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PeakTrader:

China should be exchanging its goods for U.S. goods. Instead, it exchanges its goods for U.S. dollars (or cheap paper), which depreciate through inflation, interest rates, and currency exchange rates, because China wants to (or has to) maintain employment.

China selling goods too cheaply and lending dollars too cheaply benefit the U.S. more than China.

Tariffs, on Chinese goods, would slow or stop that virtuous cycle.

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James, the U.S. has been able to sustain up to $800 billion a year trade deficits in the long-run.

For example:

You buy a set of four $200 tires not for $800, but for $500, to induce U.S. demand and raise foreign output and employment.

Then, you borrow the $500, to either invest or buy other foreign goods or both.

If you pay back the $500 within a month, you pay roughly $500. If you pay it back in a year, you pay $450. If you pay it back in two years, you pay $400, etc..

So, you’re able to consume more than produce, in the global economy and in the long-run.

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And, because of diminishing U.S. marginal utility, prices of foreign goods and U.S. interest rates fall, or foreign currencies appreciate, (i.e. foreigners receive fewer units of their currencies per dollar) to continue inducing U.S. demand and maintain foreign employment.

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Morganovich, when you don’t understand international trade, then of course it doesn’t make any sense to you.

I can only begin to explain the mechanisms.

For example, Japanese yen was once worth 360 per dollar and appreciated, over time, reaching 80 per dollar recently. Over that time, Japan exported more to the U.S. than it imported from the U.S..

Japan invested dollars in U.S. Treasury bonds to spur net exports, to raise or maintain output and employment. U.S. Treasury bonds are the safest investment in the world with the lowest interest rates.

Because Japanese would’ve received so few yen per dollar, they eventually invested in U.S. real estate, built U.S. factories, retired in Hawaii, etc..

The net result is the U.S. basically received hundreds of billions of dollars of free goods from Japan for Japanese employment.

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Ron, I think, I explained some 7th year economics in a way almost everyone can understand, except for a few people like you.

I won’t begin to explain the Japanese liquidity trap to you, because that would get into Keynesian economics, which would confuse you even more, if possible.

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Morganovich, again, your comment makes no economic sense. I’ve explained one way how foreign saving is destroyed, and yet, you still believe all foreign consumption is deferred.

People don’t buy goods based on the net present value of future cash flows. They buy goods based on market prices. If producers want to sell more goods, they lower the price. If they want to sell fewer goods, they raise the price.

When you import four tires for $500, there’s a current account deficit and a capital account surplus (the balance of payments always balances, in the initial transaction). However, over time, the dollar depreciates, which means interest payments and the principal decline in real terms.

And, when you bought those tires at $500, you won’t buy more tires, unless they’re $300. So, that’s another price foreigners pay to raise or maintain production. Some is deferred consumption and some is destroyed saving, which is why the U.S. can consume more than produce in the global economy and in the long-run. A proportion of foreign goods is basically free.

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Or, you can try to understand an economic model, e.g. the Mundell-Fleming model (which I give you odds of zero based on your prior comments), or read the sentence of the article below: “For America, it has meant cheaper iPods, lower interest rates, reduced mortgage payments, a lighter tax burden.”

James Fallows studied American history and literature at Harvard, where he was the editor of the daily newspaper, the Harvard Crimson. From 1970 to 1972 Fallows studied economics at Oxford University as a Rhodes scholar.

January/February 2008

Through the quarter-century in which China has been opening to world trade, Chinese leaders have deliberately held down living standards for their own people and propped them up in the United States. This is the real meaning of the vast trade surplus—$1.4 trillion and counting, going up by about $1 billion per day—that the Chinese government has mostly parked in U.S. Treasury notes. In effect, every person in the (rich) United States has over the past 10 years or so borrowed about $4,000 from someone in the (poor) People’s Republic of China.

Any economist will say that Americans have been living better than they should—which is by definition the case when a nation’s total consumption is greater than its total production, as America’s now is. Economists will also point out that, despite the glitter of China’s big cities and the rise of its billionaire class, China’s people have been living far worse than they could. That’s what it means when a nation consumes only half of what it produces, as China does.

Neither government likes to draw attention to this arrangement, because it has been so convenient on both sides. For China, it has helped the regime guide development in the way it would like—and keep the domestic economy’s growth rate from crossing the thin line that separates “unbelievably fast” from “uncontrollably inflationary.” For America, it has meant cheaper iPods, lower interest rates, reduced mortgage payments, a lighter tax burden. The average cash income for workers in a big factory is about $160 per month. On the farm, it’s a small fraction of that. Most people in China feel they are moving up, but from a very low starting point.

This is the bargain China has made—rather, the one its leaders have imposed on its people. They’ll keep creating new factory jobs, and thus reduce China’s own social tensions and create opportunities for its rural poor. The Chinese will live better year by year, though not as well as they could. And they’ll be protected from the risk of potentially catastrophic hyperinflation, which might undo what the nation’s decades of growth have built. In exchange, the government will hold much of the nation’s wealth in paper assets in the United States, thereby preventing a run on the dollar, shoring up relations between China and America, and sluicing enough cash back into Americans’ hands to let the spending go on.

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http://www.aei-ideas.org/2013/07/friday-afternoon-links-7/#comments

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PeakTrader:

"Equal outcomes"

They either don’t believe in the Law of Comparative Advantage, or they want short people to paint ceilings and tall people to paint floors.

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PeakTrader:

The Oil Drum: “Running Faster to Stay in Place.” How much can you say about Peak Oil in eight years?

World Crude Oil Production (millions barrels per day) EIA

1990: 60.5
1995: 62.4
2000: 68.5
2005: 73.6

2006: 73.3
2007: 72.9
2008: 73.7
2009: 72.3
2010: 74.1
2011: 74.1
2012: 75.6
2013: 75.5 (annual rate first three months)

U.S. Crude Oil Production

2008: 5.0 (low from 1970 peak)
2009: 5.4
2010: 5.5
2011: 5.7
2012: 6.5
2013: 7.1 (annual rate first three months)

http://www.eia.gov/totalenergy/data/monthly/pdf/sec11_5.pdf

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Two-thirds of oil is used in transportation.

Two-thirds of electricity comes from coal and natural gas.

The U.S. is abundant in coal and natural gas.

Could this be a future headline?:

“Tesla Motors surpasses GM as top automaker”

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PeakTrader:


"Foreign exchange reserves earn low returns, if any, and are generally not bought by government officials for investment purposes. Government bonds are conservative securities that make minimal interest payments. Government bond interest income may not be enough compensation to make up for losses in value due to deteriorating exchange rates associated with the foreign currency.

As of 2010, China has bought more than $2 trillion worth of dollar-denominated reserves to lower exchange rates for the Chinese yuan against the dollar. These transactions are intended to benefit the Chinese export economy, by making the nation's wares more affordable for foreign buyers."

http://www.ehow.com/about_6645776_nation-need-forex-reserve_.html