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PeakTrader:

JazzBumpa, a weak village cannot support much.

The strength of a community is (at least largely determined) the summation of the strength of each individual.

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Dan, I disagree with JazzBumpa. It doesn’t take a village, it takes individuals.

Let’s take a simple example – a community of three hobos.

The community cannot help those hobos much, except in redistributing what they have, which is a zero sum game, although one hobo may value an item more than another.

However, if one hobo builds a still, grows the ingredients, and works to produce alcoholic drinks, then the community improves

I think, many people forget villages, communities, or economies are made up of people.

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JazzBumpa, you seem to discount the strength of individuals to strengthen a village, community, or economy.

I’ve explained synergy above, and also before in the Law of Comparative Advantage (i.e. if two countries, or individuals, specialize and trade, both countries, or individuals, benefit).

A major difference between the U.S., the world’s only superpower, and other countries is the difference between the best and brightest individuals in the world (immigrants made the U.S. "better and smarter").

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Joel, you’re in denial, and you didn’t understand what I wrote. If it took only a village, why didn’t the Congo rebuild Europe? Did I hear anything about individuals from JB, until I brought it up?

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If you’re better than someone else at both doing something difficult, e.g. improving an iPhone, and doing something easy, like putting iPhone parts together, then you should specialize in improving iPhones, because it’s more valuable and pays much more, and another specializes in putting iPhone parts together, which is less valuable and pays much less, and then trade.

That’s a difference between individuals.

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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 (Chinese) 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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The rebuilding of Europe and Japan added to U.S. per capita real GDP, and it was faster after Germany and Japan rebuilt.

GDP = Consumption + Investment + Government + Net Exports.

If you take away China’s investments and net exports, you have consumption and government, and we know consumption is low and malinvestment is high.

China’s GDP is an illusion. The private sector is small (consumption fell from 45% to 36% of GDP in the past decade). To a large extent, China is a giant U.S. assembly plant.

What the Chinese do best is corruption, crony capitalism, misallocate resources, cause negative externalities, prevent creativity, create inefficiency, and export much of its GDP.

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And, JazzBumpa, this is part of one of my comments, you also deleted, that supports the Fallows article:

…the U.S. is able to maintain trade deficits in the long-run, mostly, because foreigners lose through changes or differences in inflation, interest rates, and currency exchange rates. For example, over the past few decades, the Japanese yen appreciated from 360 to 100 per dollar, which means Japan received fewer and fewer yen per dollar.

Here’s an article by the Fed:

Income Flows from U.S. Foreign Assets and Liabilities
Federal Reserve Bank of New York
November 14, 2012

Foreign investors placed roughly $1.0 trillion in U.S. assets in 2011, pushing the total value of their claims on the United States to $20.6 trillion. Over the same period, U.S. investors placed $0.5 trillion abroad, bringing total U.S. holdings of foreign assets to $16.4 trillion. One might expect that the large gap of -$4.2 trillion between U.S. assets and liabilities would come with a substantial servicing burden. Yet U.S. income receipts easily exceed payments abroad.

As we explain in this post, a key reason is that foreign investments in the United States are weighted toward interest-bearing assets currently paying a low rate of return while U.S. investments abroad are weighted toward multinationals’ foreign operations and other corporate claims earning a much higher rate of return.

U.S. investors earned a much higher rate of return on multinationals’ foreign operations and similar corporate holdings than did foreign investors here, 10.7 percent versus 5.8 percent, respectively.

The superior U.S. rate of return on FDI, as well as the greater tilt in U.S. foreign investments toward FDI, accounts for the $322 billion income surplus recorded in this category in 2011…The United States has earned a substantial premium on FDI investments at least since the 1960s.

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Globalization has allowed the U.S. to consume more than produce, up to $800 billion a year, in the global economy and in the long-run.

The U.S. offshored low-end manufacturing, imported those goods at lower prices and higher profits, and shifted limited resources into high-end manufacturing and emerging industries.

Moreover, I may add, because the U.S. shifted from low-end manufacturing into high-end manufacturing and emerging industries, the U.S. has much more market power than its trading partners.

The U.S. not only leads the world in the Information and Biotech Revolutions, it leads the rest of the world combined (in both revenue and profit).

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The World’s Reserve Currency
October 3, 2007

“A reserve currency is money that’s held by many countries as their foreign exchange reserves. It’s also the currency that’s typically used to price commodities, such as oil and gold, that are traded between countries.

A country whose currency is the predominant reserve currency benefits tremendously. In the case of the dollar, the U.S. benefits from the increased demand for the dollar that the reserve currency status creates.

Other countries give the U.S. valuable goods in exchange for dollars issued by the Federal Reserve. They also lend the dollars they’ve accumulated back to the U.S. at low interest rates. Most significantly, the U.S. benefits from importing these goods and exporting its inflation to other countries in the form of depreciating dollars.”

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Milton Friedman:

“The “worst case scenario” of the currency never returning to the country of origin was actually the best possible outcome: the country actually purchased its goods by exchanging them for pieces of cheaply-made paper. As Friedman put it, this would be the same result as if the exporting country burned the dollars it earned, never returning it to market circulation.”

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Joel, you’re in denial, and you didn’t understand what I wrote. If it took only a village, why didn’t the Congo rebuild Europe? Did I hear anything about individuals from JB, until I brought it up?

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If you’re better than someone else at both doing something difficult, e.g. improving an iPhone, and doing something easy, like putting iPhone parts together, then you should specialize in improving iPhones, because it’s more valuable and pays much more, and another specializes in putting iPhone parts together, which is less valuable and pays much less, and then trade.

That’s a difference between individuals.

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Joel, so you agree with JazzBumpa (in the first comment responding to the article) “It takes a village,” any village, as long as it’s “a village.”

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Nanute:

Seems to me, every village has at least one idiot.

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PeakTrader:

Obviously, some villages have many idiots.

All villages aren’t the same.

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