Huffington Post: Tariffs Are a Bad Idea

This evening I replied to an article on the Huffington Post about the struggle in Congress to deal with the debt ceiling. The comment I responded to was from a Tea Bagger who said that more money in our pockets will create more jobs. I stated that more money in our pockets will create more jobs in China for the reason that more money spent at Wal-Mart will be next handed over to a merchant in China. I said that in order to stimulate the economy we need to balance trade, and that tariffs would do just that. Finally I made the statement, “Why must we have unfair trade agreements?”

About 20 seconds later a reply to my comment was posted by a “Huffington Post Moderator” saying “Tariffs are a bad idea. They work both ways.” Well, golly-gee! I didn’t know that, and I am glad that the Huffington Post Moderator figured out my point in 20 seconds.

The problem is that we want the low prices of the cheap imports, no matter what the effect is on our economy. It is true that tariffs will raise prices, which is what the Federal Reserve has been trying to do for 10 years as they fight the deflation bogey man.  But prices are artificially deflated due to the fact that we are importing from third-world countries with lower standards for safety and labor relations than we have here. In addition to that, the Chinese have kept their currency pegged to the dollar all these years, but is now being adjusted slightly. If the Chinese currency were allowed to float, then market dynamics would cause a weakening of the dollar and cause Chinese products to become more expensive. However, that is bad in the eyes of the Chinese. They don’t want to see their currency appreciate against the dollar so they can maximize their profit.

It really is a matter of greed and desiring to exploit cheap labor without having any negative effects on the domestic economy. The whole global economy model was encouraged by the large corporations who saw an opportunity to get market share in the huge economy of China and other developing nations and to lower their labor costs. When I first saw jobs being outsourced, I said, “This is like firing your customers when you send a job overseas, because employees are consumers.” Of course many displaced workers found opportunities in various service sector fields, but the fact remains as I have discussed previously, the enormous trade deficits we have amassed amount to huge claims on American assets. How will they be settled, with US Treasuries, corporate debt and equity, real estate, commodities, or goods produced by Americans? Warren Buffett, who I think of as a very intelligent person, said the US is heading toward becoming a nation of sharecroppers. He said that for this very reason. So yes, Huffington Post Moderator, tariffs do work both ways, but they are not a bad idea because we have unfair trade agreements. I am advocating enough tariffs to bring about a balance in trade.

Solution to the Economic Situation

Here is a letter I recently sent to the Charlotte Disturber newspaper. I know they won’t print it because it is too logical:

“Knowing that you don’t have space to print a well developed argument, I am going to try to explain how to solve the economic situation in just a few sentences. It really is simple, a fifth grader can see it. Naturally politicians are going about it backwards.

The root cause of our economic crisis is the global economy model. We have outsourced manufacturing and created huge trade deficits for nearly two decades. Trading partners generally have three things to do with dollars received: invest in US Treasuries, purchase assets such as stock, real estate, and commodities, or buy goods made in the US. Since we don’t make as many goods, they have fewer options. Purchasing goods would be the best choice since that would truly stimulate the economy. Handing out cash to taxpayers does not stimulate the economy since the next hand to get a dollar spent at Wal-Mart is likely Chinese.

We look at solving the Federal deficit by slashing programs which will have a contracting effect. We need to think in terms of restoring the tax base and bring back manufacturing jobs. We should enact tariffs until a balance of trade is achieved. We still need to rein in Federal spending. Trading partners will not purchase US Treasuries if we have a balance sheet worse than Greece’s or the fiscal restraint in printing money of a banana republic. They need to have goods to buy with their dollars!”

I never thought I would live to see the day when this country would intentionally destroy its economy, but that is what has happened. Rather than correct the madness of unfair trade agreements we have made, we will continue this path to its bitter end when the United States collapses. Here is a half-baked idea that is more likely to be pursued. The Federal Reserve could embark on the mother of all quantitative easing maneuvers and buy up all US debt from now on (by printing dollars), and retire any debt that foreign entities own as they mature. (What will foreigners do with their dollars then? We could bar them from buying any US property as well.) They may not stop there, they could buy up all the debt from bankrupt states which are drowning in a sea of red ink as well. Of course they do not realize that it is the loss of tax base that has caused the depression, so the states and Federal government seek more and more ways of cutting programs and services since they will not cut the military budget. Once all the debt notes are owned by the Federal Reserve, they can issue a new currency at whatever exchange rate they want. Any country opposed could be reminded that we have a nuke with their name engraved on it. So basically we would have accepted all the foreign-made goods in exchange for pieces of paper and then refused to give anything of value for it in return.

The dominance of world hegemony by the United States is destined to come to an end. The war against terror has produced an insurmountable debt that will eventually sink the United States. So ultimately, the Islamic terrorists will win because they will have put into motion the bankrupting of America, which actually started nearly a decade earlier. Once complete, they will have gold and commodity assets that the world needs. China, of course, is another player in the world hegemony game, but the days of United States dominance are coming to an end unless something very creative can be done. But we do still have our nukes and export military hardware to the world, so that is our ace in the hole. It’s too bad the economic geniuses that gave us the unfair trade agreements can’t figure this out.

My general views

I am pro-organic food, which means I am anti GMO food and Monsanto, who is trying to control the world's seeds and genetically modify food so it is resistant to Roundup. This company is insidious and evil beyond imagination. I am also opposed to Codex Alimentarius and any proposals that will limit my access to foods, herbs, and supplements that I would want to use for the benefit of my health.

I am anti-nuclear power and also coal power. Nuclear power is a never-ending nightmare that will be with humanity for as long as we exist on earth. There should be a moratorium on all nuclear plants and all existing ones should be dismantled. I am appalled by the immoral use of depleted uranium in ammunition and artillery that the United states introduced into conventional warfare during Gulf War I. Read about it. It is evil, and we are the perpetrators.

Coal is also a bad fuel because of the pollution it creates. Mercury is vaporized and has poisoned the waterways making most fish harmful and unfit to be eaten. Also the burning of the hydrocarbons contained in coal leave crystalline rock and heavy metals, including uranium, in the ash. The coal ash disaster at Harriman, TN has demonstrated the harm it causes. The ash is actually radioactive.

Change I can believe in would be to fast track truly safe energy such as solar and wind. I am afraid that it will be back to business as usual after the Japanese accident, and more plants will be built in order to lessen our dependence on foreign oil. To me the ideal power source would be to use solar energy to hydrolyze water which would form oxygen and hydrogen and recombine them in an engine that would turn a turbine. It could be done more practically in a stationary apparatus such as a power plant than in an automobile. If they can handle nuclear fuel and waste, they can handle hydrogen and oxygen. And if one explodes it leaves behind water, not deadly radioactive isotopes. Other possibilities include Tesla generators.

This country has fallen economically due to a number of factors. Not the least of these is the "global economy" model that was perpetrated by Alan Greenspan and others who attributed the wealth developed in the United States as due to free trade within our borders. The problem with this model is that the world contains borders and separate countries with different currencies and governments. All of the deficits in trade amount to enormous claims that foreigners have on American assets. Warren Buffet said we would become a nation of sharecroppers. This country should return to the situation that enabled us to achieve the prosperity that we enjoyed a few decades ago, and protect our economy. Ross Perot rightly forecast that with NAFTA the loud sucking noise we would hear would be the jobs leaving the country. Both Democrats and Republicans were falling over each other trying to enact NAFTA. Big business wanted the global economy because free trade would allow them to bust unions. So now we are comforted to know that our goods are produced largely under oppressive labor conditions. Similarly, the US raised higher safety standards on the foods we eat by banning harmful pesticides. However the chemical companies ship these banned pesticides overseas and we buy the food grown with them in use. We also import a number of goods from China that would not be allowed to be produced in the same manner domestically. None of this makes sense. We should insist whenever possible that our trading partners uphold the same standards of fairness and safety that we require in our country. That is the only way to level the playing field.

The economic collapse of course has many causes, such as the housing market, which was pumped up after the dot-com crash, abetted by faulty economic theory espoused by Alan Greenspan who purposely talked in a way to make Congressmen think they were stupid if they did not go along with him. Mr. Greenspan was also fully aware of the nature of fraudulent derivatives and the unregulated hedge fund industry. Credit default swaps were sold to the tune of hundreds of trillions of dollars and the default of even one percent of them would be enough to cause a major investment bank to fail. Of course they are too big to fail, so the taxpayers got to bail them out, so they enjoy enormous profit without risk. Certain derivatives that cannot possibly be backed by the writers are fraudulent and should be banned. If banks are able to match counter parties for certain transactions, such as interest rate swaps, then they are OK. The hedge funds have become more powerful than central banks, able to bring down entire nations through credit default swap spreads that affect interest rates and can cause a vicious cycle of borrowing costs for troubled economies. One thing that Islam has right is that usury is immoral. The use of leverage in the stock market was permitted around 1920 when the banks wanted to increase their profit, and this singular fact was the largest factor in the Great Depression, as it caused a speculative bubble fueled by leveraged money. It is essentially a sum zero game with some winners and some losers, and the banks, always making money. They in effect turned the securities markets into a gambling casino.

I am opposed to leverage in all forms that can be directly accessed by a securities account. If one wishes to borrow money to invest, so be it, but don't make it easy to do by leveraging the securities account. I recognize the need that commercial entities have to hedge their commodities and think that options provide a way of achieving this goal without having as much impact on price. The price of crude oil, for example, is much higher due to speculative buying in the futures market. I think that it is fair to say that all of the market crashes we have seen are due to excessive speculation.

I don't favor big government as a fix for all problems, but I do favor taking care of people with needs. It is unconscionable to me that we would put people into the streets who are aged or disabled before we would raise taxes on the wealthy, who are now paying one of the lowest tax rates in history. Our federal deficit is the largest threat to this nation, and at some point if inflation takes hold, which surely it will after two rounds of quantitative easing (i.e. printing trillions of dollars), the amount of interest that we will pay on the debt will become enormous. Our balance sheet is worse than Greece's. We have managed the debt because of unprecedented low interest rates and the fact that until now our credit has been sterling due to sound fiscal policies. But just as a homeowner with a variable rate mortgage gets squeezed by rising interest rates, Uncle Sam will lose it when inflation comes back. We have spent trillions fighting wars and conquering nations. The military budget somehow is sacred and untouchable, but all the social services are the first to be axed. Something just doesn't make sense about this mindset...

Fixing the Economy

I just got an email from my Congress human, Sue Myrick, with the caption "It's Time To Turn Our Economy Around!" I wish it were as easy as buying a new car, as in the local ad line "It's time to talk to Tim!" Sue has a few good points about balancing the federal budget, lowering the tax burden on Americans and mentions abolishing the Internal Revenue Service and  the tax code, replacing it with a national sales tax.

Reducing the federal deficit is enormously important, but that alone is not going to turn the economy around. From the time that NAFTA was enacted until now we have seen manufacturing jobs leaving and being more or less replaced by service jobs. Those manufacturing companies that produce things that can't be conveniently imported or things of a fad nature are still doing well. Companies that have been able to adjust to the global market and compete internationally have done well. But in the state of North Carolina, textiles and especially furniture, a pride industry of the area, have pretty much vanished. Service industries have come in to fill the void. I recall politicians saying the displaced workers can drive around in delivery trucks instead of manufacturing the goods. I also recall hearing George Bush the Elder saying "What difference does it make if they are making computer chips or potato chips?" These comments display an incredible insensitivity, callousness, and disregard for the economic base of this country and lives of American workers. The corporations that could exploit the international market became enriched and were able to reduce labor costs. The laborers were converted to service workers who pampered and pandered to the needs and wishes of the super-rich. But this type of economic base is etherial and not nearly as stable as a manufacturing base. Now we are dependent on foreign suppliers for nearly everything we consume. I remember how we complained during the first oil embargo in the 1970s how we were importing around 35% of our oil.

Mr. Greenspan pointed out that the trade imbalance creates claims on American assets. So far the demand for American assets has been mostly met through purchases of US Treasury securities. The abundant supply of these securities has been assured by the massive spending of the federal government and continues unabated by ever increasing federal budget deficits. But even if we balance the budget this year and reduce the national debt, massive claims on American assets will still exist. Foreigners may desire to purchase property in the United States and if not deemed strategic will do so. Perhaps the Chinese would like to own the whole state of Kansas so they can assure adequate supplies of wheat. They can buy out US corporations or, if we had a manufacturing base they could purchase goods made in the US. Which is the better situation for Americans? It seems that at some point if the dollar is debased far enough and oil costs escalate high enough, that it will become economically feasible to produce goods domestically, rather that to import them.

How to fix the economy? I believe the unfair trade associated with the global economy has damaged this country terribly. We import goods produced under labor conditions that would not be tolerated in this country, we import produce that has been sprayed with insecticides that have been banned in this country, we purchase goods that are made with hazardous materials that would not be allowed in this country, and so on. Ultimately, to restore our country's economy and to restore the tax base of the governments, both federal and local, we must balance our trade deficit and attract more manufacturing jobs back into the country. If tariffs are needed then so be it. Just as a city government plans a budget and figures a tax rate to be sufficient to cover planned expenditures, a tariff could be enacted at a rate computed to balance the trade deficit.

The government has a difficult task of reducing its deficits because the tax base has shrunk and people still demand services and programs from the federal government. Since the military budget seems to be off the table, the "guns and butter curve" dictates that we spend less for butter since the total available resources has declined. For the federal government to reduce its deficit, the tax base needs to be restored. This can only happen if we can balance our trade deficit. As usual, politicians are looking at things in reverse order. You need to get to the root cause of the problem to cure a disease.

As the manufacturing jobs were disappearing after NAFTA, things were looking prosperous during the 1990s due to the dot-com bubble. But it was based on nonexistent earnings. To pump the economy back up, the Federal Reserve pushed the housing bubble until it too collapsed. The truth of the matter is, the underlying strength of the economy, the wealth of the nation, was steadily declining, hidden by speculative bubbles. What household can max out all their credit cards and keep spending and spending when they have taken pay cuts or lost their jobs? Our trading partners keep extending us credit, just as the credit card issuer raises the household's spending limit. But the situation is not sustainable until the household increases its income or reduces its spending.

It may be true that the most efficient use of resources globally would be to allow labor to be performed in the third world nations. But we live in a world divided by borders and sovereign nations. Until the day comes that we have "One-World Government" with a single universal currency that will never be feasible. Did I hear someone say "Illuminati?" The reason for the prosperity in the United States, which has enjoyed free trade among our several states, is that when there is a trade imbalance between states, the state with the abundance of dollars can seek assets from any of the other states, so it does not come directly back to the state with the trade deficit. There have been areas of relative poverty and wealth, but overall the nation has prospered. Due to the use of the US Dollar as a world reserve currency, this same effect has also helped to mitigate the trade imbalance that exists between the US and its trade partners. They can take their dollars and trade them for assets held by other countries rather than demanding assets from the US. But still, ultimately a claim on US assets exists.

I am not an economist, only a man on the street that tries to stay informed and form an opinion about what's going on in this country and the world. Sometimes I think a little common sense is more logical than all the economic theory.

Inflation and hyperinflation

My first blog!

I confess that I am not an economist, but I have become more interested in the subject over the years.I credit Jim Sinclair who gives free advice on his Mineset web-site for much insight.

http://jsmineset.com/


Alan Greenspan acted puzzled and befuddled by the fact that all the easing by the Fed did not produce any significant inflation, and still hasn't. Here is my theory about the subject. Inflation is caused by supply and demand for goods and services and generally is affected by money supply. However in the golden age of the global economy we have been able to keep prices in check due the fact that labor costs have been reduced through outsourcing. However in a domestic economy, eventually price pressure would be felt even if labor costs had been contained. But in the global economy, foreigners who are paid dollars for goods and services bought by Americans are generally satisfied to invest many of those dollars in US Treasury securities rather than seek goods or services to purchase from the US. Due to the enormous twin deficits, the trade deficit and the Federal budget deficit (and national debt), the funds sent overseas do not come back in sufficient amounts to put pressure on goods and services in the US economy. So it is fairly easy to see why in the global economy that a country running staggering federal budget deficits as well as having enormous trade deficits with our trading partners would not experience inflation. Mr. Greenspan looked at the situation as a convenience because the trade deficit financed the federal deficit.

However, this is a convenience that has a day of reckoning. The notion of hyperinflation is scoffed at by most economists because inflation has been low for more than 20 years. But as Jim Sinclair points out, hyperinflation is not a demand event. There has never been a hyperinflation that came about because of an overheated demand market, except perhaps in the price of tulips centuries ago in Holland. Generally hyperinflation as it occurs in places such as Zimbabwe and post WWI Germany, is caused by loss of confidence and/or printing of huge amounts of money by a central bank. The United States has maintained sterling AAA credit due to its sound fiscal management policies, but with two rounds of Quantitative Easing (printing trillions of dollars), we risk a loss of confidence that could trigger hyperinflation. This is the driving force behind the rising price of gold and silver as hedges against the dollar. Once foreign holders of dollars decide that they are better off not holding dollars then the supply of dollars will increase and velocity of money will start pushing prices higher.

To learn about "Quantitative Easing" watch this humorous but sad You Tube video:

http://www.youtube.com/watch?v=PTUY16CkS-k