Monday, November 24, 2008

Eating Your Young


Let's ask a basic question: why do individuals, companies, and states engage in trade? We like to think that it is because there is mutual advantage in doing so. We also like to think that free trade and open markets are how trade works. We also like to believe in Santa Claus... even if for one day a year.

Trade is done for one reason: to gain an advantage. Implicit in that, is leveraging what we have, to get what we don't have, but that is not necessarily the reason... only one possible outcome.

When Great Britain became great, it was because they leveraged their naval power to establish foreign sources of items not readily available domestically. That included foreign labor at negligible costs. And they went after products not available domestically... spices for example... that could be sold for very high profit margins. Along the way, they picked up military control of vast sections of the world and literally siphoned off the wealth of those areas. Trade was simply a nice by-product of leveraging power.

Trade was that in name only. The give was far less than the take. But eventually, the give, while unintentional, became more important than the take as western science, methods, and processes were transferred to these domains.

Eventually, Great Britain began to loosen and lose control over these domains and it found that, while it was a great consumer, it didn't do very well as a "trading partner." Sure, it had a vast amount of accumulated wealth, but after two world wars and a government disposed to "sharing the wealth," it became apparent to most of the world that Great Britain had reverted to Britain.
Even its world-class universities and intellectual storehouse were insufficient to arrest the slide into second-class citizenship. It was just easier to watch its domestic manufacturers slide into oblivion or be taken over by foreign countries.
The U.S. hasn't taken quite the same path. We didn't colonize other nations for their wealth (if you don't count taking over the areas that are now part of the "states"), but we certainly used our military strength to encourage low cost trade with countries that might not otherwise be so concerned about a relationship with the west. Oil from the Middle East continued to flow after Great Britain's departure; Nigeria and Venezuela were also willing "partners" in trade. We took their natural resources and shipped them finished goods... and flourished as unskilled workers became educated and productive and well-off through jobs in our factories.

Then we discovered that we could trade jobs for cheap labor. We could still make goods elsewhere, but increase profit margins. Fair enough. U.S. citizens could find other jobs... nice service jobs. U.S. companies still controlled the products and manufacturing processes.

But wait! Why bother with the risk of manufacturing when we could just import what we needed. We could just brand the products and everyone would be comfortable buying the stuff. Who cares if Eddie Bauer western wear is made in China or Sears flat-screen TVs are from Japan and Korea? If some of the manufacturers used child labor or created unsafe conditions or provided goods that were unsafe after awhile, that was an acceptable risk.
But then some of those foreign nations figured out that if they were supplying the labor and the materials and the manufacturing, why not control the distributing and selling? Just hire Americans at lower pay than their U.S. companies employed counterparts. Honda design, Honda engineering, Honda components and assemblies, Honda assembly plants, Honda managers, Honda profits sent to Honda. The Great Britain model! They control everything and we supply the cheap labor to put the pieces together.

We'll even give away land and abstain from collecting taxes as did the great State of Alabama just to get those foreign "traders" to come in and give us jobs and tell us what to do... eh, Sen. Shelby? And we'll tax our U.S. industries more heavily to make up for it.

Why have those expensive domestic manufacturers when it doesn't take much to lure one of those "labor-efficient" ones from Japan or Korea or China? And... we won't have all of those damned, evil, well-paid executives in our country.

Also, our pension funds wouldn't have to buy stocks in those risky domestic manufacturers. The Chinese stock exchange will let us buy some shares of their industries... and we wouldn't even have to waste our time voting for boards of directors or management or environmental proposals.
Strange how that works out. Just like South Africa and Ceylon [Sri Lanka] and Nigeria we get the benefit of all of that foreign expertise and control.

No, it doesn't have to be that way... it's just so much easier to be that way. Ask Great Britain... I mean Britain.
It's not, as some would suggest, about trading steel for bananas or computers for oil. We don't seek to trade for mutual benefit... or just the things we can't make or grow more efficiently. We purchase from others because it's easier to not do things for ourselves. It's easier to let our "trading partners" siphon off our wealth and future for an inexpensive now. It doesn't matter if you are blue collar in Buffalo or white collar in Wichita. A good deal at Wal-Mart is all that matters.

And, strangely, those foreign nations and their companies seem more than willing to accommodate our desires. It's as if they think that they are getting a good deal.
Who cares if American industry goes bankrupt and goes away? As a nation, we don't need heavy manufacturing... unless you want to be able to make large, technically-complex things.
Look at a country like Switzerland. They make some watches and have some banks and cook up some pretty good chocolate products. We could be like Switzerland.

Look at Argentina. They make some nice wines and grow a lot of cattle. They don't produce submarines or aircraft. We could be like Argentina.

We don't have to be the world's policeman anymore. Europe doesn't need us. Asia is now peaceful and China will keep things that way. The UN will work just fine for keeping the Middle East peaceful and we are going to have one helluva diplomatic system with our new President and Secretary of State. So all of those tanks and bombers and missiles we use to make are pretty much artifacts of the past.
No, we can get by with a lot less. We don't really need all of those suburbs and cars and trucks and airplanes for CO2-producing trips... not with all of those available half-empty cities, practically-free houses, and welfare programs that keep on giving. We don't need all of that air-conditioning and heating and big buildings for working and shopping... not when we can take off or add clothes as needed and cardboard is very cheap and can be taped together easily as our space requirements grow. We don't need a lot of things. And we certainly don't need to obtain it or make it ourselves.
We can get it from Japan or Korea or China or India. Just ask Great Britain... Britain. They'll tell you how easy it is.
All we have to do is eat our young... give away their futures for an inexpensive today. Turn our fortunes over to the control of foreign companies and nations. Redistribute any productive U.S. energies to those who are perpetual "cultural victims."
Steel, textiles, televisions, automobiles, aircraft. Who needs to have them made by American companies when we can have McDonalds... or Burger King if you want it your way?

That's what Vietnamese workers are for.

We can send the Japanese some chicken tacos in exchange... okay beef tacos... they like beef as long as there is no mad cow... and ash wood for baseball bats [until the Emerald Ash Borer from China kills all of those trees... just another trade victim].

Mostly gone!
The Chinese do it cheaper and they don't need all of those safety and pollution regulations!

Going fast!
Let the Koreans make them... they need the jobs

May never get here.
We don't need this anyway... and, if we do,
we can get this for 1/3 the price from India... they have all of the Ph.Ds now.

I know, I know... I'm just being dramatic. The issue is really much too small to be of concern.

Besides, life is good... just ask him.
Don't need no stupid job....


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There is always an easy solution to every human problem—neat, plausible, and wrong.
Henry Louis Mencken (1880–1956)
“The Divine Afflatus,” A Mencken Chrestomathy, chapter 25, p. 443 (1949)
... and one could add "not all human problems really are."
It was beautiful and simple, as truly great swindles are.
- O. Henry
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Tracking Interest Rates

Tracking Interest Rates


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."
"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."

December 11, 2007 Somehow the Fed misses the obvious.
[Image from:]
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 "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?

About Me

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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)