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Friday, March 18, 2005

Excessive Spending - Buffett Wrong?

Dr. Don Boudreaux, who contributes to "Cafe Hayek", wrote on March 16:

But having re-read the part of Buffett’s letter dealing with the trade deficit (more accurately, the current-account deficit), I still believe that I’m right and he’s wrong. If my paying my Virginia neighbor $10 to mow my lawn creates neither debt nor other economic problems, how would my paying a Canadian $10US to mow my lawn create debt or other economic problems? What conceivable economic difference can the latitude or longitude of the seller’s residence make?

But is there even a whiff of relevant economic difference between this transaction when it takes place between two Americans and this transaction when it takes place between an American and a Canadian?

Perhaps there is a difference – a difference seen by Warren Buffett, David Ignatius, Paul Craig Roberts, Pat Buchanan, Lou Dobbs, and others, but missed by me. Please – and I’m not being facetious – if you detect an economically relevant difference between these two transactions, write to me and enlighten me.

But until I’m shown such a difference, or discover the difference on my own, I cannot but conclude that Buffett’s concerns about the trade deficit are misplaced.

Well, how about this:

The difference between paying a neighbor... or even a Canadian who happens to live close by for a service... and buying goods from a country 8,000 miles away is that... unless the equation is somewhat balanced by that country buying goods or services from the U.S.... there will ultimately be a negative economic impact as the U.S. economy loses it's ability to generate wealth internally.
    • The Canadian across the river is likely to use his newfound income to purchase goods or services from the area. The economy of the area is infused with income and spending that enriches the area.
    • The purchase of goods from an country 8,000 miles away that does not reciprocate, brings goods into the country while moving the wealth generated from production out of the country. Many of those who would normally infuse the economy by spending their income within the country and keeping the economic engine running, move to the sideline or, worse, become a drain on the economy (collect "benefits"). The economy of the country 8,000 miles away grows and prospers, but bad things tend to happen to the U.S. economy such as:
      • devaluation of the dollar
      • increased cost for goods (inflation)
      • higher unemployment
      • lower tax revenues
What about the lower cost of goods that are imported versus produced locally? Yeah, that is a benefit for awhile. But as the current-account deficit continues to grow to a significant portion of the GNP, the bad things start to show up.

$1 spent on imported goods enriches the exporting nation and the importing company. It may also enrich the retailer. But the negative side is that the U.S. supplier of raw materials loses, the U.S. manufacturer loses, the U.S. manufacturing employee loses, and maybe even the U.S. distributor. $1 at retail multiplies throughout the economy more when production is within the U.S. than when it is elsewhere. Ultimately... say at 5-10% of GNP... the current-account deficit begins to erode the purchasing power of the country as higher paying jobs are replaced with lower paying ones and the value of the dollar drops globally. In simple words: wealth moves elsewhere.

Oh, I know that there is faith that the lost jobs will be replaced by higher-paying, higher-skilled jobs... isn't happening. Faith isn't good enough. One need only look around to see the real dynamics in play.

Some topics I'd like to see at Cafe Hayek:
  • The advantages of protecting the home base while invading other economies (I can sell to you, but you can't sell to me)
  • Undermining the economy of your competitors by undercutting their means of production
  • "Win-lose" economics as a path to power (why use military force when you can drain the resouces of your enemy)
... but that's unlikely. After all, that would require a belief that there are non-economic agendas associated with economic policy.

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There is always an easy solution to every human problem—neat, plausible, and wrong.
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“The Divine Afflatus,” A Mencken Chrestomathy, chapter 25, p. 443 (1949)
... and one could add "not all human problems really are."
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FEDERAL RESERVE & HOUSING

SEARCH BLOG: FEDERAL RESERVE for full versions... or use the Blog Archive pulldown menu.

February 3, 2006
Go back to 1999-2000 and see what the Fed did. They are following the same pattern for 2005-06. If it ain't broke, the Fed will fix it... and good!
August 29, 2006 The Federal Reserve always acts on old information... and is the only cause of U.S. recessions.
December 5, 2006 Last spring I wrote about what I saw to be a sharp downturn in the economy in the "rustbelt" states, particularly Michigan.
March 28, 2007
The Federal Reserve sees no need to cut interest rates in the light of adverse recent economic data, Ben Bernanke said on Wednesday.
The Fed chairman said ”to date, the incoming data have supported the view that the current stance of policy is likely to foster sustainable economic growth and a gradual ebbing in core inflation”.

July 21, 2007 My guess is that if there is an interest rate change, a cut is more likely than an increase. The key variables to be watching at this point are real estate prices and the inventory of unsold homes.
August 11, 2007 I suspect that within 6 months the Federal Reserve will be forced to lower interest rates before housing becomes a black hole.
September 11, 2007 It only means that the overall process has flaws guaranteeing it will be slow in responding to changes in the economy... and tend to over-react as a result.
September 18, 2007 I think a 4% rate is really what is needed to turn the economy back on the right course. The rate may not get there, but more cuts will be needed with employment rates down and foreclosure rates up.
October 25, 2007 How long will it be before I will be able to write: "The Federal Reserve lowered its lending rate to 4% in response to the collapse of the U.S. housing market and massive numbers of foreclosures that threaten the banking and mortgage sectors."
November 28, 2007 FED VICE CHAIRMAN DONALD KOHN
"Should the elevated turbulence persist, it would increase the possibility of further tightening in financial conditions for households and businesses," he said.

"Uncertainties about the economic outlook are unusually high right now," he said. "These uncertainties require flexible and pragmatic policymaking -- nimble is the adjective I used a few weeks ago."
http://www.reuters.com/

December 11, 2007 Somehow the Fed misses the obvious.
fed_rate_moves_425_small.gif
[Image from: CNNMoney.com]
December 13, 2007 [from The Christian Science Monitor]
"The odds of a recession are now above 50 percent," says Mark Zandi, chief economist at Moody's Economy.com. "We are right on the edge of a recession in part because of the Fed's reluctance to reduce interest rates more aggressively." [see my comments of September 11]
January 7, 2008 The real problem now is that consumers can't rescue the economy and manufacturing, which is already weakening, will continue to weaken. We've gutted the forces that could avoid a downturn. The question is not whether there will be a recession, but can it be dampened sufficiently so that it is very short.
January 11, 2008 This is death by a thousand cuts.
January 13, 2008 [N.Y. Times]
“The question is not whether we will have a recession, but how deep and prolonged it will be,” said David Rosenberg, the chief North American economist at Merrill Lynch. “Even if the Fed’s moves are going to work, it will not show up until the later part of 2008 or 2009.
January 17, 2008 A few days ago, Anna Schwartz, nonagenarian economist, implicated the Federal Reserve as the cause of the present lending crisis [from the Telegraph - UK]:
The high priestess of US monetarism - a revered figure at the Fed - says the central bank is itself the chief cause of the credit bubble, and now seems stunned as the consequences of its own actions engulf the financial system. "The new group at the Fed is not equal to the problem that faces it," she says, daring to utter a thought that fellow critics mostly utter sotto voce.
January 22, 2008 The cut has become infected and a limb is in danger. Ben Bernanke is panicking and the Fed has its emergency triage team cutting rates... this time by 3/4%. ...

What should the Federal Reserve do now? Step back... and don't be so anxious to raise rates at the first sign of economic improvement.
Individuals and businesses need stability in their financial cost structures so that they can plan effectively and keep their ships afloat. Wildly fluctuating rates... regardless of what the absolute levels are... create problems. Either too much spending or too much fear. It's just not that difficult to comprehend. Why has it been so difficult for the Fed?

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Michigan, United States
Air Force (SAC) captain 1968-72. Retired after 35 years of business and logistical planning, including running a small business. Two sons with advanced degrees; one with a business and pre-law degree. Beautiful wife who has put up with me for 4 decades. Education: B.A. (Sociology major; minors in philosopy, English literature, and German) M.S. Operations Management (like a mixture of an MBA with logistical planning)