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Source link: http://archive.mises.org/4906/the-actual-nature-of-offshoring-and-of-our-balance-of-trade-deficits/

The Actual Nature of Offshoring and of Our Balance of Trade Deficits

April 13, 2006 by

Few issues are more frequently commented on than the shifting of American manufacturing to locations outsides the United States, in order to take advantage of lower foreign wage rates, particularly in Asia. This shifting is what is meant by “offshoring.” With equal or greater frequency lamentations are heard concerning the United States’ chronic excess of imports over exports, i.e., its so-called “unfavorable” balance of trade.

Here’s an example that will help to put both matters in proper perspective.

Assume that an American firm is contemplating the investment of $10 million of capital, to build a factory. Construction materials and the use of construction equipment, along with the machinery to be installed in the factory, will cost $5 million of those $10 million. The remaining $5 million will have to be paid to cover the wages and benefits of 100 American construction workers for a year, at the rate of $50,000 per man.

In an impoverished country in Asia, however, the cost of equally capable construction workers is only $1,000 per man. In other words, a total labor cost of $100 thousand, instead of $5 million. The construction materials, construction equipment, and the machinery for the factory can all be shipped there. To make it simple, let’s ignore the costs of transportation and any other costs associated with set up abroad. Thus, the total cost of constructing the plant in Asia would be just $5.1 million, instead of $10 million. This, of course, is a powerful incentive for building the plant in Asia. And, then, once the plant is built, whatever the number of workers it needs for its operation can be found locally at a comparably small fraction of the cost of employing American workers.

Exactly such considerations explain why a very substantial amount of American manufacturing has moved offshore. It’s just so much cheaper.

Commentators, who are almost invariably critics, see this movement of capital offshore. But strangely, what they do not see is that the process is much more than just a movement of a given amount of capital from one place to another. That much, or, better, that little, is true in terms of monetary value, but in terms of actual physical wealth, and, in this case, physical capital, there is a substantial increase. Being able to obtain for $5.1 million what one would otherwise need to spend $10 million for, makes it possible to buy practically twice as much for the same $10 million. Our firm can build practically two factories in Asia for the price of one in the United States.

An American firm which invested in this way, would be in a position to supply its customers with approximately double the output for the same money, because it conducted its manufacturing operations in Asia rather than in the US. Even if it were the case, as is so often claimed, that displaced American factory workers must end up as mere hamburger flippers, the American economic system would still have this doubled output; plus it would have all the extra hamburgers the displaced factory workers would produce.

This sounds to me like quite an overall gain to the American economic system.

In the nature of the case, the gain enters the American economy in the form of imports. In essence, we’re getting the output of two factories in Asia instead of one in the United States, and the doubled output is coming into our economy in the form of imports. Absurdly, this gain in our wealth is what is called “unfavorable.” It’s certainly not unfavorable to American consumers. The only thing I can imagine that would be more favorable and, at the same time, would be ignorantly denounced as more unfavorable, would be imports simply washing up on our shores for free, but recorded by the customs bureau as having substantial value.

Offshoring has not resulted in a decline in the American economic system but just the opposite. It’s provided the American people with access to vastly increased manufacturing capacity, which is providing much larger quantities of goods at sharply lower prices. And this last is despite substantial inflation of the American money supply.

Thanks to offshoring, we are supplied with shoes and clothing, television sets, computers, CD and DVD players, microwave ovens, and many other goods in unprecedented quantities and at extremely low prices. In the nature of the case, this abundance comes to us in the form of imports.

What is the economic problem in this?

I say, “economic” problem, because I can imagine something arising that could cause a problem. That would be the loss of the offshore factories and the imports they provide, say, as the result of seizure by foreign governments and the inept, chaotic management the governments would impose. That would be a catastrophe.

But it cannot be stressed too strongly, the problem is not in offshoring or in imports; the problem is in anything that would threaten offshoring and the imports it provides.

This article is copyright © 2006, by George Reisman. Permission is hereby granted to reproduce and distribute it electronically and in print, other than as part of a book and provided that mention of the author’s web site www.capitalism.net is included. (Email notification is requested.) All other rights reserved. George Reisman is the author of Capitalism: A Treatise on Economics (Ottawa, Illinois: Jameson Books, 1996) and is Pepperdine University Professor Emeritus of Economics.

{ 39 comments }

David C April 14, 2006 at 2:04 am

Well there is another problem with off shoring. In a normal world we would be getting more wealth by doubling our manufacturing capacity offshore, however we don’t live in a normal world. We live in a world where wealth is denominated in dollars, and the dollars we use have lost half their value in relation to commodities over the last 5 years – so in practice we have gained no extra wealth from off shoring because we are stupid and refuse to use gold as a currency.

Also, in a normal world, the free flow of goods that are allowed to come to the US would be accompanied by a free flow of labor. In an environment where labor is allowed to flow freely, industries would naturally want to build their factories in countries that are more stable, less taxing, and respect property rights more. But, the funny thing is that open immigration dozen’t work well in societies that have a welfare state – because then they can just all come here and get freebies coerced at every one else’s expense. Or, alternatively, we could end up encouraging separate standards that lead to massive class differences and racism – like in France. So once again, we are stupid because we have chosen to lock out immigrants to uphold a welfare state rather then legitimize cheap immigrant labor and have factories and infrastructure.

So the end game is that India with it’s big gold hoards will have real wealth, China will have real infrastructure, and the US/Europe will have neither. Sounds like a nice formula for all satanic geopolitical hell to break loose while we and our political/economic freedoms become a sitting duck. Ironically, all those statist programs coerced at everyone else’s expense will become worthless anyhow. They say, well how will the government pay for my retirement? How will the government pay for my child’s education? How will they pay for my medical care? Only to demand it to the point they get nothing – I am awe struck by the arrogance and stupidity.

Martin Kelly April 14, 2006 at 2:11 am

The author of this piece repeats the usual tropes about offshoring’s net benefits.

Capacity may thus be doubled – do prices reduce accordingly?

Do governments reduce the cost of the social programs with which they burden citizen taxpayers, in order to reflect their reduced earning capacity?

And why is it always assumed that it’s a good and wholesome thing for a wee Chinese lassie to work 16 hours a day for 64 cents an hour? Isn’t she worth more?

Offshoring is the triumph of the rights of capital over the rights, and wishes, of citizens in supposedly ordered, civil societies. Foggy thinking focussed solely upon the economic at the exense of the civic is a form of fascism. Nations are more than economies.

Graeme Bird April 14, 2006 at 3:30 am

“The author of this piece repeats the usual tropes about offshoring’s net benefits.”

No that’s wrong Martin. Where have you seen this particular point made before? An effective doubling of scarce capital in the example given. Not ‘the usual tropes’. But instead the exact opposite. An angle that hasn’t come up before.

Simon M April 14, 2006 at 3:58 am

So the plan is for the Asian workers to accept hamburgers in payment?

What exactly are Asian laborers going to accept in exchange for manufacturing DVD players? America must produce something of value to Asians if it wants this trade to continue in the long term. This is obvious when money is stripped out of the picture.
At the moment though, Asians are willing to accept “dollars” in payment and hold them – take the note, throw it on the pile & go straight back to work. The dollar itself is absolutely useless. The assumption is that these dollars can be used at some later time to go and buy something acutally useful.
This is when the problem arises. If America is not producing enough items of value to Asians – only hamburgers – then Asia will look to buy American capital assets, assuming they’re allowed to… This is a loss of real wealth (insert Mises’ quote about burning your furniture to heat your home).
When you ignore the role of money in the process (or assume a hard commodity currency), the problems of a trade deficit are obvious, both on a personal and a national scale. When fiat currencies are involved, especially hedgemonic ones like the dollar, it becomes much harder to see the underlying picture.
Also complicating the issue is the role of time in the process. This is a fundamental part of Austrian economics. The trade deficit is not causing major problems at the moment because other nations are not currently spending the payments they earn. Do people honestly expect this to continue for the next 5, 10, 20+ years? This trade is an exchange that takes place over time, and so far we’ve only seen the first half of the exchange.

Peter April 14, 2006 at 5:36 am

If by offshoring you could double the number of hamburgers you were eating, how can this be desirable ? In effect this is what has happened to the USA. Getting fatter by working less and eating more. Stage two of offshoring is when the USA closes the factory that makes exercise equipment needed for all the fat people that have been created. Increasing consumption by making goods cheaper is not necessarily desirable if you are accumulating rubbish at “bargain” prices.

Graeme Bird April 14, 2006 at 6:55 am

Peter for goodness sakes:

1. Food production is important.

2. Other production is important.

3. Obesity is an individual issue. And for kids it would be far easier to deal with under free education as opposed to government compelled kid-warehousing.

4. None of the above has anything to do with the Proffessors retrospectively simple yet brilliant point about multiplying the effectiveness of scarce capital resources.

MCLA April 14, 2006 at 7:11 am

“And why is it always assumed that it’s a good and wholesome thing for a wee Chinese lassie to work 16 hours a day for 64 cents an hour?”

It is not assumed that 64 cents an hour is a good and wholesome thing. What is assumed is that’s the best deal she is being offered by anybody. If she had a better, more wholesome deal available she would definitely take it.

“Isn’t she worth more?”

Now, who’s to answer that? Is she worth $5 and hour or $7 an hour? Should she work 40 hours a week or 35 hours a week? I think the only mechanism that can give a reasonably close answer is a free market. And the answer (for the time being) is 64 cents an hour for 16 hours a day.

Cheers!
MCLA

Person April 14, 2006 at 8:07 am

Yeah, free trade is good, but only if you have a free market. Because the market isn’t 100% free, obviously free trade hurts us. [/tired old "socialist" "libertarian" argument]

Person April 14, 2006 at 8:11 am

Peter: Obviously, doubling the potential American “hamburger makers” does not mean hamburger production will double! If the demand isn’t there, those freed up workers will — through the direction of entrepreneurs — end up providing the next highest ranked good.

David White April 14, 2006 at 9:14 am

Further to Peter’s comments regarding the dollar, the global economy is held hostage by this otherwise worthless “reserve currency,” which can accordingly be printed ad infinitum…until it can’t. When that day comes is anybody’s guess, but since the American consumer consumes solely on this basis — i.e., he doesn’t save and produce; he borrows and spends — offshoring is a moot point in that the lower priced goods it results in are offset by the ever-increasing debt required to purchase them.

In other words, it doesn’t matter where you make what you can’t afford, as sooner or later (and it’s already late) you’ve got to pay the piper.

Roger M April 14, 2006 at 9:31 am

Those who think that a gold standard would dramatically change the dynamics of the trade deficit should read Bastiat, who wrote at a time when gold was money. He writes that gold is not wealth; goods and services are wealth. The idea that gold equals wealth is a money illusion. Besides, the US has the largest stash of gold of any country in the world, larger than that of China and India combined. If you don’t believe me, check out the web site of the World Gold Council.

Tom Schofield April 14, 2006 at 9:32 am

Did Professor Reisman propose that cheap imports solve all economic problems? Perhaps he only claims that, in and of istelf, an influx of cheap goods is an economic positive. Cheap Chinese-made T-shirts are great, but we can’t expect them to cure all that ails an over-taxed, over-regulated, and over-subsidized American economy.

Plowman April 14, 2006 at 10:49 am

“And why is it always assumed that it’s a good and wholesome thing for a wee Chinese lassie to work 16 hours a day for 64 cents an hour?”

Is 64 cents an hour the standard gripe now? That’s great! 5 years ago when I was in college it was always “13 cents an hour” that was the major beef. But if 64 cents an hour is now the going rate to complain about, that’s almost a 5-fold increase! Yay capitalism!

billwald April 14, 2006 at 12:01 pm

“and the dollars we use have lost half their value in relation to commodities over the last 5 years”

I’m retired on a pension. I have at least as much money left over at the end of the month as I did 5 years ago. The concept of inflation is flawed if it does not consider cost of living in terms of work hours.

Paul Edwards April 14, 2006 at 12:31 pm

Roger,

You say of Bastiat that “He writes that gold is not wealth; goods and services are wealth.”

I know of a good, or it was once; it was called the “pet rock”. Its price on the market has fallen somewhat since its heyday. I don’t know what the going price for one is today. But my point is that a good is whatever the consumer perceives as scarce and valuable. Some goods you can count on in this way; and unlike pet rocks, gold you can count on. Therefore, money is a good and gold is definitely a good. Furthermore, on this basis, i would argue gold is also wealth. It is tradable for other goods and services which are also wealth.

On the question of how a world-wide gold coin standard would impact trade deficits, the answer is this: it would make them perfectly consistent with consumer preferences rather than on the whims of criminals who manipulate national monetary policies and fiat currency exchange ratios at the expense of the consumer.

On a world-wide gold coin standard, there would really be no trade deficits; just net directional flows of gold (a monetary good) for all other goods across practically inconsequential (from a trading perspective) national borders (assuming no other trade barriers such as tariffs, quotas, regulations or other asinine market hampering state interventions).

William April 14, 2006 at 12:43 pm

Face it folks, outsourcing and its partner legal and illegal immigration of low skilled labor will be with us for a very long time.

The US has lots of money (capital), lots of technology and not much low skill labor. Mexico, China, India, etc have little of all the above except low skill labor. So there is a HUGE incetive for a buyer of labor in the US to purchase labor abroad!!!!

This purchase of labor commonly called outsourcing keeps products cheap, immigration down and millions of US workers employeed trying to sell technology to these outsourcers.

Just think if we stop oursourcing how bad the illegal immigration gets when the US low skill laborers realize that they have a monopoly?

I am one of the millions who outsources technology to foreign countries. And, I am interestingly, also an outsourced laborer because the owners of my company are from a foreign country.

Anthony Meaney April 14, 2006 at 1:14 pm

How does Reismans argument translate to white collar workers who are being offshored like accountants or customer sevice agents? You don’t have to build cheap factory for them and in some cases these people aren’t even working for manufacturers.

Does the “cheap goods flowing to our shores” argument still hold true in this case?

I would be interested in some of your thoughts on this.

David White April 14, 2006 at 1:40 pm

Roger M:

Bastiat was right to distinguish between money and wealth, but he also knew that gold is money precisely because it is a good (all the more so today: http://www.gold.org/discover/sci_indu/indust_app/index.html) that, for millennia, has best served as a medium of exchange.

That said, ALL, money is an “illusion” in that it is purely a function of people’s faith in it. Take away the faith, and you take away the money. And since civilization as we know it is impossible without money, when people lose faith in whatever money they are presently using, where do they turn? No less than Alan Greenspan had the answer when he testified before Congress in 1999: “Gold still represents the ultimate form of payment in the world. Fiat money, in extremis, is accepted by nobody. Gold is always accepted.”

In other words, when push comes to shove, if you don’t have wealth, you’d better have gold, as it’s ultimately the next best thing to wealth and in that sense largely indistinguishable from it.

As for the World Gold Council, I rather think they’ve got blinders on when it come to US gold holdings. According to the Gold Anti-Trust Action Committee — http://www.gata.org/gold_reserves.html — “Hard as it is to fathom, it appears that much of America’s gold is essentially gone or in severe jeopardy.” But that’s to be expected, as the powers that be have been doing their utmost to suppress the price of gold for decades –http://www.gold-eagle.com/gold_digest_02/murphy013002.html

Gee, I wonder why.

Peter April 14, 2006 at 8:38 pm

To Graeme Bird and Person:

The professor makes a good point about multiplying the effectiveness of scarce capital resources but I have to see the result of that in the USA in other than inflated house prices and fatter people. In other words the theory is fine but the ability of the USA to take advantage of this theory has failed to a large extent. As to the comment by “person” that hamburger production will not double as production will go to the next highest ranking good I say this : “The ranking by the American consumer of his cosumption is a big problem. They have either been investing in or consuming the wrong things.

Roger M April 14, 2006 at 9:44 pm

Anthony,
Outsourcing white collar jobs should work in the same way as factory jobs. For example, we might be able to purchase twice the accounting services from Indian accountants, or the same service for half as much. As a result, the firms that outsources accounting to India will have extra money to spend on another kind of service, possibly consulting. But keep in mind that technology has probably put more accountants and software programmers out of work than has outsourcing.

I recently wrote an article for the American Institute for Economic Research newsletter about manufacturing. In my research, I learned that the effect of technology is about eight times as large as outsourcing for causing the loss of jobs in manufacturing. I would guess the ratio is about the same in white collar work.

Roger M April 14, 2006 at 9:48 pm

You gold bugs should keep in mind another of Bastiat’s lessons about money. Even gold does not have a fixed value. History has proven that an excess of gold causes it to lose its purchasing power, while a shortage raises it. Gold may be the best money, but it’s not perfect. If a financial meltdown of the magnitude that many of you are hoping for occurs, there will be an abundance of gold and a shortage of goods, especially food. No one will want to trade food for gold.

Peter (not the same one) April 15, 2006 at 1:58 am

Peter: I say this : “The ranking by the American consumer of his cosumption is a big problem. They have either been investing in or consuming the wrong things.

And who are you that you know what people should be investing in and consuming better than they do themselves? Must be good to be a god!

Peter April 15, 2006 at 3:05 am

History has proven that an excess of gold causes it to lose its purchasing power, while a shortage raises it.

Huh; we hardly need history to tell us that praxeological fact.

(Seems funny to talk about gold “losing its purchasing power” today, when it’s passing the moon and obviously heading out of the solar system)

If a financial meltdown of the magnitude that many of you are hoping for occurs, there will be an abundance of gold and a shortage of goods, especially food. No one will want to trade food for gold.

Nobody’s hoping for it; just recognizing that it’s inevitable. There’ll be a shortage of cheap goods (priced in worthless fiat paper), not a shortage of goods. And there won’t be an abundance of gold, either. People will want to trade food for gold for the same reason they always have: those who have food will want other things, those who have other things will want food, and it won’t necessarily be easy to find people who have the exact goods you want, and want the exact goods you have — hence the need for a medium of exchange (that isn’t mere paper).

David White April 15, 2006 at 8:15 am

Peter,

The only thing I would add to your excellent reply to Roger is what Paul Volker said when he was asked recently about a return to the gold standard: namely, there’s not enough gold to make it feasible.

We’re talking about a measly 155,000 above-ground tons of the stuff, after all, meaning that silver, and possibly copper, would also be re-monetized once the government fiat system collapses, as it inevitably will.

George T. Kysor April 15, 2006 at 5:12 pm

Yes, GR, one can blithely equate offshoring with happy consumers and expect the of same to continue, but when one takes into account the nitty-gritty conditions actually affecting the results of offshoring, in the present circumstance, then, I believe, the results of offshoring will be seen much differently.

At the end of the twentieth century the inhabitants of the USA were, in large part, enjoying a very high standard of living compared to those in China and India – a very large disparity, indeed! So, what happens when those vast hordes in China and India begin to compete with the much higher paid people in the USA? What else but a leveling of the standards of living because, when wages level, the prices of imports will no longer be cheap. Of course, only when the standards of living reach parity can the American standard of living stop decreasing.

This leveling is now taking place (although conventional economic statistics may indicate otherwise). The living standards of China & India are increasing and the living standard of the USA is decreasing and, at a certain point in time, the twain shall meet. Hopefully, after that point, the living standard of the USA will raise or at least level off.

I think that if one takes conditions as they presently are, then it is apparent that the timelines will proceed thusly:

1) For three reasons (vast populations, very low standards of living, & rapid industrialization) the very low prices of goods and services from China & India will incrementally increase, along with their standards of living, but only at a very slow rate.

2) For converse reasons (comparatively small population, very high standard of living, & many industries already offshored) USA wages, and hence the standard of living, will incrementally decrease at a very fast rate.

Although the point at which the two timelines reach parity is not magical, it is, I think, a convenient place to consider that at that point the USA standard of living might start to increase or at least to level off.

My guess is that the duration of this economic depression in the USA will be at least several years if not much longer.

bear April 15, 2006 at 8:44 pm

The short run benefits of the build offshore, employ foreign slave labor, and ship to the US crowd ignores the economic cost of the destruction of the American standard of living.

Currently, the greatest benefit that can be cited is the low domestic interest rates that have allowed extreme asset price inflation from knocking out the American economy in one fell swoop. We obviously prefer slow death.

Speaking of beef, where is the long term benefit of our current trade policy. Reduced personal income growth? Who does that benefit!

Hollowing out of our manufacturing industries?

Doubling of home prices?

A three to five times increase in commodities prices?

Below average growth in job creation?

An unbelievably bleak economic outlook for our children as they face repayment of the Bush/Greenspan debt?

A growth in GNP that is pumped up by an extraordinary run up in government deficit spending?

Stop me when I’ve covered enough of the apparent benefits. Our trade policy sure seems to be working well.

Paul Edwards April 15, 2006 at 9:08 pm

George T.,

For sake of argument only, let’s say your analysis is correct. What would you propose: further market interventions by the state to limit outsourcing to other countries? Would you advocate more tariffs and quotas, or outright banning of importation of goods and exportation of capital whatsoever, except for imports in minor commodities which cannot be produced on this continent at all?

Based on this philosophy, it could be argued that New York State would benefit by such trade restrictions against all other 49 states of the union, that cities would benefit by such trade restrictions against all other cities and towns, neighborhood vs neighborhood, and finally that each family would benefit by severely restricting its trade with other families; especially poorer families.

What sense would it make if people in very wealthy American neighborhoods would only do business with, buy food and clothing articles for instance, made by Americans only living in the same or perhaps other similarly wealthy neighborhoods. If such an attitude ever came about in widespread fashion, it would not only represent an absurdity, but it would be the end of civilized life.

No one ever goes to the store and worries: I wonder if the person who made this article is as rich as me, because if he isn’t, I am supporting a poor person making a buck, when I should be supporting a rich person. Nope, we buy from whoever gives us the best for the least, and this is as it should be and in the end, it is how we all do well.

David White April 16, 2006 at 10:29 am

Paul,

Neither do you worry when you shop that by doing so you’re participating in the decline of your own standard of living. The fact is, however, that so extreme are the global labor imbalances that as the world “flattens,” it cannot do so without the haves giving ground to the have-nots– not because wealth is a zero-sum game but because the haves are so mired in debt that their wealth is an illusion. We’re talking about the most massive Ponzi scheme in human history, after all, which can no more be fixed than a volcano be capped.

Thus the solution will be economic reality reasserting itself one way or the other — i.e., by either taking our medicine now or (as will assuredly be the case) by postponing it until the last possible moment, in which case the medicine will be that much more bitter.

Acknowledging this — i.e., assuming political failure at every level (Katrina writ large) — the wise individual will see to his own, which includes, among other things, storing up that which economic reality will once again be powered by: gold.

Graeme Bird April 16, 2006 at 10:34 am

Show me a high savings nation and I’ll show you a net exporter. If you won’t save a great deal then you will expect to have a deficit trading balance.

If you had a 100% backed metallic currency and no taxes on interest earnings with dividends a tax deductible expense for business (and no taxes on dividends received) I assume that the savings rates would keep going up and up and end up very high indeed.

Then this offshoring wouldn’t be such cause for alarm. Because you would be offshoring a bunch and still building up domestic capital equipment. Still running a surplus trading budget despite massive offshoring.

But the example shows that while your capital is scarce to ban offshoring or tax it would not be making the best use of your capital.

Francisco Torres April 16, 2006 at 12:47 pm

Show me a high savings nation and I’ll show you a net exporter. If you won’t save a great deal then you will expect to have a deficit trading balance.

No, it does not work that way, because trade “deficits” are an illusion. Even with savings, you can still have an apparent trade “deficit”. Please read:

“The Trade Deficit: Much ado about nothing.”
http://www.fee.org/publications/the-freeman/article.asp?aid=3789

Like in the article says, I save 20% of my income every year, yet I have a trade “deficit” with Sears, since I buy more from them that they buy from me.

If a country is a net exporter, then it simply means the governments is imposing severe restrictions on trade, since it is INDIVIDUALS who trade, not countries. Exporters are going to be, almost invariably, big corporations – so if a country is exporting more than it is importing, it means the government is favouring the corporations via trade restrictions, tariffs and other criminal… I mean, forceful activities.

Francisco Torres April 16, 2006 at 12:49 pm

Sorry, scrap the “almost invariably” condition. It should be simply “often”.

George T. Kysor April 16, 2006 at 1:39 pm

Question: “For sake of argument only, let’s say your analysis is correct. What would you propose: further market interventions by the state to limit outsourcing to other countries? Would you advocate more tariffs and quotas, or outright banning of importation of goods and exportation of capital whatsoever, except for imports in minor commodities which cannot be produced on this continent at all?” – Paul Edwards

Answer: Learn Chinese.

Paul Edwards April 16, 2006 at 3:07 pm

LOL.

Assuming (again) that your analysis is correct, I think your solution is as good as any.

Paul Edwards April 16, 2006 at 3:21 pm

“Acknowledging this — i.e., assuming political failure at every level (Katrina writ large) — the wise individual will see to his own, which includes, among other things, storing up that which economic reality will once again be powered by: gold.”

Wise advice. And while i’m at it, if any foreign goods are offered to me so as to appear better for me from my own perspective, i should continue to buy them; especially if they allow me to save more so i can continue to invest in gold as well.

Paul Edwards April 16, 2006 at 3:23 pm

Francisco,

That was a good article you linked us to.

Graeme Bird April 16, 2006 at 5:06 pm

“If a country is a net exporter, then it simply means the governments is imposing severe restrictions on trade, since it is INDIVIDUALS who trade, not countries.”

No that’s not true at all. The capital and the current accounts balance. So if you loan or invest overseas more then you borrow or receive investments FROM overseas you will export more then you import by that amount.

If you save a great deal its likely that eventually you will loan more to other countries then you will borrow from other countries. Thereby running a trade surplus. So in the end high savings nations tend to run surplus balances.

Germany saves a lot and has a trade surplus. Japan saves a lot and has a trade surplus. All the way down the line high savings nations tend to have trade surpluses.

averros April 16, 2006 at 5:57 pm

Answer: Learn Chinese.

There’s an old Soviet-time Russian joke going like that: “Optimists study English. Pessimists study Chinese. Realists study machine guns.”

P.M.Lawrence April 16, 2006 at 9:27 pm

The significance of a whole country having a trade deficit, when it is individuals and firms that do the actual trading, is this: when an individual account falls due, the individual reaches out for other sources of funding, maybe loans or new investment or trading out of trouble – but with everybody in the group in the same boat, this gets much harder.

I tried sending an email to Professor Reisman in reply but it bounced, so I am copying the body of it in below:-

You ask “what is the economic problem in all this?”

I would say it comes from something you passed over briefly, the idea
that some displaced workers might (for instance) end up making
hamburgers. The thing is, that is not only a personal sacrifice for
them, it suffers from the fallacy of composition; there would not be
enough low end jobs to absorb all the displaced, not at levels
sufficient to survive on – workers in third world countries still have
some personal resources, and in their race to the bottom with wage
levels they can settle for top up wages lower than living wages. After
further shake outs, generations down the track, that may cease to be the
case, but even then they will be at very low wage levels.

This has a huge impact on “consumers” in the original country, since
they will not in fact be able to afford the new things at all. What is
more, the whole market there and in the supplying countries is already
distorted, so it is unfair to assume that the costs of distortions may
not themselves outweigh the gains you describe, even if you measure the
good and bad by aggregates like whole countries.

It is also the case that fiat money issues can lead to massive
transfers of capital, i.e. that a large part of “investment” is merely
transfer; but this is not at the expense of the country issuing the fiat
currency, even though it harms the country with the “investments”. With
middleman countries involved, they accept US dollars in exchange for
consumables but invest in what they do with regard to third countries -
things like iron ore purchases from Australia by China, paid for in US
dollars.

By looking at what is good for a country as a whole and ignoring what
can happen to significant elements within it, that can harm many people
in the original countries. For a historical parallel, I’d suggest
looking at Spain after the silver driven inflation of the 16th and 17th
centuries had trickled down through Europe. Both Spain and the end
countries ended up worse off, with the real gainers in middleman
countries like England and Holland.

mark April 17, 2006 at 7:53 am

“they accept US dollars in exchange for consumables like iron ore purchases from Australia, paid for in US dollars.”

If this were true in the agregate, the Australian dollar would strengthen making their exports more expensive and their imports cheaper.

Seems like the same boat to me.

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