Free Trade

The topic of free trade has been kicked about by the political class for so many decades that I think that most have lost sight of the reality a long time ago. It certainly must behoove an individual recently unemployed to have a very personal sense of loss when his job for life disappears over to China. How can he not be upset and how can he not associate that loss with free trade? He would never be able to see it as a byproduct of an increasingly efficient economy, because he got left out.

Let me explain how clear that is. The labor component of a manufactured good is somewhere between five to twenty percent of the end selling price to the American consumer. Most of the eighty to ninety percent of that consumer dollar is consumed by taxes to the consumer’s government and the balance for the task of selling and delivering it to the consumer.

Much more of the consumer dollar is spent on this latter activity then on the actual manufacturing. Therefore it is hugely advantageous to the consumer to ship production to low cost labor regions because it expands his real purchasing power. This has happened to us. We now buy almost all ordinary consumer goods from low cost manufacturing sources. Thus while the average pay packet in North America has stagnated for thirty years, our purchasing power has grown hugely.

As you may have guessed, the consumer budget is not going to climb swiftly just because someone slaps a duty on some necessary goods. It will be diverted instead to a different mix of goods and in the process the unemployment will be diverted also. This will always hit high cost goods first (ours). In short, you cannot win at this game but you can put up with it and encourage high end production that is far less vulnerable to been turned into a common commodity.

The huge trade growth that occurred because of NAFTA should always be remembered. If it is not growing now it is because of politically generated beggar thy neighbor trade inhibitors. And the irony there is that they mostly transfer the problem internally rather than externally. China does not lose a dime when we fight among ourselves.

This type of political economic thinking produced millions of unemployed back in the thirties. And the inverse of the NAFTA story is exactly the same thing. It will be a massive reduction in mutual markets and massive systemic unemployment taking years to recover from. It will certainly mean a crippling of the North American auto industry at its nadir.

We have the current row over tires. The solution is a timed duty that allows the industry to adjust to a very new competitive environment that must include Chinese owned manufacturing and anti dumping provisions which are now overdue anyway.

We are suffering from an unpleasant flaw (among many) of capitalism as presently practiced. That is it is way too easy to use capital itself to eliminate competition rather that foster competition.

After all, you dump tires for two years and drive out the local competition. When they are gone, you have all the market and the original price structure in your pocket. Yes Virginia, mature markets need to be regulated in a timed manner that prevents such simple minded abuse of capital. The easy way is to insist that capital is available on the same terms to all market participants. That way, if you decide to double capacity in a stagnate market, then so does you competitor. Something like that would keep everyone sober. Anyway, this must be thought about.

Ron Paul and the Great Contraction

Ron Paul has made himself the spokesman of the gold crowd that has maintained a minority position on gold since the War of Independence. He has through his dynamic candidacy brought another generation into that world. It makes enticing reading.

Unfortunately, it is all dangerous rubbish and capable of driving catastrophic financial policy. We today are in the midst of a global credit contraction. That means a global deflation of pricing structures. Or haven’t you noticed?

The first wave is always in commodity prices. Commodities are now busted and the only one with a sustainable upside is oil because we have lost supply elasticity and we are waiting now for the production shoe to drop with disastrous repercussions.

The fact is that the global financial system lent trillions of dollars and now needs to get a lot of it repaid in order to cover accelerating losses, while at the same time shore up their balance sheets to maintain the good loans that they have.

The money that is been printed today on fabulous terms is to replace all this credit that has disappeared.

Let me make this as clear as humanly possible, so that you can understand just how ugly this all is.

If the auto industry defaults on and never pays back fifty billion dollars (not actually very likely) the American financial industry will eat the loss as a capital loss. It will then be unable to lend 500 billion to a trillion dollars to the rest of us, nicely wiping out any benefit from the so called mortgage bailout. You wonder why the industry is hoarding cash and taking its time to reenter the lending market? You would too.

And yes we still have not solved the mortgage problem in the one way that it might be solved as I posted a couple of months ago. Liquidation pressures continue to mount and no bank can solve it alone and the liquidation blowout will continue to destroy bank capital.

The Great Depression wiped out the banking system for exactly the same reason. The Great Contractor is loose and has not been visibly halted yet. We are hoping that the prompt injection of massive liquidity will stem the tide and I believe it should. In this case it must start soon with a major uptick in the volume of house sales to reassure frightened bankers.

Right now, the fed is struggling to prevent a sharp reduction in the real money supply.

The gold crowd’s prescriptions would take us back to a dollar a day, little credit and a financial depression every decade that would keep the population impoverished. I think I will pass.

And yes the auto industry needs to go through the rigors of chapter 11 in order to break their labour contracts so that their costs can match those of their onshore competitors. Otherwise we will revisit this particular disaster and the industry will be in far worse shape and be able to save far fewer jobs. Remember British Leyland.


Ron Paul: Bailouts Will 'Destroy the Dollar'

Thursday, December 11, 2008 12:26 PM

By: Jim Meyers

U.S. Representative and former presidential candidate Ron Paul tells Newsmax that bailouts of U.S. corporations are “bad morally” — and says current federal economic policies “will literally destroy the dollar.”

He also insists that the use of “counterfeit” paper money instead of a gold-backed currency is “insane,” and declares it is “foolhardy” for Barack Obama to propose national health care under the present economic conditions.

The Texas legislator ran for president as the Libertarian candidate in 1988, and sought the Republican presidential nomination beginning in March 2007. He withdrew this past June and did not endorse GOP candidate John McCain.

Asked by Newsmax’s Ashley Martella about the bailouts of Wall Street, the banking industry and apparently the Big Three automakers, Paul — a member of the House Financial Services Committee — said:

“I think we’re going in the wrong direction and I strongly oppose it.

“I find it to be bad economics. I find it bad morally to transfer wealth from one group of people to another no matter what kind of problems they have…

“Lo and behold, the Constitution doesn’t talk much about allowing Congress to go and bail out their friends. So I oppose it from practical and well as philosophic reasons.”

Martella noted that some of the big problems automakers face are union-related, such as commitments to life-long pensions and health care for retired workers.

Paul said the automakers are “sort of trapped because they’ve signed these contracts…

“These commitments, which had been signed onto by the pressure of the unions, which were backed up by law, [have] brought them to their knees.

“If we take the funds from those people who have been more efficient to prop this system up, we’ll never see the correction…

“Excessive labor costs are very very important but the business people, the people who run the car companies, won’t dare say so, or won’t say very much, because they can’t offend the liberals in Congress who are the ones who are going to bail them out.”

Paul said his fellow legislators are “working real hard, we’re working overtime, maybe this weekend we’re going to work real hard to prolong the agony and not allow the market to correct the imbalances.”

Paul has called for abandoning the Federal Reserve System and returning the nation to a gold and silver standard. He told Newsmax why.

“It’s not so much that gold is perfect, it’s that paper is insane. To give politicians and bureaucrats and secret bankers the license to counterfeit money and create money out of thin air is destined to fail, and it has. That’s why we’ve had this financial bubble develop since the linkage to gold has been severed in 1971…

“Now they’re trying desperately to print and spend, but the bubble was overwhelming and the bursting of this bubble is something they can’t contain. It would never happen under a gold standard because there would be no legal right for our central bank to spend money and create money out of thin air. The arrogance of it all is unbelievable.

“If we continue doing what we’re doing now, we will literally destroy the dollar.”

Paul, who is a physician, was critical of Obama’s stated aim of developing a national health care plan. He said: “He has no money. Where is he going to get the money?

“He has no intention of bringing our troops home. He’s talked a little about Iraq, but we’re maintaining a world empire to the tune of a trillion dollars a year. He wants more troops in Afghanistan … You have to save some money someplace.

“So if you want to help some people who are sick, we’ll have to change our foreign policy and bring our troops home.

“I believe that all goods and services in a free society should be by voluntary means and never through government coercion. The more the government’s involved, the more money they spend, and the more they pretend they’re helping, it does but one thing — it pushes prices up.

“When Obama says something like that, somebody in the media someday would have to say, ‘Where are you going to get the money?’ If he’s going to steal it from someone, who is he going to steal from? The producers are hurting. The corporations are bankrupt. There’s no funding.

“Instead of coming back to a balanced budget and living within our means, to propose national health care, and not attack our empire, is just foolhardy and will seal our fate.”

An opponent of the Patriot Act, Paul was asked if he would give any credit to the measure for keeping Americans safe since 9/11.

“No, not really,” he said. “All it’s done is regulate people. We’ve regulated the American people. The people are less free, but the fact that we haven’t had an attack is probably just a coincidence.”

Paul was especially popular on college campuses during his most recent presidential campaign. Martella asked: “Did you sort of feel like a rock star when you spoke to college students?”

Paul responded: “No, not really. I’m pleased that they’re interested in the issue of freedom and individual responsibility, so I’m delighted with that, but I guess the rock star status goes to Obama and others.”