Re: Sobering Thoughts on Export Policy

["J. Barkley Rosser, Jr." <rosserjb@xxxxxxx>]

Henry,
      Of course the main debtor here is the US
itself.  That is the seignorage essentially, that
the rest of the world accepts the debt instruments
of the US on and on.  Not clear how much longer
that will go on.  Last time it broke down was 1971.
Barkley Rosser
----- Original Message -----
From: "Henry C.K. Liu" <hliu@xxxxxxxxxxxxxx>
To: <pkt@xxxxxxxxxxxxxxxx>; <TheNewForum@xxxxxxxxxxxxxxx>;
<a-list@xxxxxxxxxxxxxxxxxxx>
Sent: Friday, December 14, 2001 10:46 AM
Subject: Sobering Thoughts on Export Policy


> The export sector of the Chinese economy has been exerting excessive
> influence on Chinese foreign policy. China has been making political
> concessions to the US for fear of losing the US market. This is ironic
> because, according to trade theory, a trade surplus accompanied with a
> capital account deficit is not
> in the interest of the exporting nation.
>
> Imports are resold in the importing country (US) at a greater margin
> than provided for the exporter (China). If the exporter accumulates
> bonds and currency of the importer, then the exporter will see no
> benefit from exports as goods leave the country but none come in to
> offset the imbalance. True wealth is given away by the exporter for
> nothing, at least until a long term trade deficit allows the former
> exporter to import an equivalent amount of goods. This is the current
> situation in US-China trade. The quality of the currency accumulated
> makes for the difference in quantity of goods and services received when
> the currency and investments in the importer are cashed in. Since the
> drivers of trade imbalances are overvalued currencies of the importer or
> undervalued currencies of exporters, obviously the one sided trade can
> only end when the exporter has wasted away much of its wealth, or the
> importer has run deficits to levels that overwhelm the willingness of
> the exporter to accept more of the importer's debt. Interest rate
> policies of central banks are usually the culprit in this matter, as
> they may drive investment flows in one direction, making necessary the
> excess export and import situation. Other forms of waste
> of wealth, such as pollution and low wages are penalties assumed by the
> exporter.
>
> As presented above, the importer enjoys a greater gross margin on the
> imported product than the exporter may realize in export. In part, this
> has to do with the inflated distribution cost in the importing country
> because of overvaluation of the currency. Thus the $2 comb set leaving
> the Chinese factory is a $3 part of a shipment arriving at San Diego. By
> the time the US consumer buys it for $10, the US economy
> registers in GDP, +$10 in final sales, -$3 in imports for a +$7 in GDP.
> The GDP improvement to import ratio is greater than two, in this case
> 2.3. The GDP improvement to export ratio is zero if the $2 export price
> becomes  parrt of the importer's capital account surplus. If 50% of the
> $2 export price belongs to return to foreign capital, the the ratio is
> in  fact negative.
>
> The numbers for other products vary greatly, but the pattern is
> similar.  The $1.2-1.3 trillion of imports to the US in 2000 are
> directly responsible for some $2 to 2.5 trillion of US GDP, that is over
> 20% of its $9 trillion economy. Perhaps more. The $400 billion of
> Chinese exports are directly responsible for a loss of
> $400 to $800 billion in Chinese GDP.   Viewing the greater margins
> available in the importing country,
> to a great extent, as a result of a currency valuation imbalance and
> understanding that retailing and distribution are still very inefficient
> relative to manufacturing, one comes to the observation that imports
> raise apparent productivity because sales per employee increase as one
> goes from the production floor towards the final consumer.  Also, the
> closer in function the production floor is to the retail space,  so the
> higher its apparent productivity. If through marketing and proximity a
> seller can gain advantage in assembly of  imported major parts to order,
> the producer can win final sales  away from the offshore integrated
> manufacturer who makes the same parts and assembles them abroad. In the
> high technology arena, time to market is  key, as are key design
> elements. By hiding costs through the use of employee stock options for
> compensation, a local in the importing country can use the high
> valuation of his stock, driven by artificially low interest rates at the
> exporter country, to subsidize the production of final product,
> be it  software or hardware. The content of the product will,
> increasingly come from exporting nations, and the producer's action may
> be but little beyond a glorified twist of a screw driver, advertised ad
> nauseum.  In attempting to quantify the order of magnitude of the effect
> of importation on apparent aggregate productivity, it is possible  to
> observe a direct relationship to the trade deficit. The end
> result is that the productivity improvement observed is not as strong as
> presented by aggregate data. The 4% level in the government statistics
> can be primarily attributable to the great increase in imports. The
> improvement in net productivity is much smaller, on the order of 1.8%
> since the technology revolution began affecting the economy as a whole.
> Much of the rest of the improvement has to do with normal
> cyclical behavior of productivity, the result of normal rise in capacity
> utilization during boom times.
>
> There is another measure of volume increases in trade flows that stems
> from the improvement of the trade weighted dollar. The trade weighted
> dollar measure shows improvement consistently because of the
> attempts by European, Arab Oil and Japanese holders of US debt to retain
> value in the dollar by creating dollar denominated debt in emerging
> economy countries that actually produce something, as opposed to the US
> which gains foreign income through the use of international protections
> for grossly overvalued
> intellectual property. This is discussed elsewhere in some detail. For
> the purpose of this discussion, one need focus only on the fact  of the
> broad trade weighted dollar index being in a rising trend as highly
> indebted emerging market economies attempt to extricate themselves from
> dollar denominated debt through devaluation of their currencies and
> subsidization of exports. The impact on the index of US price inflation
> is that of amplifying the trend through the US expansion of monetary
> aggregates, also known as
> monetary expansion and money printing.
>
> Adjusting for this debt driven increase in the value of dollars, the
> import volume into the US can be estimated in relationship to these
> aggregates. This is given in the figure below. The growth rate of the
> volume of goods shipped to the US has remained near 15% for most of the
> 1990's. As the slightest and most cursory glance at the chart will show,
> the United States enjoys a booming economy when the currency is gaining
> ground. This occurs when central bank controlled interest rates in the
> US are higher than those in its creditor nations. This leads to the odd
> conclusion that raising interest rates in the US actually prolongs the
> boom rather than threatening it, because it causes massive flows of
> liquidity into the US financial system, lowers import price inflation,
> increases apparent productivity, and prompts further spending by the
> consumer. For those who view the US as the New Rome, this great stream
> of imports is the spoils of war waged by an economic empire plundering
> the world, this data would come as no surprise.
>
> If the transition to off shore production is considered to be the source
> of the productivity boom of the "New Economy", then what remains of the
> productivity increase that is not attributable to the importation of
> other nation's productivity, is summarized in the figure below. While
> the published government figures of the productivity index show a rise
> of nearly 70% since 1974, the actual rise in productivity is between 0
> and 10 % for the period. The lower values are consistent with  the life
> experience of anyone in the working class and the middle class.   This
> experience of declining reward for effort coincides with the
> Reagan shift to having workers pay for their benefits, while promoting
> steep subsidies of corporations, particularly in the earlier stages of
> corporate growth. The record of this transition is chronicled well by
> Batra in his books "The Myth of Free Trade", and "The Crash of the
> Millenium". Though Batra does not pay attention to the monetary root
> cause of the problem, he does record its effects with great powers of
> observation.
>
> Historical timelines for the actual levels of productivity in the US may
> be traced back to the introduction of accounting computing by IBM and
> later EDS in the late 1960's. This cleared the accounting pools of the
> great corporations and some government agencies.   Automation of
> scientific work began even earlier and entered  mainstream engineering
> by the mid 1970s. By 1980, the ordering systems and inter-corporate
> billing were computerized to a great extent, as  had  occurred in
> banking and finance in the 1970s. By this time, PCs were available,
> Digital's Rainbow, Commodore 64, Sinclair, Amiga, and others
> were available, and were quickly entering mainstream secretarial work.
> By the mid 1980s office automaion was well underway. Computer controlled
> manufacturing equipment and processes were the hot
> items of the late 1970s and were mainstream by the mid 1980s. Business
> to business networking within and without the internet became mainstream
> five years ago, as were supply chain management and inventory control.
> The current process is one standardization and inclusion,  whereby the
> final applications of old technologies are coming to  an end. The
> productivity gains are still minor because of the  low level of
> brainpower produced by the American public school system can not be
> sufficiently ameliorated by the computers that have come to replace
> missing intelligence. Inventory management in the current "Just In Time"
> manner was not attractive until high real US interest rates made the
> holding
> of inventory unattractive. Prior to this, inventory was a profit
> center,  not a cost center. Now that the world has organized away the
> inventory that cushions supply disruptions and price inflation, we are
> quite defenseless against them. This is the best chance for Murphy's Law
> to demonstrate itself with a cruel spate of price inflation.
>
> In summary, the productivity boom in the US is as much a mirage as the
> money that drives the apparent success. There is not productivity boom.
> There is an import boom. The imports are not driven by the
> great growth of the American economy. They are driven by debt of the
> countries producing this wealth. The imports, in the view of the
> advocates of the New Rome theory, are a payment of tribute by vassals.
> The result of this distortion driven by the monetary system is a decline
> in real living standards in all of the indebted world, and in the United
> States. Indeed, reward has been divorced from effort. There have been
> enormous strides in productivity around the globe, few of them came in
> the United States. It has been the seigniorage of the dollar reserve
> system granted to the US without economic consideration, that allowed
> the import of productivity from abroad and the superficial appearance of
> health in the US economy.
>
> Hegemony is a term coined by Gramsci, but proudly borrowed by Greenspan
> to use in his congressional testimonies to describe US financial power.
> It is not my invention. Preserving US financial hegemony is a key reason
> Greenspan poses for resisting market regulation.
>
> Henry C.K. Liu
>
>