themadgreek

themadgreek
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Old Westbury, New York, United States
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December 27
Bio
Dean is the Mad Greek and a veteran of the capital markets for over 20 years. He is host of the syndicated radio program Capital Markets Live! and founder of Status Equity Research, an online publication on the capital markets.

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FEBRUARY 8, 2009 5:31AM

THE RETURN OF ECONOMIC RATIONALISM

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The Economist - The Return of Economic Nationalism - Cover Photo Feb. 7, 2009 

Begging for the Return of the White Swan

Published in The Economist for February 7 - 13, the lead story, The Return of Economic Nationalism, is another battle cry, warning against the rising tide of nationalism and protectionist measures.  The sad reality of exponential altruism is that we live in a universe defined by the weakest force in quantum physics, gravity. Time is like distance and it is relative to all things including the expansion model of modern day globalization. Over a protracted new world period 1980 to 2008 (from REAGANomics to AmBUSHanomics), gravity, too, has its role. Pure and simple, nothing goes up in a straight line, uninterrupted forever. Even the universe is rife with primordial black holes that constrain expansion of matter within that region of space.

I do not dispute the importance of open and fair multilateralism. In fact, the last frontier on earth in this regard, Africa, has a few tinderboxes like Somalia and Liberia, dangerously positioned on the cliff of an already fragile world economy. I certainly agree with those who believe it is vitally important to preserve the model, ideal and purpose of multilateralism. And it is true that the preservation of emerging market growth and stability is jeopardized by a rush to nationalism. However, at the same time, to draw conclusions that the disarmament of nationalism (the alleged doomsday weapon of mass trade destruction) should rest squarely on the shoulders of America and its leadership is like telling an ex-husband, who was taken to the cleaners by his ex-wife, to go borrow money and pay her alimony after she remarries. Asia has not only emerged as a highly productive economic force, it has also positioned itself through wealth creation and savings to have the means to finally step up and Buy America, in its purest form, through more equitable balances of trade. 

The greater the distance from the big-bang genesis of matter - be it the exploding mass  sub-atomic photons released into an ever expanding universe or the exponential release of currency in the creation of emerging markets - the less gravity it will have in relation to the mass from which it is created.  The US dollar is so far away from its home, in trillions, that it has no foundation of value in its own market. For the dollar to come home Milton Friedman reasoned that trade would have to occur either directly or indirectly.  Considering deficit trade agreements are in place between the U.S. a debtor/deficit and Japan/China a creditor/surplus, the dollar isn’t coming home anytime soon unless Japan and China’s balance of trade with surplus U.S. trade partners exists. Take this away and all that’s left are adjustments to currency policy and concessions on foreign investment in the Far East to effectuate a better balance of trade.

Splitting Hairs or Splitting Babies

Now, for practical purposes, our three dimensional universe has finite economic resources. There can be no such thing as unending.  Even galaxies get trapped by dark matter (weak force) and collapse in on themselves.  Is this to say that the world economic order is finished?  No, not by a long shot.  Did it collapse in on itself as far as banking is concerned? Yes. 

In the ongoing debate of how to unlock the credit markets and free the world of the effects of an economic winter, no one seems to be looking at the creditor nations with any sense of duty and responsibility. Turning the page on the next global economic cycle, the thrust and energy to promote continuous economic growth within a structure of finite resources must be passed - as history has so aptly taught us - to successors more fit to take the baton on the next leg of the race.  This crisis has already sewn the seeds of "me first" nationalism across the globe and I am certain that the stresses caused are treating EU-topia and its current 27 member constituency to run adrift of their collective esoteric decorum of equanimity.  After the banking crisis emerged, finger pointing became the art form of disdain – index finger out, middle finger in return.  It seems ever since 2003, American unilateralism has had unceasing critique. Now in the midst of each country’s pronounced self-preservation policy, why should the U.S. remain reticent?  And what of China and Japan? 

China's financial and banking industry is still in its relative infancy and its capital market has hardly reached the standard of being truly open. The country sports a high savings ratio and can stimulate demand when economic recession occurs. China's economy is therefore cushioned against the worst of the current disaster. To wit, any loss of trade (coming from America and other economically depressed nations) which results in a downward shift in China's GDP will be met with expansion of domestic demand, investment by reducing the burden on enterprises - a nice way of saying subsidy and lower corporate taxes - and increasing social expenditure - another nice way of saying government spending on public works.  Japan, experiencing a long suffering, protracted and deflated economy, nevertheless still has a surplus economy.

Hence, the U.S. Government, staring into an abysmal economy with a high and rising unemployment rate, a banking crisis and too numerous stock market scandals, decides to write a stimulus package that carries forth a pro American bias on trade. Anyone so much as whispering a degree of restriction, will be vilified by hoards of economists who are on the edge of their seats fearful that China and Japan will launch a confetti canon filled with worthless U.S. Treasuries into the global capital markets.  Well we’re not supposed to talk about those things. We can’t use terms and words like “unfair”, “inequitable”, “one sided”, and “manipulative”, because these terms are incendiary. The next fear mongering you’ll hear is that Wen Jaibao will personally come and slap an eviction notice on the front door of the U.S. Dept. of Treasury. If I say we need a policy dialogue with measured responses to creditor nations on balance of trade during economic downturns, I'm branded a nationalist/ protectionist. If I say direct the measures at China and Japan, I suddenly become an Anti-Sinomite

Protectionism is a fearfully and dreadfully dirty word that shakes the rafters and loins of the multi-national entities operating in potentially retaliatory environs. I prefer Partyisoverism.  Now that is a word with meaning.  It should replace Protectionism and purposefully so because Partyisoverism really is a word to describe the subtle, weighted and measured response to cleaning up decades of chaotic trade imbalances that have been shouldered by the benefactor (the U.S.) of multilateralism and globalization.

The international clamor over the “Buy America” provisions in the U.S. emergency economic recovery stimulus package stems from the House's call for U.S. raw material manufacturing to be the sole source of the government's expenditures in procurement and fulfillment of public infrastructure earmarks.  The productivity resources that will come from this give up/take away in trade can be adjusted to fit the hemispheric curve. If it affects our neighbors to the north and south, encourage specialization. Don't cutoff imports within free trade regions. In other words, keep Canada and Mexico in the mix.  As for the other exporters of raw materials, don't cut them off completely, but severely restrain these exports and going forward, evaluate key components in the balance of trade  with these exporting countries so as to modify restraints as the economy improves and the natural unemployment rate finds its way towards equilibrium. “…After all, we're not Communists [i]

Unfortunately, We Are Deeply Indebted To Communism

To believe that capitalism has a political preference, such that it is symptomatic of a democratic way of life, is purely anachronistic. America and Great Britain, long standing republics following the Hellenic concept of democracy, are the modern day leaders in sponsoring the accelerated expansion of globalization, enjoying the benefits of specialization and comparative advantage.  But like eating ice cream and drinking vodka, too much of a good thing can have damning consequences. A deficit nation that continues to pour an imbalanced and excessive amount of liquidity in support of global trade in the face of its own need for repair will lose its constituency faster and actually lead to long term cognitive dissonance and displeasure. And when things go to far awry of the sensibilities of the masses, Constitutional forces will be there to fix a direction astray of chaotic meanderings.  From America's humble beginnings, declared by the unanimous congressional assent of its independence in 1776, these words ring true today, for the weight of our times.

"When in the Course of human events, it becomes necessary for one people to dissolve the political bands which have connected them with another, and to assume among the powers of the earth, the separate and equal station to which the Laws of Nature and of Nature's God entitle them, a decent respect to the opinions of mankind requires that they should declare the causes which impel them to the separation." [ii]

America just went through an election process that showed a resolve for, among other things, “Change”. The U.S. has a new government administration that oddly, many political detractors have deridingly labeled “Communist”. This weekend, political debates continue to rage in Washington D.C. about the inclusion of exclusionary terms of trade in the proposed stimulus package. While, I agree with the dangers of isolationism and excessive protectionism, I don't agree on the weighted balance of responsibility and pointing a finger at America.  We are not the end all, be all, and patent holder of the crown of global enabling.  Our esteemed politicians need to steer clear of this horrible bait. There is a time and a place for supporting international supply side growth. The system works in normal times when multipliers and the marginal propensities of consumption and saving are fixed upon less volatility and variability of expectations. It wouldn’t hurt to establish a short run marginal constraint on global aggregate supply.  The arrogance of believing in such extraordinary power has otherwise driven the American Republic into the ground twice in a mere eighty years – handing the U.S. a double dose of hubris and two very unpleasant endings that has scarred generations.  The first collapse came from irresponsible protectionism, the second from irresponsible global spending.

Yes, I agree with The Economist regarding America’s involvement in the process of saving multilateralism, but not at the expense of this rare and unprecedented opportunity to right its own ship.  It is time for America to take up whatever measures are necessary in proper and fitting diplomacy and deliver a clear message to traditionally closed markets to drop their controls and open their markets to the fullest extent. With a USD dollar under pressure and oil now fairly in check, this will be the quickest and most effective means of reducing the burden of debt, trade imbalances and deficit spending. I applaud Treasury Secretary Geithner’s candor on trade policy and currency straight out of the gate. It has to start with a wake up call and Geithner did what needed to be done. He aimed a flare gun, not a shot gun at China and shed light on a very important issue – fair trade. Yet, instead of focusing on just and equitable principles of trade, protect-a-phobiacs start running wild for fear of losing their Keynesian keys to the Maybach filled dreamland that brought us to this point, separated domestic wealth in a most retched way, and now cautions against a backlash. It's foolishness to consider trade partners can't have honest dialog about such things without flank side fear mongering that exacerbates differences and galvanizes the nationalist resolve of our counterparts before we even sit across the negotiating table. You can’t take issue with Geithner’s comments because he’s the authority that should not be usurped other than by the President himself.

The Differences are Real

The numbers speak for themselves. All things equal, American consumers spend three times more on China’s exports to the U.S. than the Chinese purchase from the United States. In USD, at the workforce adjusted rate (unemployment), the average U.S. worker outspends the Chinese laborer by $2,293 to $766 (as adjusted; $87 in actual) in per capita income expense for each other’s goods. The U.S. trade imbalance with China last year was a whopping -$268.25 billion.  Here’s the scorecard.

Average gross per capita workforce income is as follows (in USD):

 

U.S. $6.789 trillion - $332.59 billion is spent on imports from China & $145.63 billion is spent on imports from Japan       

                                   

China $4.033 trillion - $66.04 billion is spent on imports from the U.S. & $75.99 billion is spent on imports from Japan

 

Japan $2.453 trillion - $66.50 billion is spent on imports from the U.S. &  $117.53 billion is spent on imports from China

Again, I agree with writer from The Economist, where the article stated:

The international economic system depends upon a guarantor, prepared to back it during crises.[iii]

No truer words can be spoken, especially during a time that threatens the global hegemony of the G20.  However, they seem to be a bit jaded from wearing the wrong set of rose colored glasses these days. This is why it is more important for creditor nations (like China and Japan) to take the lead in extending growth in global GDP, not debtor nations (like the U.S. and U.K.).  History is clear to point to the failures. Smoot-Hawley was a failure because of the magnitude of the tariffs (60% on average for foreign imports) and the fact that the enforcer, the U.S. was a creditor nation. The trade restrictions were out of whack and an unwarranted use of poor judgment in a world hardly fit with mature and developed industrial economies. One might say Smoot-Hawley was like a teenage bully punching out a five year old kid.

Considering the numbers stated above, it seems that the protectionist name dropping and fear mongering has put the shoe on the wrong foot. To further this notion that protectionist restrictive threats to globalization or the removal of such measures are dependent upon a lead sponsor creditor nation, one need only look at the U.S. circa 1986. This was the last time America was a creditor nation. It was then that the U.S., already in the first phase of its long bullish march – an aggressive and expansive domestic supply side policy – added very friendly and more open immigration and trade policies with China. The excessive over stimulating and drunken deficit spending put forth to support this and other massive specialization programs have left their mark. So that I understand the current argument correctly, with a comatose U.S. economy laying half dead in the Doha ICU, the very liberal trade policies that quickly drove America’s status from creditor to debtor nation should be fearfully enforced to continue. The reason, according to The Economist, is that “trade encourages specialization, which brings prosperity.” A nice catch phrase from the burnt postcard pitched into the ashes of millions of foreclosures and bankruptcies in the U.S. last year. Apparently, the debtor nation supply-side free trade system has its disadvantages. Now that the Black Swan has laid her toxic eggs we can see how prosperity is apportioned in these, the most interesting of times.

 


[i]Certainly, he can present a bill for such services. After all, we're not Communists. But he must let us draw the water from the well. - Don Barzini speaks to the other Dons - The Godfather (1972)  

 

[ii] The U.S. Declaration of Independence – July 4, 1776

 

[iii] The Economist, February 7th – 13th – The Return of Economic Nationism. Pg. 9 – 10.

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Dean nails this right on the head. In order for this economy to re-gain any momentum we must retreat from outsourcing in spite of the affects it will have on other countries. Once again I applaud the Mad Greek for blowing my mind!!!!