a high SAVINGS rate vs. a nation with a high CONSUMPTION rate has lower prices.

Think of the Law of Supply & Demand. Less demand=lower prices.

 

[Hawk_4shur]

Interesting discussion. I'll try to add some logs to the fire.

The US has lost manufacturing jobs due to labor costs. We've priced ourselves out of the global manufacturing market because it's simply too expensive to make things like clothing, shoes and TV's in the US. Is there a way to reverse that in the global economy?

But, certainly you can't do that any time soon - maybe never. So, given the present situation, what is the problem with a trade deficit? Pre-Covid, the US was close to full employment and hopefully can return to that. As long as someone is buying the goods and services we produce at full employment, why is a trade deficit a bad thing?

The pre-Covid federal deficit was $1 trillion with total revenue around $3.5 trillion and spending around $4.5 trillion. It's like a family making $140,000 per year and spending $180,000. If the US could figure out how to increase revenue by 12% and reduce spending by 12% they could balance the budget. But neither party seems interested in it. How long can we sustain these trillion dollar deficits?

We are a nation of consumers. How can a government that needs people to spend money to survive going to encourage savings more than they already have? IRA's and 401k's are available to all workers, but how many people actually maximize these opportunities? How many don't participate at all?

 

[nolesincebirth]

Our current fiscal policies discourage savings, per se. They encourage investment but discourage “savings” in the sense that the purchasing power of the dollar is decreasing. Just saving a dollar is a bad idea.

 

[West Dundee Hawkeye]

Interesting discussion. I'll try to add some logs to the fire.

The US has lost manufacturing jobs due to labor costs. We've priced ourselves out of the global manufacturing market because it's simply too expensive to make things like clothing, shoes and TV's in the US. Is there a way to reverse that in the global economy?

But, certainly you can't do that any time soon - maybe never. So, given the present situation, what is the problem with a trade deficit? Pre-Covid, the US was close to full employment and hopefully can return to that. As long as someone is buying the goods and services we produce at full employment, why is a trade deficit a bad thing?

The pre-Covid federal deficit was $1 trillion with total revenue around $3.5 trillion and spending around $4.5 trillion. It's like a family making $140,000 per year and spending $180,000. If the US could figure out how to increase revenue by 12% and reduce spending by 12% they could balance the budget. But neither party seems interested in it. How long can we sustain these trillion dollar deficits?

We are a nation of consumers. How can a government that needs people to spend money to survive going to encourage savings more than they already have? IRA's and 401k's are available to all workers, but how many people actually maximize these opportunities? How many don't participate at all?

Think of the average test results of the ACT for the USA. I think a perfect score is 36. My kids had some friends in high school who all had a 4.0 GPA or better and who all got ACT scores in the 30's. Many of these kids had most or all of their college paid for at schools like Illinois, Michigan and Northwestern.

They also knew several kids who were close to flunking out and who got a 12 on their ACT. None of these kids went to college. What are these kids supposed to do for a job?

My wife is from Oelwein, Iowa. They wrote a book about it called Methland. Since I have known my wife the population has declined by 50%. Why? Lack of jobs after the railroad closed.

The former mayor of Chicago, Rahm Emanuel, said the best social program is a job. Look at all of the crime in Chicago. Their are no jobs for these kids. There was an article a few years ago in the Trib that 44% of males in the City of Chicago between 21-25 did not have a job or were in school.

Manufacturing jobs have traditionally paid better than service jobs. How are these young kids supposed to get married and raise a family on a service job income?

The Left lives in this dream world where if kids just go to college, they can all become pathologist. The Right just wants profits and will outsource the jobs.

Another problem is the manufacturing supply chains will leave the country and move to countries like China that at best are not our friend and at worst they are our enemy, who could shut down shipments to the US at any time.

I am a big fan of Truman, Ike and Clinton. Each of them balanced the budget 3 times. Biden needs to follow their policies and balance the budget to increase Savings to increase Exports to help the Working Class.

 

[soybean]

The US does not do enough to reward being thrifty and a saver. Speculation and reckless behavior is rewarded too much.

What steps can "The US" take to reward being thrifty and a saver?

 

[Hawk_4shur]

I am a big fan of Truman, Ike and Clinton. Each of them balanced the budget 3 times. Biden needs to follow their policies and balance the budget to increase Savings to increase Exports to help the Working Class.

I try to keep up with global economics and come of the comments in this thread, but I will admit I don't understand the connection between these 3 things -

Balance the budget
Increase savings
Increase exports

I agree they are all important.

They also knew several kids who were close to flunking out and who got a 12 on their ACT. None of these kids went to college. What are these kids supposed to do for a job?

I am disappointed with our K-12 education. Let's say for simplicity that 1/3 excel because they want to. They are smart ambitious kids. Another 1/3 manages to get through it and are either smart enough to get into college or have enough other skills to get a decent job. The last 1/3 has no interest in the classes they are offered, has no ability or interest in going to college and don't learn any other skills to help them later in life.

I wish all kids were smart enough or engaged enough to get into the top 2/3, but they aren't. How do we provide life skils? Trade skills? How do we get them more engaged in school?

I wish I knew.

 

[Pepperman]

The US does not do enough to reward being thrifty and a saver. Speculation and reckless behavior is rewarded too much.

I was pleasantly surprised to agree here.

Our current fiscal policies discourage savings, per se. They encourage investment but discourage “savings” in the sense that the purchasing power of the dollar is decreasing. Just saving a dollar is a bad idea.

What if you save that “dollar” by investing it in overseas markets and instruments not denominated in USD?

What steps can "The US" take to reward being thrifty and a saver?

Stop encouraging consumption. Stop encouraging artificially low rates. Stop double taxing dividends and capital gains. Stop offering such a cushy social safety net.

START teaching kids about compound interest and the dangers of being in debt (which also compounds in some cases, particularly for those who use credit cards or payday loans).

 

[West Dundee Hawkeye]

I try to keep up with global economics and come of the comments in this thread, but I will admit I don't understand the connection between these 3 things -

Balance the budget
Increase savings
Increase exports

I agree they are all important.



I am disappointed with our K-12 education. Let's say for simplicity that 1/3 excel because they want to. They are smart ambitious kids. Another 1/3 manages to get through it and are either smart enough to get into college or have enough other skills to get a decent job. The last 1/3 has no interest in the classes they are offered, has no ability or interest in going to college and don't learn any other skills to help them later in life.

I wish all kids were smart enough or engaged enough to get into the top 2/3, but they aren't. How do we provide life skils? Trade skills? How do we get them more engaged in school?

I wish I knew.

Current Account = Financial Account

This link is attached to an article on the importance of SAVINGS and how it impacts EXPORTS. The formula is:

Savings-Investment=Exports-Imports.

Trade is a component of GDP as GDP=Consumption+Government+Investment+(Trade Balance).

The Trade Balance or Current Account is Exports-Imports. For the US this is negative and has been for years.

The idea behind SAVINGS is when you or I get $1, we can spend (consume) it or not (save) or spend some percentage of it.

If a country has higher imports than exports, the question is how are those paid for? First someone uses SAVINGS then someone has to borrow. The US does this by issuing Treasuries from 30 days-30 years. These Treasuries can be bought by people in the US or foreigners. So for example, Japan has over $1 trillion in US Treasuries which means they have lent the US over $1 trillion.

The US does not issue Treasuries specifically for the purchase of imports but to afford tax cuts, gov. spending & gov rebates. This money is then used by the public to buy imports like a car from Honda. So the US borrows from in this case, Japan, and uses that $ to buy imports from Japan.

The US budget is paid for by taxes and borrowing. When the US runs a budget deficit it has to issue the above discussed Treasuries. This additional borrowing is a dis-savings.

When running a budget deficit, public saving is negative. As a result, national savings decrease, so do the supply of loanable funds. As the supply of loanable funds decreases, liquidity in the economy tightens. This restriction in liquidity can and is offset by borrowing abroad or from QE by the Fed.

The US is borrowing $ by issuing Treasuries to help the US afford the current level of consumption. This consumption pushes up prices. this makes our widgets less competitive. By pushing up prices, it also pushes up interest rates which make the $ go higher relative to its major trading partners which makes the widgets even less competitive.

A great way to increase SAVINGS is to balance the budget through tax hikes & spending decreases. Since Savings-Investment=Exports-Imports, this will increase Exports. People will have less money to consume.

Hope that helps.

 

[Hawk_4shur]

Current Account = Financial Account

This link is attached to an article on the importance of SAVINGS and how it impacts EXPORTS. The formula is:

Savings-Investment=Exports-Imports.

Trade is a component of GDP as GDP=Consumption+Government+Investment+(Trade Balance).

The Trade Balance or Current Account is Exports-Imports. For the US this is negative and has been for years.

The idea behind SAVINGS is when you or I get $1, we can spend (consume) it or not (save) or spend some percentage of it.

If a country has higher imports than exports, the question is how are those paid for? First someone uses SAVINGS then someone has to borrow. The US does this by issuing Treasuries from 30 days-30 years. These Treasuries can be bought by people in the US or foreigners. So for example, Japan has over $1 trillion in US Treasuries which means they have lent the US over $1 trillion.

The US does not issue Treasuries specifically for the purchase of imports but to afford tax cuts, gov. spending & gov rebates. This money is then used by the public to buy imports like a car from Honda. So the US borrows from in this case, Japan, and uses that $ to buy imports from Japan.

The US budget is paid for by taxes and borrowing. When the US runs a budget deficit it has to issue the above discussed Treasuries. This additional borrowing is a dis-savings.

When running a budget deficit, public saving is negative. As a result, national savings decrease, so do the supply of loanable funds. As the supply of loanable funds decreases, liquidity in the economy tightens. This restriction in liquidity can and is offset by borrowing abroad or from QE by the Fed.

The US is borrowing $ by issuing Treasuries to help the US afford the current level of consumption. This consumption pushes up prices. this makes our widgets less competitive. By pushing up prices, it also pushes up interest rates which make the $ go higher relative to its major trading partners which makes the widgets even less competitive.

A great way to increase SAVINGS is to balance the budget through tax hikes & spending decreases. Since Savings-Investment=Exports-Imports, this will increase Exports. People will have less money to consume.

Hope that helps.

I believe that to be completely accurate and most likely an excellent explanation.

But, I still don't get it. My bad.

 

[artradley]

A great way to increase SAVINGS is to balance the budget through tax hikes & spending decreases. Since Savings-Investment=Exports-Imports, this will increase Exports. People will have less money to consume.

Hope that helps.

Mainly that’s a great way to destroy the economy.

 

[West Dundee Hawkeye]

I believe that to be completely accurate and most likely an excellent explanation.

But, I still don't get it. My bad.

The Current Account measures flow of stuff and the Financial Account measures flow of cash. They have to be in balance.

 

[onlyTheObvious]

Federal spending gets disproportionately spent on rural states, and particularly rural areas. Certainly the stimulus payments helped poor, rural areas more per capita.

Global trade (US trade deficits) have hurt those towns the most, no doubt. Hard to compete against cheap international labor.

Is that true if you take out the billions given to farmers? That money goes to a select few.

 

[Hawkize!!]

Interesting discussion. I'll try to add some logs to the fire.

The US has lost manufacturing jobs due to labor costs. We've priced ourselves out of the global manufacturing market because it's simply too expensive to make things like clothing, shoes and TV's in the US. Is there a way to reverse that in the global economy?

But, certainly you can't do that any time soon - maybe never. So, given the present situation, what is the problem with a trade deficit? Pre-Covid, the US was close to full employment and hopefully can return to that. As long as someone is buying the goods and services we produce at full employment, why is a trade deficit a bad thing?

The pre-Covid federal deficit was $1 trillion with total revenue around $3.5 trillion and spending around $4.5 trillion. It's like a family making $140,000 per year and spending $180,000. If the US could figure out how to increase revenue by 12% and reduce spending by 12% they could balance the budget. But neither party seems interested in it. How long can we sustain these trillion dollar deficits?

We are a nation of consumers. How can a government that needs people to spend money to survive going to encourage savings more than they already have? IRA's and 401k's are available to all workers, but how many people actually maximize these opportunities? How many don't participate at all?

As someone said it, "the US is the Saudi Arabia of money". Our 'elites' have convinced us that we are a nation of consumers, like somehow that is normal. This only works as long as those among us with accumulated capital (think top 10%) are able to export our capital to other places to produce goods and maximize ROC, so that we can keep the other 90% in servitude. And this only works for those with capital to export.

While we were at near full employment pre-Covid, anyone digging into the numbers has known that for decades the quality of jobs has been declining and the ability to accumulate capital has eroded. America is home the largest number of billionaires on the planet. It is also home to the most emaciated masses in the OECD. This cannot sustain.

Consider ... we are sending our deficit (about 1/2 trillion of it each year) to China. China takes these dollars and lends it to the world under 'BRI' and uses it to buy and hoard commodities, defaulting their debt and assuming 99 year leases on their assets and building up their military. We then use what's left of our domestic savings to arm our military to protect us from the adversary we helped arm ... all so that we can continue to export our dollars and extort our poor.

What's more ... our global supply chain are all routed through China now ... so it's not as if we can quickly switch our production from China, to say Vietnam or India, at scale for some time. Doesn't help that we've dismantled our basic industries like shipbuilding and exported the shipyards to China as well.

Our elites (in both parties) have sold us down the river ... people in Methland get it intuitively, though they may not yet understand exactly how.

 

[Hawkize!!]

Mainly that’s a great way to destroy the economy.

The deficit hawks always turn out in force anytime we start discussing fiscal programs to support the bottom half. SMH.

 

[Hawkize!!]

I believe that to be completely accurate and most likely an excellent explanation.

But, I still don't get it. My bad.

You don't get it because it isn't how it works anymore. He's discussing a hard money environment. The US doesn't live in this universe. Heck, nobody lives in this universe. I'd recommend writings by Stephanie Kelton and Warren Mosler on Modern Monetary Theory.

IMPORTANT: Remember, while the left describes it as a solution ... it really isn't. It's best seen as a descriptive (rather than prescriptive) exploration of where we are going.

What is Modern Monetary Theory? Understanding the alternative economic theory that's becoming more mainstream

Modern Monetary Theory is an unconventional economic theory that states a government can create more money as the issuer of its own currency.

www.businessinsider.com

 

[Sooner-Be-Dead]

Is that true if you take out the billions given to farmers? That money goes to a select few.

For reference, farm subsidies are in the $10-50B range per year (it got out of hand the last few years) whereas the stimulus payments were a over a trillion $.


Edit: Lot of ag companies got free PPP money and didn't really need it.

 

[Hawkize!!]

Think of the average test results of the ACT for the USA. I think a perfect score is 36. My kids had some friends in high school who all had a 4.0 GPA or better and who all got ACT scores in the 30's. Many of these kids had most or all of their college paid for at schools like Illinois, Michigan and Northwestern.

They also knew several kids who were close to flunking out and who got a 12 on their ACT. None of these kids went to college. What are these kids supposed to do for a job?

My wife is from Oelwein, Iowa. They wrote a book about it called Methland. Since I have known my wife the population has declined by 50%. Why? Lack of jobs after the railroad closed.

The former mayor of Chicago, Rahm Emanuel, said the best social program is a job. Look at all of the crime in Chicago. Their are no jobs for these kids. There was an article a few years ago in the Trib that 44% of males in the City of Chicago between 21-25 did not have a job or were in school.

Manufacturing jobs have traditionally paid better than service jobs. How are these young kids supposed to get married and raise a family on a service job income?

The Left lives in this dream world where if kids just go to college, they can all become pathologist. The Right just wants profits and will outsource the jobs.

Another problem is the manufacturing supply chains will leave the country and move to countries like China that at best are not our friend and at worst they are our enemy, who could shut down shipments to the US at any time.

I am a big fan of Truman, Ike and Clinton. Each of them balanced the budget 3 times. Biden needs to follow their policies and balance the budget to increase Savings to increase Exports to help the Working Class.

"the best social program is a job" is the most pernicious myth still prevalent on the left (including our current POTUS). There's nothing gratifying or life-enriching about being a crappy burger flipper or raking garbage.

The best social program is empowering people to reach for the best versions of themselves ... accomplished through a program that provides all our people with (a) food security, (b) healthcare and (c) educational opportunities.

- I haven't yet found a better way to do this yet than Medicare for all + some basic UBI tied to the poverty rate.

- Education is already done (except for the signaling mechanism of a fancy school name on our resume) ... my middle school kids are already accessing college-level courses in areas of their interest (music, game design) on Coursera for $60 a month.

 

[Hawk_4shur]

As someone said it, "the US is the Saudi Arabia of money". Our 'elites' have convinced us that we are a nation of consumers, like somehow that is normal. This only works as long as those among us with accumulated capital (think top 10%) are able to export our capital to other places to produce goods and maximize ROC, so that we can keep the other 90% in servitude. And this only works for those with capital to export.

While we were at near full employment pre-Covid, anyone digging into the numbers has known that for decades the quality of jobs has been declining and the ability to accumulate capital has eroded. America is home the largest number of billionaires on the planet. It is also home to the most emaciated masses in the OECD. This cannot sustain.

Consider ... we are sending our deficit (about 1/2 trillion of it each year) to China. China takes these dollars and lends it to the world under 'BRI' and uses it to buy and hoard commodities, defaulting their debt and assuming 99 year leases on their assets and building up their military. We then use what's left of our domestic savings to arm our military to protect us from the adversary we helped arm ... all so that we can continue to export our dollars and extort our poor.

What's more ... our global supply chain are all routed through China now ... so it's not as if we can quickly switch our production from China, to say Vietnam or India, at scale for some time. Doesn't help that we've dismantled our basic industries like shipbuilding and exported the shipyards to China as well.

Our elites (in both parties) have sold us down the river ... people in Methland get it intuitively, though they may not yet understand exactly how.

So, let's take a tiny example. LG "makes" washing machines. They are a Korean company. Most or all of their washing machines are made in China.

Please ignore the accuracy of these numbers.

So, LG in Korea has a machine made in China that costs LG $500 (all of the materials needed for the washing machine are also made in China) and has it shipped to a warehouse in the US. Best Buy buys the machine for their store and pays LG $750. I walk into a Best Buy and buy the machine for $1,000.

So, China has $500 to pay for workers, equipment, plant, etc and has a $50 profit.

LG has $250 to pay workers, equipment, plant, etc in the US and Korea. So, Korea makes a profit of $25 and the US company makes a profit of $25.

Best Buy has $250 to pay workers, equipment, stores, etc. So, they make a profit of $50.

I paid $1,000 and it paid for costs and profits in the US, Korea and China.

Now, LG could decide to make those washing machines in the US, but because of labor, material and facilities high cost in the US that washing machine would have cost me $1,500. So, I decide to buy a Panasonic for $1,000.

I get that if washing machines were made in the US it would provide a lot of good jobs. But, the high cost of doing so sends LG to China.

So, my transaction created a trade deficit with China and Korea. China collects a tax on the $50 in profit so they get $10. They also collect another $2 from the income tax on the workers and $3 from the companies that make the materials for the machine.

China then makes $7.5 billion in revenue on the $500 billion of trade surplus they have.

Again, ignoring the accuracy of the numbers, is this what you are talking about?

And, what can be done about it?

 

[Hawkize!!]

So, let's take a tiny example. LG "makes" washing machines. They are a Korean company. Most or all of their washing machines are made in China.

Please ignore the accuracy of these numbers.

So, LG in Korea has a machine made in China that costs LG $500 (all of the materials needed for the washing machine are also made in China) and has it shipped to a warehouse in the US. Best Buy buys the machine for their store and pays LG $750. I walk into a Best Buy and buy the machine for $1,000.

So, China has $500 to pay for workers, equipment, plant, etc and has a $50 profit.

LG has $250 to pay workers, equipment, plant, etc in the US and Korea. So, Korea makes a profit of $25 and the US company makes a profit of $25.

Best Buy has $250 to pay workers, equipment, stores, etc. So, they make a profit of $50.

I paid $1,000 and it paid for costs and profits in the US, Korea and China.

Now, LG could decide to make those washing machines in the US, but because of labor, material and facilities high cost in the US that washing machine would have cost me $1,500. So, I decide to buy a Panasonic for $1,000.

I get that if washing machines were made in the US it would provide a lot of good jobs. But, the high cost of doing so sends LG to China.

So, my transaction created a trade deficit with China and Korea. China collects a tax on the $50 in profit so they get $10. They also collect another $2 from the income tax on the workers and $3 from the companies that make the materials for the machine.

China then makes $7.5 billion in revenue on the $500 billion of trade surplus they have.

Again, ignoring the accuracy of the numbers, is this what you are talking about?

And, what can be done about it?

Sure ... let's play this out. The rub is that of the $500 that goes to China, a vast majority the money that goes to the workers has them operating in an economy where washing machines cost $500. And, the Chinese workers have steady manufacturing jobs that pay them less than what they could make in the US, but on a PPP basis ... they're better off than they were before the job landed up there.

As for LG, consider their P/L ... cost of goods $500, S&H $100, margin $150 (20% sounds about right). Best Buy ... same. Now, the jobs that are created in the US (Korea is a better story than the US) are gig jobs (truck driver, retail shopfloor type jobs) that are very low skill. So, while their wages are depressed, they still need a washing machine ... and are paying $1,000 for it. In the meantime, everything we think of as 'margin' ($150+$50+$150) is likely going to pay capital. It's highly likely that a lot of is going to someone in the US. But the problem isn't who's doing ok ... it's who isn't.

If you were to look at this in terms of Pareto efficiency, net net the system is better off. But the only one screwed is the US worker ... he / she makes less, spends more, can't save and therefore doesn't benefit from the booming capital markets.

What can we do about this? Many people smarter than me believe it may be time to unwind the US' status as reserve currency ... because global demand for the USD keeps US monetary policy loose while keeping the USD stronger than it should be (which is really the reason why Chinese workers are cheaper than US workers).

This isn't the first time this is happening ... look up the Plaza Accord. The last time, we were playing with friends (Germany, Japan etc.). This time, don't expect the Chinese to come to the table to help us out.

 

[Hawk_4shur]

What can we do about this? Many people smarter than me believe it may be time to unwind the US' status as reserve currency ... because global demand for the USD keeps US monetary policy loose while keeping the USD stronger than it should be (which is really the reason why Chinese workers are cheaper than US workers).

Is that even possible?

 

[Hawkize!!]

Is that even possible?

US GDP as a percent of global GDP has dropped to 15% while the USD is still used in 70% of all global transactions. Is it not only possible ... it's inevitable. Of course, it'll continue to be used in global trade, but expect its usage to shrink over time. China / Russia are already de-dollarizing their reserves and (as possible) their trade interactions.

While the rest of the world is steeply invested in the dollar system (see Turkey and its troubles right now ... #SwapLines) ... nobody is particularly HAPPY with the dollar system anymore. At a minimum, everyone will breathe a lot easier if the US loses its control of the SWIFT system ... its primary weapon in enforcing global sanctions.

If we thought Obama overused sanctions as a tool ... Trump unilaterally turned it into a WMD (Iran Sanctions, Russia etc.) and shredded the global consensus on permitting US control over global finance.

 

[West Dundee Hawkeye]

The deficit hawks always turn out in force anytime we start discussing fiscal programs to support the bottom half. SMH.

I have always been a fiscal hawk. Put me in the camp with Truman, Ike & Clinton. I am not a Trump screw the working class Republican. I am a we all do our part to balance the budget and that means top tax rates at 92% like under Truman & Ike.

With QE going on the Capital Gains tax rate should also be at 90% for the top.

 

[West Dundee Hawkeye]

You don't get it because it isn't how it works anymore. He's discussing a hard money environment. The US doesn't live in this universe. Heck, nobody lives in this universe. I'd recommend writings by Stephanie Kelton and Warren Mosler on Modern Monetary Theory.

IMPORTANT: Remember, while the left describes it as a solution ... it really isn't. It's best seen as a descriptive (rather than prescriptive) exploration of where we are going.

What is Modern Monetary Theory? Understanding the alternative economic theory that's becoming more mainstream

Modern Monetary Theory is an unconventional economic theory that states a government can create more money as the issuer of its own currency.

www.businessinsider.com

Thank you for your reply. Respectfully, I disagree with MMT.

MMT would turn a country into the Weimar Republic. People would need wheel barrows of money to buy a loaf of bread.

 

[West Dundee Hawkeye]

Sure ... let's play this out. The rub is that of the $500 that goes to China, a vast majority the money that goes to the workers has them operating in an economy where washing machines cost $500. And, the Chinese workers have steady manufacturing jobs that pay them less than what they could make in the US, but on a PPP basis ... they're better off than they were before the job landed up there.

As for LG, consider their P/L ... cost of goods $500, S&H $100, margin $150 (20% sounds about right). Best Buy ... same. Now, the jobs that are created in the US (Korea is a better story than the US) are gig jobs (truck driver, retail shopfloor type jobs) that are very low skill. So, while their wages are depressed, they still need a washing machine ... and are paying $1,000 for it. In the meantime, everything we think of as 'margin' ($150+$50+$150) is likely going to pay capital. It's highly likely that a lot of is going to someone in the US. But the problem isn't who's doing ok ... it's who isn't.

If you were to look at this in terms of Pareto efficiency, net net the system is better off. But the only one screwed is the US worker ... he / she makes less, spends more, can't save and therefore doesn't benefit from the booming capital markets.

What can we do about this? Many people smarter than me believe it may be time to unwind the US' status as reserve currency ... because global demand for the USD keeps US monetary policy loose while keeping the USD stronger than it should be (which is really the reason why Chinese workers are cheaper than US workers).

This isn't the first time this is happening ... look up the Plaza Accord. The last time, we were playing with friends (Germany, Japan etc.). This time, don't expect the Chinese to come to the table to help us out.

Being the Reserve currency of the world is not something the US had to apply for. It just happened as the UK went bankrupt after WW2.

The rest of the world's business model is to sell stuff to the US. If the US starts trying to dramatically weaken the $, the rest of the world would do the same thing with their currencies and their would be hyperinflation.

Two years after the Plaza Accord was the Louvre Accord which ended the weakening of the $.

It is not easy and nobody wants to hear it but the way to lose weight is to increase exercise and/or cut caloric intake. That is the same with a countries currency. The hard work is to raise taxes and/or cut spending like Bill Clinton did. The challenge is to cut price levels and interest rates without subsidizing the rich.