At the ‘Casey Daily Despatch’ yesterday, Bill Bonner talked about President-elect Donald Trump's apparent aversion to free trade. But as Bill explained, free trade isn't the problem… our fake money system is. Today, in this guest post he digs deeper into this serious problem…
Wait a minute…
Larry Summers is wrong about almost everything. Could he be right about this?
“Trade Cheaters”
Summers is referring to the paper written by two members of Trump’s trade team: his pick for secretary of commerce, billionaire investor Wilbur Ross, and the director of Trump’s new National Trade Council, Ph.D. economist Peter Navarro.
It calls for a turn away from free trade and toward managed trade – or what is vaguely described as “fair” trade.
Colleague Karim Rahemtulla, on an investment scouting trip in India and China, sends this note:
I met with a factory owner in China. He pays his workers 2,000 renminbi a month, about US$300. He thinks it’s too expensive and is now opening factories in Vietnam and Cambodia, where he can pay half of what he’s paying just outside Shanghai.
In India, I saw two ads in the newspaper. One was for call centre workers with a university degree as a requirement. The pay range was between 9,000 rupees (US$132) and 15,000 rupees (US$220) a month. The other ad was for a chartered accountant with three years’ experience for the Nehru Foundation – a big Indian NGO. The pay for that was 29,000 rupees per month, about US$426.
What kind of “fairness” is it that denies a job to a man in Calcutta to pay a man in San Jose 10 times as much for the same work?
Less than US$200 a month for a job in an Indian call center.
(Source: Karim Rahemtulla)
Ross and Navarro call China a “trade cheater.”
Imagine a town with a bar on every corner. One of these gin joints gets an idea of how to increase his customer base: Offer free drinks!
There’s a “cheater” for sure… and a moral conundrum for a nitwit.
What should a serious drinker do?
Turn up his nose… turn away his face… and take his business to another place in the name of fairness?
No. Not really.
Bad Engineers
If the new Trump administration follows the advice laid out in the Ross-Navarro plan, it will almost certainly lead to disaster.
Of course, there will probably be a disaster anyway. But as it is, you can’t fault the hotel mogul, reality TV star, and president-elect. He didn’t build this railroad; it won’t be his doing when it goes off the rails.
But Ross and Navarro are bad engineers… They’re twisting the tracks!
Specifically, they’re advising the new administration to abandon free trade in favour of crony trade – deals designed to reward or punish certain industries or countries depending on which direction the political winds and lobbyists’ money are blowing.
As far as we know, all human economic progress has been made by a combination of technological advances, specialisation, and an elaboration of the division of labour made possible by property rights, honest money, and free-market capitalism.
Anything that stands in the way of these things – for instance, crony trade deals – reduces output, wealth, and choice.
But alert readers are right: Just as free immigration can be incompatible with a zombie welfare system (it attracts immigrants who become parasites)… free trade can cause problems in a fake financial system (it causes imbalances that threaten the world economy).
Out of Hand
An honest money system has feedback loops that keep things from getting out of hand.
Under the Bretton Woods system, for instance, a nation that imported more than it exported soon found its gold reserves – and therefore its money supply – shrinking. A recession was sure to follow.
But the post-1971 fake money system has no such natural limits.
Americans bought products from overseas with the feds’ fake dollars. Foreigners – particularly the Chinese – took these dollars and used them to build out their economies… and compete with U.S. manufacturers to provide cheap products for credit-fueled U.S. consumers.
And since 1980, when trade with the Middle Kingdom really got going, we have accumulated a trade deficit of about $10 trillion with China.
That is the money that built the factories that now undercut American manufacturers… that created a $225 trillion pile of global dry debt… and that corrupted and corroded the whole world’s financial system.
Still, we wonder if Ross and Navarro really know what they are doing.
They say they aim to reduce America’s trade deficit. That is to say they want the U.S. to export more and import less… thus keeping more dollars at home.
Do they realize that our whole world economy is built on fake money, giant U.S. trade imbalances, and a mountain of debt?
Take away the trade imbalances and the whole system collapses.
The fake dollars go overseas… then come back home and buy U.S. Treasuries, lowering yields. (In the bond market, yields move “inversely” to prices.)
If the fake money stays home, Treasury yields – and the government’s borrowing costs – go up… and the whole shebang comes down. Interest rates rise. Stocks fall. The economy goes into recession… and probably depression. China is devastated. And jobs disappear everywhere… in Mexico, China… and the U.S. Is that what they really want?
Regards,
Bill Bonner is an American author of books and articles on economic and financial subjects, the founder and president of Agora Publishing, co-founder and regular contributor to The Daily Reckoning, and author of a daily financial column,Diary of a Rogue Economist.
He is author and co-author of Financial Reckoning Day: Surviving The Soft Depression of The 21st Century; Empire of Debt; Mobs, Messiahs and Markets and the recent Hormegeddon: How Too Much of a Good Thing Leads to Disaster.
This post originally appeared at the Casey Daily Despatch.
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