Tuesday, September 28, 2010

Why Manufacturing Jobs Are Leaving, And How It Could Destroy Our Currency

Ask anyone this question: "Why has America lost over 3 million manufacturing jobs in the last 15 years?" and I'll bet you good money that the most common answer you'll get is "free trade", or maybe "NAFTA".  It makes sense, right?  American companies can send jobs overseas, get the products built with cheap labor in countries with low regulations and nearly nonexistent labor laws, and then ship the products back to America for next to nothing.  Sure beats meeting the laws and regulations associated with hiring workers in America.  I mean, this is just common knowledge. Duh.

Well, this is a very solid argument.  But there's just one small caveat to it... it's completely and utterly wrong.  Free trade may have been a factor in speeding up the outsourcing, but not really.  If done right, free trade is a good thing and doesn't automatically lead to the deployment of manufacturing jobs to developing nations.  It only worked that way because it's a symptom of a much larger disease.  I'll try to explain this in a clear way, but I should warn you that it gets rather complicated.

For all intents and purposes, the United States is the only country that uses the American dollar.  Every dollar that leaves America must come back at some point.  That is, when America imports goods, we send dollars to the countries that we get the goods from.  Since those dollars cannot be spent in the foreign countries, they must eventually come back to America. Foreigners could buy up manufacturing plants in America, but if they move those plants overseas, any profit they make in the United States would have to be spent in the United States.

I'll put it another way.  Suppose an American exporter sells his goods to a Japanese importer and is paid in Japanese Yen.  The American cannot use the Yen to pay his workers, buy clothing and food for his family, or buy theater tickets.  If he wants to do any of those things he needs American dollars.  Therefor his Japanese Yen are of no use to him unless he uses them himself to buy Japanese goods or sells them to some other American importer for dollars.  The buyer of the Yen will use that currency to buy Japanese goods.  So every Yen that leaves Japan has to eventually get back to Japan in exchange for something that Japan produces, because Japan is the only country that uses the Yen as currency.  It works the same way with America.  Every dollar that we send overseas for goods has to eventually make it back to America.

You see, there really shouldn’t ever be a trade deficit of any major significance. This may seem strange, but it shouldn’t. Exports pay for imports, so they must eventually balance out. Think of a bartering society.  I can trade you 5 chickens for your goat.  My 5 chickens are my exports, and the goat is my import.  Your goat is your export and the 5 chickens are your import.  Because we both agree that 5 chickens is worth 1 goat (maybe I have too many chickens and you have too many goats.  Supply and demand dictates the value of the chickens/goat), neither one of us has run a trade deficit.  It's no different if we were countries instead of individuals.  Say my country has a lot of pens, but no pencils.  Your country has pencils but no pens.  So, we trade.  I give you pens and you give me pencils.  For both of our countries, our exports paid for our imports and we have no deficit.  When money gets involved, the situation is essentially the same.  I'll sell you pens for money that you earned by producing pencils and then use that money to buy your pencils.  That's how economies work regardless of whether there are 2 goods involved or 2,000.  My excess production/resources are traded to you for your excess production/resources, and there is no trade deficit.  It works the same way for nations as it does for individuals.  At least that's how it's supposed to work.

"But Chris, the U.S. does have trade deficits and we just racked a whopping one of 568 billion dollars in 2008!"  Well, two points need to be made here.  The first one is general while the second one is specific to the United States.

In general, it’s obvious currencies don’t leave and come back instantaneously. There will be up and down cycles. It’s also hard to account for every economic transaction taking place between individuals, companies and governments in one country or another. This is especially true, given there are often large black markets in even the freest economies. And finally, well, governments just lie sometimes. Shocking, I know. All of this becomes obvious when you look at the CIA Factbook for 2009, which says the world as a whole ran about a $133 billion dollar trade surplus. This is, of course, impossible.

Accounting errors can only account for small discrepancies though.  The United States is a very peculiar case.  We just so happen to hold the world's reserve currency.  To explain what this is and how it came about, we have to go back to the end of World War II. After the war, the Allied governments wanted to set up a system that would facilitate international trade and prevent the hyper-nationalistic protectionism of the 1930′s, which helped spur the Second World War. John Maynard Keynes and Harry Dexter White designed a system known as Bretton Woods, in which every country in the American sphere of influence tied their currency to the U.S. dollar at a fixed exchange rate and the dollar was in turn tied to gold at $35 per ounce.  Basically the dollar was valued at $35 per ounce of gold and every other currency in the world was valued at some fixed exchange rate with the US dollar.  All these currencies throughout the world could be exchanged for a certain number of American dollars, and those dollars could in turn be exchanged for gold at $35/ounce. Sounds like a good idea, right?

In reality, the system was doomed from the beginning.  The problem was simple: it relied on wise fiscal policy by U.S. politicians.  In 1971, after a decade of paying for "guns and butter" (the Vietnam War and the Great Society) by inflating the dollar, the U.S. government could no longer justify the $35/ounce exchange rate.  When foreign investors started requesting their gold in exchange for dollars, president Nixon responded by removing the gold standard.  From that point on the only thing that gave our dollar any value was the trust and confidence of the dollar.  It's called fiat money, and without the trust and confidence of its value you may as well have monopoly money or a dirty bar napkin with "IOU" written on it in sharpie.

The fixed exchange rate system was eventually replaced with floating exchange rates that had no gold backing. This allowed investors to set currency values by bidding on them in relation to each other. Now, this system works in principal, but unfortunately it opens up countries to currency attacks. If a government enacts poor policies, investors can leave that currency en masse. Or, as many leftists claim, powerful countries can simply de-fund weaker countries if they don’t like their policies; although whether this has ever actually happened is disputed. Regardless, it leaves countries vulnerable as illustrated by the most famous example of such currency implosions, the Asian Financial Crisis of 1997.

To avoid these crises (and store a “risk free” currency in case of other problems), governments started stockpiling dollars to act as a safety net in case their own currency was attacked. While the dollar was the reserve currency under Bretton Woods, as well as in the ’70′s and ’80′s, government stockpiles really accelerated in the 1990′s and 2000′s when China started taking off and the fall of communism brought with it a whole host of new countries, who, lacking Soviet support, needed to start stockpiling dollars.  America, as the world's economic leader, was seen as having the strongest currency and countries began to gather up dollars in their reserves.  If their currency was "attacked" at least they had dollars that were worth something.  But, as I said before, the dollar is only worth something because people think it's worth something.  Since leaving the gold standard, there is nothing of value that these little green pieces of paper represent.

So what does all of this have to do with disappearing manufacturing jobs and trade deficits?  As I pointed out earlier, we don't really have a trade deficit per se.  What we have is countries selling us goods for dollars.  But instead of those countries exchanging the dollars for our goods as would be normal, they're stockpiling them in their central banks because the dollar is the reserve currency and owning dollars is supposed to protect their money against any currency attacks.  Essentially, we have no trade deficit because the figures don't include our number one export: little green pieces of paper about the size of a dollar bill that are easy and cheap to print.  But remember, the dollar doesn't have anything of value behind it ever since we left the gold standard. Hopefully you can see where all of this is leading.

The dollars are no longer returning to the United States, or at least, a sizable portion of them are not. We buy toys from China and oil from Saudi Arabia and cars from Japan and electronics from Taiwan and cocaine from Mexico and they turn around and stuff those dollars into their central banks. This does two things: first, companies no longer have to buy anything from the United States with the dollars they receive (because foreign countries will buy the dollars to put in their reserves); they can simply outsource their factories and then sell the dollars they collect to the host country’s central bank, or other investors.  If these countries did not want to buy and stockpile the American dollars, those dollars would have to be spent in America on goods produced in America.  But the dollars are being funneled elsewhere and the result is that our manufacturing sector is hollowed out because foreign countries would rather hoard American dollars than spend them on American goods. Second, it gives the U.S. government a license to print an almost infinite amount of money without producing inflation. Or in other words, we pay for our imports with nothing more than thin, green pieces of paper that we can print for nothing.  And as long as those little pieces of paper don't come back to America, we don't see any inflation because there is no velocity.  We get a great standard of living, the rest of the world gets jobs, and all we have to do to keep the system working is to print paper (dirty bar napkins with "IOU" written on them in sharpie).

This is a great system, right?  Now we get to have Guns And Butter Part Duex and not see any inflation as a result.  How wonderful!  But as Herb Stein once said, "things that can't go on forever don't".  The dollar currently makes up about 64% of foreign reserves, with the Euro at a distant 2nd with about 26%.  This creates an extremely precarious situation.  While the dollar isn't sinking like a rock (yet), many foreign countries are worried about our bailouts, stimulus packages and gigantic deficits.  Foreign central banks are becoming so nervous they have started diversifying into the euro and other currencies. If we’re not careful, they will pull the plug and all those dollars will come rushing back to the United States. If this happens, the dollar will hyperinflate overnight.  And all it'll take is for one country to start sending dollars back to America or stop buying American debt.  That would start a domino effect where everyone starts trying to sell their dollars but nobody wants to buy them, the price of the dollar will fall through the floor and the whole house of cards --er, dollars-- will come crashing down.  Think of the housing crisis, except instead of houses it's dollar bills.

I'm actually surprised that the rest of the world hasn't realized that the dollars they're holding are worthless and they would be better off spending their money on themselves instead of financing our debt and consumption.  I guess the short term pain of dumping U.S. dollars currently outweighs the long term positive effects of having a stronger currency and being able to consume the goods that they work so hard to make.  It seems that politicians, no matter what country they're in, don't have the guts to make short term sacrifices for long term gains.  But eventually this will all happen.  Some event will take place and it will trigger a little bit of worry around the globe and within a very short period of time those dollars will all come back to America, the world will stop financing our debt and consumption, and we'll all be millionaires buying $10,000 loafs of bread. Or, you know, we could continue to run trillion dollar deficits forever, nobody will want to be paid back and everything will work out perfectly.  We'll probably find out in a few years.

Thursday, September 2, 2010

Mosque - 1, Ground - 0

OK media, you win.  The ground zero mosque is, somehow, a topic worthy of a national debate.  I suppose I'll throw my hat in the ring as well, even though it's utterly pointless and stupid.

First of all, I take issue with the term "ground zero mosque".  It is neither on ground zero, nor is it a mosque.  It's a few blocks away from ground zero and it's a Muslim community center.  (It's at this point that half of everyone reading this will tune out and lose any sliver of open-mindedness that might have existed.  But I guess I'll continue anyway.) It'll have a basketball court, swimming pool, auditorium, culinary school, and *gasp* a place for Muslim prayer.  If the "place for Muslim prayer" part makes it a mosque, then the pentagon is technically a mosque.  This is little more than a YMCA with a prayer room.

The media pundits have gotten very good at misleading phrases just like this.  Death panels, blood for oil, welfare queens, vast right-wing conspiracy, yes we can, ad nauseum...   These phrases might sound vaguely correct, but they're horribly misleading.  "Ground zero mosque" is just another one to add to the list.  Is everything around ground zero a "Ground zero [something]"?  Ground zero starbucks.  Ground zero McDonalds.  Ground zero jiffy lube.  Ground zero homeless bum begging for change and vodka next to the ground zero transvestite prostitute.  Just how far away does something have to be before it stops being in the "ground zero" halo area?  Would it be OK if they built this building 5 blocks away?  10?  20?  Where do you draw the line with this?

There are really only a couple things to consider here.  Is the land privately owned?  Why yes, yes it is.  Can people do whatever they want with the land they buy (for the most part)?  Why yes, yes they can.  But there I go, trying to use logic and reason in an issue as emotionally ripe as this one.  So instead of trying to give you my opinions, I'll take some time to address a few of the arguments I've heard.  And give you my opinions in the process, I guess.

"THEY'RE BUILDING A MOSQUE AT GROUND ZERO!!!!!!!!!!!!!!!" - Shut up, they're building a Muslim cultural center a few blocks away from ground zero.

"BUT MUSLIMS BLEW UP THE TOWERS!!!!!!!!!!!!!!!!!!!!!!" - Shut up.  The 'terrists' were Muslim extremists.  Stop grouping a whole religion into the most radical elements of that religion.  It's not as if all Christians rub little boys, blow up abortion clinics and protest war veterans' funerals with "God hates fags" signs.  Muslim does not equal Terrorist.  It's a very simple concept.

"BUT THEY COULD BE TRAINING NEW TERRORISTS THERE!!!!!!!!!!!!" - Seriously, I heard someone argue that.  I don't even know where to start with this one.  But I'm gonna go out on a limb here and say that if you actually believe this, then there is nothing I can say to make you come to your senses.  It's like arguing with someone who thinks Bush was behind 9/11.  Or, better yet, it's like trying to convince a complete moron who thinks they're really smart that they are, in fact, a complete moron.

"WHAT IF SOMEONE BUILT A JAPANESE CULTURAL CENTER DOWN THE ROAD FROM PEARL HARBOR??!!??!!!!???!!!????!!!??!???!!" - First of all, if some Jap bought the land, he should be able to do whatever he wants with it.  And yes, that includes building a Japanese cultural center.  Second, shut up and click here.

"BUT THE PEOPLE ON THE LEFT ARE CONSTANTLY ATTACKING CHRISTIANS!!!!! - Shut up.  When someone tries to keep you from doing your Christian thing it pisses you off.  So your response is to keep Muslims from doing their Muslim thing?  How childish is this?  Seriously, it's the same response you get when you ask a 5 year old why he did something wrong.  "BUT MOM, HE DID IT TO ME FIRST!!!!!!!!!"  Turn the other cheek and stop whining.

"NYC ALREADY HAS A LOT OF MOSQUES!!!!!!!!!!! THEY DON'T NEED ANOTHER ONE!!!!!!!!!!!!!!!!!!!!! - Shut up.  If you substitute "Wal Mart" for "mosque" you would be pissed at anyone making that same argument, and rightly so.  If there are too many mosques, then nobody will go there and it'll eventually shut down.  Let the free market decide how many mosques should be built in an area.  Yeah, you can't pick and choose when you want to invoke the free market argument.

"BUT THE TERRORISTS WILL VIEW THIS AS A VICTORY AND USE IT AS A RECRUITING TOOL!!!!!!!!!!!!!!!!!!!!!!!!" - Shut up.  I'm so sorry that I don't allow the opinions of religious extremists to dictate my actions.  Forgive me.

BUT IT'S INSENSITIVE!!!!!!!!!!!!!!!!!!!!!!!!!!" - OK, this one I can actually understand.  I think it's a knee jerk emotional response with no real merit, but I can at least understand the response.  9/11 was an extremely tragic event, and it changed us all in some way.  In many ways, it defined this generation.  But we all need to take a deep breath and think things through before we start letting our emotions control our logic.  And by "we all" I mean "men".  Women, there's no hope for you using logic in emotional situations.  And what is the only logical argument here?  Let them build the mosque if they want.

Maybe the people behind it have ulterior motives.  Maybe it's insensitive.  Maybe it's an asshole thing to do.  I might actually agree with some of that, but so what?  This is fucking America.  You know what we get to do in fucking America?  We get to be insensitive fucking assholes as long as we're not hurting someone else or stopping someone else from being an insensitive fucking asshole.  Once we start to prevent someone from pissing us off, then we start to lose the right to piss other people off.  And just because something pisses someone else off doesn't mean they shouldn't get to do it.  Maybe the mosque pisses you off.  I can appreciate that.  But that doesn't mean they shouldn't build it.  Eating meat pisses some people off, but that doesn't mean we should quit eating it.  Driving an SUV pisses some people off, but that doesn't mean we should quit driving it.  "In God We Trust" on our money pisses some people off, but that doesn't mean we should quit using it.  Saying "Merry Christmas" pisses some people off, but that doesn't mean we should quit saying it.

You see, almost everything that someone does will piss off someone else.  Maybe the greatest quality of America is that we don't get caught up with the emotion of being pissed off.  We have been pissing each other off throughout our history.  You know what we do about it?  Nothing.  Sure, we argue and protest and scream and yell.  But ultimately, we let people go about their business even if it offends others.  Christians, Jews, Atheists, etc. have all been offending their fellow Americans for as long as America has existed.  And now the Muslims want to join the party.  I say let them in.  After all, we've been building ground zeros next to their mosques for years now.  And if you want to buy the land next to their mosque and build a 1,000 foot tall statue of Muhammad, I'll defend your right to do it.  Even if it does make you an insensitive fucking asshole.