Protectionism and the Beginning of the End for the World Economic System Explained.

Abstract: The world economies are collapsing and the politicians are dancing around the snake pit trying to solve the unemployment problems, keep currencies from breaking up and keeping international trade ‘agreements’ from going sour while actually  drifting  toward global  protectionism. The U.K. is now publicly signaling depression, has cut its bank interest rates to a new 300 year low and several members of the EU are on the knife’s edge of collapsing. Amidst this hysteria, our socialist-oriented politicians want to avoid the Buy American slogans and buying mentality so we can keep ‘agreements’ with  our trading partners who cheat and have de facto tariff system  that  frequently put the US at a trade  disadvantage. With a diverse array of nations producing goods and services at various levels and debt obligations that range from very high to soaring surpluses the notion that governments facing an eminent depression will not put up protective barriers in their own defense is folly. Our government is in chaos and does not know what to do except print money and make speeches.  We are lost.

Presumably, we all live in a global economy where, as the cliché sounds ‘… trade floats all boats…’ along with other slogans and such.  The notion of Free Trade is a conundrum of political theories buried in inefficiency and insanity supporting the conclusion that such an apparition is elusive or nonexistent. [1] Socialist countries cannot survive on a tariff-free free trade basis given the intrinsic inefficiency of their government and its necessity to add excessive costs to all goods and services within the given socialist state. While trade ‘theories’ purport to bring ‘success’ to many if not all for those who participate, the opposite is being observed. [2] This nostrum gives rise to NAFTA, the WTO and other follies. Part of this wonderful story is actually [or accidentally] true as many countries do have positive trade balances within the lot but most others are gross debtors. The ones that have positive trade balances are the ones who use tariffs and ignore the rules. We are one of the major debtor countries and have shoveled our wealth into the hands of our enemies for a few decades, much of this for oil purchases. We are sinking in massive debt.  Ignoring Social Security and Medicare for the moment, each taxpayer[3] in the US has a current debt liability of about $175,000 and this level is rising.  Adding those two previously mentioned obligations back in the calculation puts the taxpayers at an additional debt risk another $200,000 or more and this is rising. So, as proof, we tout ‘free trade’ and NAFTA and other trade ‘agreements[4]’ and we went broke doing so. So much for ‘free trade’ or whatever we call this.  Our foreign debt is 3 trillion dollars and rising and half this debt is held in Asia alone.

In a succession of arguments and hours spend on term papers at SUNY in the early 70s, I attempted to point out to my socialist professor from Canada that ‘free’ trade was not really so free and that trade by all nations would not raise the net balance sheets of all nations and that wealth would shift from various countries to others depending on supply and demand and efficiency of production. All this was lost on the socialists at Binghamton, a campus of the State University of New York System that wallows in leftist politics.

The monetary system is very complicated as we have to deal with inter alia what exporters do with the currencies they get from trading partners in the two cases where the trade balance is positive and the reverse case where the balance is negative.  Milton Friedman had his view on the subject that trade deficits are not all that bad. [5] Warren Buffet argues to the reverse conclusion.[6] Geoffrey Crowder [the Economist] argues that the balances of trade need to be zeroed or close to that objective or chaos will abound in the markets and financial institutions. This is happening now. China and Japan and parts of the Middle East are the major creditors on this planet and the US and Europe are debtors.  Some countries may be forced to default on their bonds. This is nothing new. Nobody has a coherent theory and mechanism to handle imbalances in trade and we should just recognize that.

Many central or ‘big’ banks of several countries have failed [like ours] or will soon do so. These include those already lost like Iceland, the Baltic States, The Balkans, Hungary, and maybe soon Spain, perhaps the U.K. and maybe even Russia.[7][8] Liberal bastions in the US like California,[9] New York, Massachusetts, New Jersey and Michigan are going down financially and would print money if they could do so. Most have barrowed up to their credit limits and are stuck with begging and cost cutting however meager. We can easily show that excessive state spending on social programs [“affordable housing” at Fannie Mae and Freddie Mac] and debt caused this chaos and bailouts are the only temporary solution to this disorder. If they keep spending the problem will never go away.  GM and Chrysler, in a similar financial state as California[10] and New Jersey, are finished as corporations having passed the accounting tipping point where they will NEVER be able to make enough profits to pay off their debts even with the bailouts and high profits on their sales.  This bailout scheme is a political effort [not financial] by the government and is intended is to repay the crooked and greedy unions for their political help and to provide them with union welfare.  The teachers unions in California have almost total control of the Assembly and, of course, are directly responsible and liable for the failing school system and act like monkeys on the backs of the taxpayers of that state.

Our smaller banks are under attack from forced liquidity stuffing by the Fed so that they will pay about 12% for money  from the Fed they are supposed to loan out as mortgages at 4-5%, a typical leftist outlook on business theory. [11] The government could get partial or full ownership of many of our 7,000 banks in that manner.

Talk replaces reason:

We can mumble about the theory of trade balances and look for nuances in the system and project clever arguments to ‘prove’ anything we might wish for, but the ugly fact remains that we are in a debt-driven deflationary spiral crashing down toward depression and our government is advocating more debt as a solution to debt.[12] The first attempt at protecting domestic jobs with respect to balance of trade is to put up tariffs so that the balance of trade would ostensibly, remain positive. If everybody does this, net global trade falls and all exports drop. We are starting to see this happen:

With China’s 75% of the global toy market in mind, we must note that India has just banned imports of toys from China for a half a year.[13] Spain and France have their buy home goods slogans and speeches. This is full blown protectionism. [14] We crashed in the 30s partly because of our protective tariffs and competitive currency devaluations. FDR devalued the currency by 41% in 1934. [15] But, when the Europeans protested about our ‘Buy America’ message in new legislation[16], Obama on 4 Feb 2009 promptly caved in to the socialists and is forcing the Democrats to drop that legislative theme.[17] China has artificially kept their yuan low for decades so they could have a positive trade balance. Did they cheat?  Did they violate WTO [World Trade Organization] agreements? Thus the message that we need to add national jobs to manufacture the goods we currently purchase abroad is muddled by depression era moans by our trading partners who are doing the very same thing they are protesting. The political exact rhetoric was:  ‘“we can’t send a protectionist message” in the stimulus bill, or convey to trading partners “that somehow we’re just looking after ourselves and not concerned with world trade.”  This raises the serious question: what can we do if our socialist trading partners in the EU are worse off than we are and need for out citizens to subsidize their economies by buying products we could make here? The British PM Gordon Brown now signals world depression. [18] He used the exact words: “Brown described the global economic slowdown as a depression, saying countries "should agree on a monetary and fiscal stimulus that will take the world out of depression."[19] [Emphasis is mine in all quotes.] One can only wonder what that means.  Could Mr. Brown please show us his plan? Whose currency shall we print to accomplish this parlor trick?

An embedded assumption here is that the US might be willing to just print more money to help out our ‘allies’ in Europe so they can be comfortable and we can employ our citizens doing other things like raking leaves in the parks or building swimming pools in Miami.  When we note that the world is in a debt-driven deflationary spiral and headed for a depression it is an interesting notion that printing more money will ‘solve’ or ‘ease’ this malady.

A comment from the same article in the NYT reads: “It was in Tokyo, Mr. Mondale[20] recalled, that “I spent a lot of my life trying to cajole politicians into getting rid of ‘Buy Japanese’ laws that were keeping our products out. And so when I saw this in the stimulus bill, my first thought was, ‘This is big trouble.’ ”[21] Apparently, our politicians live in a bubble and cannot understand what Asian Mercantilism is all about, an economic process that is in full force. This is a bungled course of action that is awash with speeches and hokum and devoid of an economic plan.  The Asian community stands firm on their Buy Asian theme and has for centuries if you look closely at history.  Japan used to use car paint standards to force all auto imports to be sequestered and hen repainted before sale in their country. France squeezed VCRs in their early market days by setting up only a single inspection point at some post office in a small town where they could bottleneck the supply. The Asian balance sheets show that pretending to play the ‘free trade’ game has rewarded them and why wreck this formula now? For world ‘peace?

There is no economic plan here.  The politicians do not know what to do and are panicking.

There are several possibilities about our new ‘government’ and their views on infrastructure spending and massive spending that will drive us further into debt:

[1] They believe this massive spending plan will work.

[2] They don’t believe it will work and want to simply grab power.

[3] They know it will fail, and are vindictive and anti capitalist and want to destroy our economy.

[4] They have no idea what to do except give speeches.

In the case of [1], we are essentially lost as they look at socialism, massive government subsidized employment and debt as non lethal issues in the economy. Obama had ‘no problem’ with  $4 per gallon gas and many of his familiars, gathered at his skirts, announced that while Europe was paying $12 per gallon they were ‘doing just fine’ and they have high taxes so that must be the solution. The EU is crashing with Greece now exposed as having lied about their debt to gain entrance to the Economic Union and now they have a phony ‘official’ 7.4% unemployment rate that is now running as high as 20-30% among the youth[22], riots and their social fabric is tearing as the police have run out of tear gas canisters. Spain is close behind and as a member of the EU they cannot devalue their currency so they are also resorting to protectionism by calling on Spaniards to buy Spanish. I thought we were supposed to be against protectionism?

In the case [2], we need to look forward to their transferring wealth from the ‘rich’ to the poor via some taxes if they can.  This was a howling success in Zimbabwe, a truly iconic land of majesty in theoretical leftist designs. The nonbelievers for this second case face an unemployment problem that they will solve temporarily by printing reams of money and exotic government bailouts and enlarging government.  The debt will eventually wreck our credit rating world wide, perhaps force us to default on our bonds to Asia and will cause more banks and businesses to fail. Their last resort is the wanton plunder of our citizen’s asset base in private real estate and our 401(k)s.  We have a debt of about 11 trillion dollars now [which is $16,000  per trillion for each tax payer and about $175,000 total for the time being] and have the TARP and other bailouts amounting to about 4 trillion, and now, the President wants to run a 2009 deficit of a trillion and spend 900 bln on other things. It ought to be clear to all of us that our debt load will soon be running about $250,000 per taxpayer exceeding the price of an average home. As the debt rises, the static aggregate private wealth of 57 trillion starts to shrink as we go from about 20 trillion in debt upward. Printing money is inflationary and that will ‘lower’ the government debt in certain narrow terms.

In the third case,[3], the most probably one in my view,  we would  face punitive taxes and government regulations in the form of taxes, fees  and restrictions on cars, guns, land, certain purchases and perhaps the inability to move money out of the country. England fought this flight of cash in the 70s rather unsuccessfully as their citizens found ways to use credit cards and other financial instruments to smuggle out money. We also face confiscatory inheritance taxes as they will prevent us from sharing our wealth with our children. They could institute a wealth tax. They may outlaw gold again as FDR did in the 30s.  They might attempt to confiscate and then merge our 401(k)s into some general fund with Social Security and Socialized Medicine. These two have an unfunded liability of some 50 trillion or more. That is then the outer limit—our wealth is now committed to social programs. The low class will willingly vote for massive taxes[23] and such programs as they have nothing to lose and have only contempt for the upper classes.

Case [4] appears to be the obvious case at this point. Whatever needs to be done we must do it quickly. Let us panic and print money.

That is the situation we face: chaos. If the current left-leaning government spends and prints money too fast then inflation or hyperinflation may occur and defeat them at the polls, but they still would retain an edge on the over all vote.  Would it be too much to ask if ANY country that sank in a swamp of worthless currency ever tried anything else that might have worked and succeeded, even partially?  No, the printing presses will hum and crank out paper.

In light of this mess, the majority of the middle class would have to shift violently to the right and outvote the lower classes, dump these parasitic Democrats and then set up high interest rates for loans to fight inflation and then put up with the resultant massive unemployment.  The only way to pay off the debt is inflation so the hallucinating alternatives work at cross purposes. Only California can finesse this scenario by smoking more dope. They have a solution.

rycK

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