Comments (24)

• David White

  "Let me end simply by asking the concerned reader, do you think our free enterprise system works or not?"

  This concerned reader believes that our free enterprise system WOULD work if it were in fact free, the problem being that because the money it runs on is not a product of it -- but is instead a product of government edict -- it is inherently flawed and thus doomed to failure.

  It is for this reason, after all, that we are moving rapidly from a save-and-produce economy to a borrow-and-spend economy, financing our "growth" via foreign debt that now accumulates at a rate of over $2 billion a day.

  Thus, while there is necessarily nothing wrong with a trade deficit, the fraud of government fiat currencies (not just our own but all such currencies) has skewed the global economy out of all proportion relative to what a truly free market would look like.

  That the fraud has perpetuated itself this long is to be marveled at. But anyone who thinks it can perpetuate itself indefinitely does so at his peril.

  Published: December 15, 2005 8:18 AM

• Aaron Singleton

  Excellent article. With regards to China, the words and actions of US pundits and politicians is entirely predictable. Sensing a future downturn, they rush to find a scapegoat so they don't have to take the blame for the effects of their own policies. When things go bad China will take the heat and our politicians will say "I told you so" and then go about centralizing more power in their own hands.

  The scary thing is that if such a scenario does occur and the Chinese economy suffers serious long-term setbacks, the Chinese government will undoutbedly use it to discredit individual freedom and the market system and justify increased control over the lives of their citizens. While this could in the end be a harmless scenario that diffuses itself with minimal pain, it could also lead to war. Pointing fingers and using trade policy as a weapon is a dangerous road. I don't think we've learned yet that the Chinese are far too big and powerful to be pushed around any more. As Mr. Murphy pointed out, we should quit complaining and take the free/cheap stuff while it lasts.

  Published: December 15, 2005 8:26 AM

• Michael A Clem

  Good article, but I don't think you adequately addressed the security angle. We will maintain peaceful relations with China as long as the U.S. government doesn't do something stupid to interfere with our trade with China. Some may see it as naive, but I still think that unilateral free trade with the rest of the world is good foreign policy, and we should lay off the tariffs and other economic sanctions, regardless of tariffs and such that are applied to US exports. It could even help us in Cuba.
  

  Published: December 15, 2005 9:06 AM

• Paul Edwards

  Excellent article, thank-you.

  “Even in the "worst case" scenario, where the Chinese government (say) completely subsidizes its TV exporters in order to ship US consumers free plasma screens, this would be a boon to the American economy. Yes, it would put US television producers out of business, but it would allow US consumers to get TVs for free. After American workers had reshuffled in response to the free goods, per capita US income would be higher; instead of using scarce resources to produce television sets, we would now be showered with them for free and could use the freed up resources to produce additional goods and services.

  “…The principles here [of the undervaluation of yuan] are the same as with subsidies to foreign exporters; the Chinese government is once again making its own people poorer in order to benefit privileged Chinese firms (and US consumers of their products).

  “…this policy of the Chinese government represents a simple gift to US consumers. Yes, it hurts the business of particular US producers, but not the economy as a whole; the benefits to consumers outweigh the losses to producers.�

  How scarce are such accurate observations these days (outside of our little Austrian circles)?

  Great analysis and great article.

  Published: December 15, 2005 10:44 AM

• Sidney Patin

  Mr. Murphy does not mention that China has greatly increased their purchases of lead and brass. There is some speculation that China is gearing up for a very large military event. I don't have the sources at hand, but China is becoming a real threat to the security of all existing world powers. I certainly hope our "leaders" are aware of this escalation (if there is one) and are preparing for it.

  Published: December 15, 2005 11:33 AM

• Stefan Karlsson

  Good article, but with with regards to the issue of U.S. savings you're overlooking that the low U.S. savings rate is partially a result of U.S. government policies, particularly the budget deficit and artificially supressed interest rates. But that is of course consistent with the general theme of your article that China shouldn't be blamed.

  Published: December 15, 2005 11:44 AM

• Vince Daliessio

  Sidney frets;

  "Mr. Murphy does not mention that China has greatly increased their purchases of lead and brass."

  The operative word is "purchases". How this is anything but peaceful trade is known only to the paranoid mind.

  "There is some speculation that China is gearing up for a very large military event."

  The operative word is "speculation".

  I don't have the sources at hand, but China is becoming a real threat to the security of all existing world powers.

  Not to go too far out on a limb here, but (absent aggression of course)is that necessarily such a bad thing?

  Good article Bob.

  Published: December 15, 2005 11:55 AM

• Vince Daliessio

  Sidney frets;

  "Mr. Murphy does not mention that China has greatly increased their purchases of lead and brass."

  The operative word is "purchases". How this is anything but peaceful trade is known only to the paranoid mind.

  "There is some speculation that China is gearing up for a very large military event."

  The operative word is "speculation".

  "I don't have the sources at hand, but China is becoming a real threat to the security of all existing world powers."

  Not to go too far out on a limb here, but if the threat is via peaceful trade(absent aggression of course)is that necessarily such a bad thing?

  Good article Bob.

  Published: December 15, 2005 11:56 AM

• Paul Edwards

  Sidney:

  I think it is safe to say that Washington is prepared to escalate its aggression to anywhere on the planet including China. Watch for the increased US trade sanctions against China. After a while, Washington will get bored with economic warfare and will want to get down to the real thing. If the Iraq, Afghanistan and coming Iran and Syria debacles don't mollify them first, that is.

  Published: December 15, 2005 12:07 PM

• Don Beezley

  Excellent article--thanks. Never thought I'd miss Bill Clinton, but it would be nice to have someone around right now who is so over-involved with himself that he doesn't have time to hatch military plots against everyone else in the world--especially China.

  Published: December 15, 2005 5:15 PM

• Juan Garofalo

  The point of these machinations is to stimulate Chinese exports. By holding the dollar artificially high against the yuan, Chinese goods (priced in yuan) are artificially cheap to US consumers, and hence they are more likely to buy goods from Chinese firms rather than from domestic competitors. As with subsidies, this policy of the Chinese government represents a simple gift to US consumers. Yes, it hurts the business of particular US producers, but not the economy as a whole;

  
  Now this a problem.

  If American manufacturers of product 'A' can't compete in a real free-market then they ought to go bankrupt. Morality dictates so.

  However, American manufacturers facing competition from a subsidized firm is a different story. The problem is that a subsidized firm is a criminal entity. It's simply a branch or facade of a nation-state.

  Now, I am not at all sugesting that the American manufacturer should retaliate asking 'favours' from the American government.

  I don't know what the proper solution is but I think that to say

  the benefits to consumers outweigh the losses to producers.

  is not fair. The 'benefits' come from the taxes the 'foreign' government robs from its citizens to subsidize 'foreing' producers.

  Those 'benefits' are stolen goods...

  The 'local' producers are inocent victims at the hands of a 'foreing' government.

  A consequent anti-statist philosophy must acknowledge that...

  Or better, forget about artificial borders. The same thing is true for two American firms if one of them is subsidized.

  
  

  Published: December 15, 2005 6:50 PM

• Juan Garofalo

  The point of these machinations is to stimulate Chinese exports. By holding the dollar artificially high against the yuan, Chinese goods (priced in yuan) are artificially cheap to US consumers, and hence they are more likely to buy goods from Chinese firms rather than from domestic competitors. As with subsidies, this policy of the Chinese government represents a simple gift to US consumers. Yes, it hurts the business of particular US producers, but not the economy as a whole;

  
  Now this a problem.

  If American manufacturers of product 'A' can't compete in a real free-market then they ought to go bankrupt. Morality dictates so.

  However, American manufacturers facing competition from a subsidized firm is a different story. The problem is that a subsidized firm is a criminal entity. It's simply a branch or facade of a nation-state.

  Now, I am not at all sugesting that the American manufacturer should retaliate asking 'favours' from the American government.

  I don't know what the proper solution is but I think that to say

  the benefits to consumers outweigh the losses to producers.

  is not fair. The 'benefits' come from the taxes the 'foreign' government robs from its citizens to subsidize 'foreing' producers.

  Those 'benefits' are stolen goods...

  The 'local' producers are inocent victims at the hands of a 'foreing' government.

  A consequent anti-statist philosophy must acknowledge that...

  Or better, forget about artificial borders. The same thing is true for two American firms if one of them is subsidized.

  
  

  Published: December 15, 2005 6:50 PM

• Juan

  A consequent anti-statist philosophy must acknowledge that...

  Sorry, I meant a 'consistent' philosophy...
  

  Published: December 15, 2005 11:34 PM

• Antony Mueller

  Are trade deficits bad? - basically not. Are trade deficit risky? - yes. Can they go on? No. Does size matter? - yes.
  The problem of course will not show up as long as the money flows. The problem comes when the buck stops. The trigger can come from the creditor's side or the borrower's side. What really matters is the structure of production. Like massive internal debt, external debt, too, brings about malinvestment. Persistently high trade deficits have the same quality as any other artificial boom. See my article at safehaven: http://www.safehaven.com/showarticle.cfm?id=4289&pv=1

  Published: December 16, 2005 5:06 AM

• William

  I really hope that the protectionist forces in society do not hurt the FLOURISHING relationship between the US and China. There has NEVER been a better way to promote stability and national security than to conduct commerce with your potiential foes. As it stands, China can not threaten the US without societal mayhem and tens of millions of US consumer would take any of these stupid protectionist measures out on the politicians that enacted them.

  Moreover there is no way two countries will got to armed conflict when they have a trillion dollar trade relationship.

  Published: December 16, 2005 7:58 AM

• Paul Edwards

  Antony,

  Don't you feel that the root of all problems mentioned in your article at

  http://www.safehaven.com/showarticle.cfm?id=4289&pv=1

  is two things:

  1. over-consumption due to government spending, which results in a reduction in savings and capital investment.

  2. inflation.

  Does it not seem that low savings, and trade and current account deficits, if and when problems at all, are problems only in as far as inflation and government spending have influenced them? It strikes me that a discussion on economic problems which is sparse in the terms "inflation" or "credit expansion" and heavy in terms as "trade or current account deficits" is coming at the issue sideways, from symptoms rather than the problem, and is in danger of missing the important points of the issue entirely.

  Published: December 16, 2005 11:10 AM

• Antony Mueller

  Paul,
  yes, I also think that the trade deficit problem can be traced back to the budget deficit (which represents negative savings)and a monetary policy which has made personal saving unattractive. In this respect, however, the trade deficit is not just a symptom but an additional affliction that in turn produces other unfavorable consequences, particularly on the structure of production. What's still lacking to make the picture complete is an outburst of inflation. Then, however, it is too late to make the policy corrections.
  

  Published: December 17, 2005 8:57 AM

• David White

  Antony,

  I've been reading that inflation's a good bit higher than is being reported by the government (though, if true, I don't understand how it's doing so), but in any case, if it's still not too late for policy corrections, what (in the highly unlikely event that politicians summoned the necessary courage) can be done? Isn't it already too late? Or is it possible (but surely it's not) that "This Time It's Different"? -- http://news.goldseek.com/MillenniumWaveAdvisors/1131894000.php

  Published: December 17, 2005 10:43 AM

• Chris Donabedian

  There are some great points to this article. No doubt we should enjoy the benefits of cheap goods while they last.

  But I think there is somewhat of a strawman here. I just don't think many serous observers are concerned with the concept of cheap goods in and of itself. The problem is more here at home with the governments budget deficits and its negative effects of those. The fact that China is willing to finance the debt so cheaply is a good thing. The fact that we have all the blessed debt is the problem. And that's Uncle Sam's fault (or King George's).

  Published: December 17, 2005 1:56 PM

• Paul Edwards

  Chris,

  I think that congress is threatening to inflict tariffs against China suggests that many others will buy into their thinking and assume that these low priced goods from china are a bad thing for domestic competitors and therefore bad for domestic consumers in the long run. That this is complete fallacy will be as lost on the masses as it (apparently) is on congress.

  Published: December 18, 2005 1:26 AM

• ALFRED LORD MARSHALL

  Your assertion that a trade deficit does not hurt the US is surely based on the theory of comparative advantage which holds that all trade is barter. Trade between US and China is not pure barter, not even close. A trade deficit in the real world involves a transfer of capital, money or debt. Ever heard of the "capital account?" There is a benefit to lower prices but also a cost by a way of the multiplier and the transfer of wealth or the accumulation of debt. Honest economics involves weighing the two.
  

  Published: December 19, 2005 12:28 PM

• RPM

  "Alfred Marshall" wrote:

  Your assertion that a trade deficit does not hurt the US is surely based on the theory of comparative advantage which holds that all trade is barter. Trade between US and China is not pure barter, not even close. A trade deficit in the real world involves a transfer of capital, money or debt. Ever heard of the "capital account?"

  Yes, I'm familiar with the relation between the trade deficit and the capital account. I once read an article on Mises.org that dealt with this issue:

  Now who else might want US dollar bills, besides people intent on importing goods made in the United States? Well, some individuals (as well as foreign governments) might want to literally accumulate stockpiles of dollar bills. But the far more common purpose is to use those dollar bills to buy stocks, bonds, or other assets from the United States. For example, in 2000 the United States had a (goods and services) trade deficit of $375.7 billion, but it experienced a net inflow of capital of $407.3 billion.

  The title of the article was "The Alleged China Threat."

  Published: December 19, 2005 2:50 PM

• Paul Edwards

  Alfred,

  Comparative advantage "holds that all trade is barter"? You mean it only has application in a barter economy? I've never heard that. It doesn't seem to me that money should negate the reality of comparative advantage that simply boils down to this: Even if i do every thing more efficiently than you, we can still both benefit in mutual trade and you can still be useful if you do the things i do the least efficiently and I do those things i do most efficiently. Or, as PCR explains it,

  "Ricardo found the answer in relative or comparative advantage. He said that if Portugal specialized in wine, where its absolute advantage was greatest, and England specialized in cloth, where its disadvantage was least, total output would be higher than if both countries achieved self-sufficiency by producing both products. The higher productivity from specialization would result in mutual gains from trade."

  Published: December 19, 2005 6:16 PM

• Lyle

  You argue that deficits with China ultimately mean that "someone else must be willing to supply Yuan in order to buy up those excess dollar bills. [W]ho else might want US dollar bills?" Might it be that profligate American consumers, American state governments, and the American federal government might want these US dollar bills to repay their lines of credit and loans?What might they sell in assets to get the money they need to prevent bankruptcy? True, it is not China’s fault, rather each entity’s own profligacy--certainly not the banks legal monopoly on counterfeiting--but isn’t China a nation whose leaders continue to threaten the survival of the United States and one in which leniency and mercy will be unlikely when the debts come due?

  You argue that lower wages in China provide a comparative advantage for US industry migrating to China and for American consumers who buy their cheap imports. Isn’t this comparative advantage the result of a domestic regulatory state rather than cheap Chinese labor? Is the Chinese laborer getting the real wage or is it one that is depressed because the multinationals made a deal with the Communists for slave labor?

  
  You argue that "foreign government subsidies to their manufacturers" are "gifts" to the American consumer. Is an economic subsidy a "gift" that an Austrian free market economist should be supporting? Is buying a good produced with slave labor the same as endorsing or promoting slavery? Is buying a good with a subsidized price the same as using foreign governments to steal from foreign citizens for an artificially elevated standard of living?

  And what about the American producer? Doesn’t this amount to the producer bearing the costs of domestic regulation while suffering competition against artificially low prices? Is welfare good so long as Americans benefit, whether they be the American stockholder or American consumer? If foreign government intervention is a "gift," why isn’t domestic intervention?

  You argue that when the Chinese government buys dollars with Yuan it does so in order to keep the price of Chinese exports low as a result keeping the dollar artificially strong. You state that such a policy "once again is making [the Chinese] people poorer in order to benefit privileged Chinese firms" and the American consumer.

  The principle here is that depreciating one’s own currency gives foreign currencies more purchasing power. Aren’t the Chinese people benefiting as stockholders because Chinese firms are benefiting as a result of the Chinese government keeping its Yuan weak? Won’t increasing the purchasing power of the dollar by buying US dollars result not only in more exports for China but greater purchasing power its stockpile of dollars? Won't it do the same for its return on investment in US government bonds?

  What will happen should China dump the dollar by spending it into the American economy? Won’t China make off with the goods while Americans drown in runaway inflation? Won’t this make foreign currencies stronger, American goods cheaper, and American citizens poorer to benefit "privileged [American] firms" and foreign consumers? But it’s alright because it is American stockholders that are benefiting, right?

  You argue that a tariff would not thwart the ambitions of Chinese political rulers to destroy America. Might not a tariff cause a nation to be more honest in its international trade policies? If not, isn’t this an indication that the Chinese either have no real desire for laissez faire or that they realize no real comparative advantage exists for them except in slave labor, a depreciated currency, and the stockpiling of US government debt?
  

  Published: June 8, 2007 10:30 PM