Pretend that you own a company that used to make and sell beer, firewood and baked goods to all parts of the world

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AMERICAN DREAM

AMERICAN NIGHTMARE

A HEAD’S UP FROM A CHINESE NEWS SOURCE

LINK: http://news.xinhuanet.com/english/2009-11/14/content_12453090.htm

WASHINGTON, Nov. 13 (Xinhua) -- The U.S. trade deficit increased 18.2 percent in September to 36.5 billion U.S. dollars, the highest level since January, the Commerce Department reported Friday.

The figure was more than the 31.7 billion dollars economists had expected. The key factor that drove up the trade deficit in September was foreign oil prices, which rose to their highest level in nearly a year, offsetting a fifth consecutive gain in exports.

The Commerce Department said that exports, which have been rising since May, increased 2.9 percent to 132 billion dollars, reflecting stronger sales of American autos, aircraft and industrial machinery.

Imports rose 5.8 percent to 168.4 billion dollars, led by a 20.1 percent jump in oil shipments.

So far this year, the U.S. trade deficit is running at 366 billion dollars, about half of last year's 695.9 billion dollars deficit.

Analysts expected that a rebounding global economy will keep pushing demand for exports higher, helping to bolster the U.S. recovery.

President Barack Obama said earlier this month that the U.S. economy would transform its model of growth, indicating to promote the country's export.

A REALITY CHECK:

LINK: http://economics.about.com/od/foreigntrade/a/trade_deficit_h.htm

In 1975, U.S. exports had exceeded foreign imports by $12,400 million, but that would be the last trade surplus the United States would see in the 20th century.

[J-NOTE: And that grim picture continues to the present day.]

OUR DELUSIONAL RELIANCE ON PAPER ASSETS

Libertarian economists and other free trade advocates tend to discount trade imbalances on a number of grounds. Their bottom line - that free trade is a good thing for us, is a single stool balanced on three legs. Theory is sound – as far as it goes - but reality can be such a downer. Only one of these legs is consistent with reality.

Here they are:

(a) Protectionist restrictions on imports are self defeating because they invite a trade punishment spiral in which our own export market loses out.

(b) Our trading partners are in the same situation, this creating a genuine free trade market balance.

My Concise Stool analysis:

(a) is true; (b) and (c) ...not so much....

A PARABLE FOR OUR TIME

Pretend that you own a company that used to make and sell beer, firewood and baked goods to all parts of the world. Your grandparents started this business with a private horde of gold coins, at the time the largest in the world. We’ll call it the Pot of Gold or POG for short. Traditionally the family business was conducted by writing checks and IOU’s that were backed by the POG.

When your parents took over the business, about half of the sales were of re-branded goods made by some people down the road, the Cutthroat family. You parents bought them cheap and sold them for more, under the family brand. When Mom and Dad got older, they began to cut more corners. All of the beer and most of the baked goods were made and sold by the Cutthroat family, using the family brand, paying your parents a reduced royalty, who had nothing really to do with creating those products at all.

Because of their declining income, Mom and Dad started selling IOU’s to the POG, then reselling those same IOU’s to others. Your parents no longer produced enough to make it. The basic necessities were being supplied by the Cutthroats as amazingly low rates. Mom and Dad had been living off the POG all these years because of Cutthroat generosity.

One morning you awaken. Mom and Dad are gone. You have just taken over the family business. You discover that the demand for firewood is negligible. Even the Cutthroats don’t want it. Then you make two dreadful discoveries about the POG: It was not a horde of pure gold coins. They were mostly copper and tin, and their market value was never more than 40% of your parents’ figures. You also discover that the unpaid IOU’s and checks exceed the value of the POG by a factor of six.

My God, you think. We have been living off the family’s reputation all this time. And the word about the overvalued and over leveraged POG has gotten out. But the Cutthroat family is still sending you goods and services for the IOU’s. Thank God for their kind hearted generosity, you think. But then you learn that the Cutthroat family has a practice of executing their own business people for minor offenses...like overstating assets and borrowing with no ability to pay. You begin to worry....

Your trusted messenger arrives. She has discovered a secret Cutthroat family communiqué. Here’s what it says: “Just a little more time, and we will have it all.” You ask, “What does this mean?” Your messenger tenders her resignation. She has just been hired by the people down the road....

REALITY BITES

In the respected journal, Foreign Affairs, we are NOW told to suck it up and endure eternal deprivation and permanent subordination. I exaggerate, but not by much. The article, in the latest issue (November/December 2009), is THE DOLLAR AND THE DEFICITS by C. Fred Bergsten, who is Director of the Peter G. Peterson Institute for International Economics and was Assistant Secretary of the Treasury for International Affairs from 1977 to 1981 and Assistant for International Economic Affairs to the National Security Council from 1969 to 1971.

LINK: http://www.foreignaffairs.com/articles/65475/c-fred-bergsten/the-dollar-and-the-deficits .

“It has long been known that large external deficits pose substantial risks to the U.S. economy because foreign investors might at some point refuse to finance these deficits on terms compatible with U.S. prosperity. Any sudden stop in lending to the United States would drive the dollar down, push inflation and interest rates up, and perhaps bring on a hard landing for the United States -- and the world economy at large. But it is now evident that it can be equally or even more damaging if foreign investors do finance large U.S. deficits for prolonged periods.

“U.S. policymakers, therefore, must recognize that large external deficits, the dominance of the dollar, and the large capital inflows that necessarily accompany deficits and currency dominance are no longer in the United States' national interest. Washington should welcome initiatives put forward over the past year by China and others to begin a serious discussion of reforming the international monetary system.” I have read the hard copy, not available on line.

When you cut through the diplomat-speak, Bergsten is offering surgery, chemotherapy and a crippled economic future for the rest of our lifetimes. It’s enough to make hospice care look attractive! To be fair, he argues for a weakened dollar, immediate control of our internal deficits and a long term commitment to curbing our external deficit bill (especially to the Chinese) by curbing private consumption, probably though heavy taxation. And this is only possible if the Chinese creditors practice forbearance. Not a word in this piece about the price they will exact.

STAGING THE SUPPLY-SIDE RESCUE

Neither the “we must suffer the penalties of equality” voices on the left nor the timid, “Adam Smith and Ronald Reagan will save us” voices from the right can get us out of this trap.

Our problem in a nutshell is that we are not currently producing enough real goods and services to prevent the Cutthroat family from driving us under.

Make no mistake: THEY WANT THAT OUTCOME.

“But in the long run, that’s irrational”, you might say. Sadly, the answer to that is bright-line clear: Envy and resentment can easily overcome reason in the short term. And more to the point: In the long term (NOTE: our Chinese brothers and sisters are the quintessential long term planners), the destruction of the USA is an opportunity for former defeated enemies (think China and the USSR here) to regain their lost ascendancy.

I fear that Bergsten’s formula will incrementally lead the USA to that outcome. Surely, we can do better. I propose that we embark on a supply-driven recovery... but FIRST:

A COMMON-SENSE REALITY INVENTORY

1. The real economy drives the paper economy but the paper economy, if allowed to, can ruin the real economy.

HINT: It almost has.

2. The real economy consists of the actual core resources needed (think crops, fish, foul and meat, water, air and energy) for modern human life, the whole gig: food, housing, medical care and entertainment, and the physical processes necessary to make them available to real people in real time (think manufacturing and storage, transportation and communication).

3. The paper economy consists of the financial instruments necessary to maintain a trading system, including borrowing and payment methods and technologies.

4. The inventory of our actual resources, those located within the USA territory and immediate secure control consists of our transportation and energy infrastructure, our exportable energy reserves, our food production capabilities, our manufacturing capabilities, our intellectual property and our creative potential.

(a) Boeing, Microsoft, Disney have not YET given away, sold or irrevocably outsourced their core profit-making functions, their intellectual property and proprietary processes.

(b) The same is true of the American pharmaceutical giants and the makers of cutting edge medical technology.

(c)The US aerospace technological edge remains real, but fragile.

(d) American agriculture is still the best in the world, but on the precipice of decline.

(e) Our automobile makers are no longer a major local resource, nor a net export profit center.

(f) Our steel and aluminum makers are no longer a major local resource, nor a net export profit center.

(g) Our nuclear industry, originally the world’s leader, is looking more like a boutique effort or even a living museum.

(h) Advanced American battery technology is world class effort but not, at present, a major profit center.

5. Our vaunted “fundamentals” consist of a stable, democratic country, endowed with a reasonably healthy market system (at least as compared with the rest of the world), a literate, educable population (at least as compared with the Second and Third world populations), an attractive employment culture for well educated foreign talent, a huge reservoir of arable land, much of it under current or recent cultivation, and an immense supply of carbon-based energy reserves, among the many things we could – but decline – to sell in world markets.

6. We face fierce, ruthless economic competition, fair and unfair, like nothing our parents have ever had to confront.

OUTLINE OF A COMMON-SENSE AMERICAN RECOVERY

China has no intention of throttling its growing economic power by adopting a system that will punish it for carbon emissions. We can expect that China will continue to be the world’s single largest producer of CO2 emitting processes.

I don’t want to engage the CO2 debate in this essay. Just leave it at this: Even if we were to continue with present energy practices and trends for the next ten years, the world would not end as a result. Not even close.

During that time we can reboot the American economic machine (in real terms and not on paper), climb out of the fiscal and trade deficit crater only by self-funding. That means using our own resources...real stuff, not paper.

We are the Saudi Arabia of coal. Our untapped and underexploited oil reserves are large enough to compete head-on with any single oil supplier in the world, and we have the latent industrial capacity to become a major world-class refiner of fuels. We have more than enough natural gas to become the world’s major exporter, if we choose to do so.

Curbs on domestic energy consumption will kill economic growth. But we have more choices than any other large country in the world.

For example: We invented the atomic powered electric generation systems that safely supply electricity to the USA and Europe at present. We have in-hand and off-the-shelf nuclear energy designs that are safer than any coal plant in the world. We have a virtually unlimited inventory of fissile material (consider just the size of the US nuclear arsenal and the fact that decommissioned Russian weapons currently supply 10% of our electric power). Inside of ten years, we could easily accomplish the following:

1. Replace 50% of domestic fossil fuel consumption with clear nuclear-generated electric power and hydrogen fuel. [Nuclear reactors can be configured to produce heat, electricity and the crack water into hydrogen and captured CO2.]

2. Create a powerful net-energy export economy, relying on the newly generated surplus of soon-to-be obsolete fossil fuel reserves.

If these two steps are taken together vigorously and are mutually coordinated, the external trade deficit will be converted to a surplus within the period.

DEFICIT COLD TURKEY

Recovery also requires that our internal, fiscal, deficit be reversed and retired. That is no small thing and, yes, I understate the scope of the problem.

But the first project, though challenging, is possible within ten years provided the two income growth measures above are implemented.

We completely eliminate the externally financed portion of the national debt, the part owed to China and others, within a ten year timeline.

There are six steps that will ensure eventual success, provided we come to our collective senses and summon the political will in time. Here they are:

1. Tie all entitlements at every level of spending to a rigid schedule: No increases or COLA’s no matter what the circumstances, coupled with automatic decreases when the cost of living (or the relevant portion or sector thereof) declines.

2. No new entitlements without ACTUALLY eliminating other entitlements dollar for dollar.

3. No new indebtedness to foreign lenders. Instruments of internal indebtedness, such as treasury bills held by Americans, cannot to sold or transferred to or held in trust for the benefit of foreign interests. The effect of this measure will be to re-link domestic deficit spending to inflationary pressures.

4. The elimination of non-discretionary spending across the board. EVERY budget element starts at zero and requires a separate vote. No exceptions allowed until the USA is clear of all foreign-held debt.

5. A real presidential line-item veto.

6. As soon as a deficit is revealed, whether by appropriation or as a result of after-revealed data, all federal salaries and benefits are instantly and automatically reduced pro-rata to eliminate the shortfall, until and unless the congress and president enact measures that will produce the same net savings.

When do we start? Absent an unexpected epiphany in the White house and a revolution in the congress, this is a 2012 startup.

EXPLOIT AND EXPAND OUR ADVANTAGES

This country is still the world’s epicenter of creative innovation. If you doubt this, I recommend the recently released book about the best, low profile, modest cost government program we’ve ever come up with: “The Department of Mad Scientists, How DARPA* (* the Defense Advanced Research Projects Agency) Is Remaking Our World, from the Internet to Artificial Limbs” by Michael Belfiore.

DARPA started as ARPA under Eisenhower and yes, it did plant the seed from which the internet grew.

But our most creative innovations start small. In the present environment they take place, if at all, in an investment atmosphere choked with private and public bureaucracy and stifled by tax and regulation policies that tend to throttle business startups in the cradle.

The Great American Restart will require us to suck it up, clear away the underbrush of well-meaning but counterproductive regulations that inhibit bold new ventures and – leftists hold your breath here – to allow and encourage American entrepreneurs to make money. In practical terms this requires a huge, permanent repeal of a whole range of business taxes, including “success penalties” like capital gains and corporate income taxes, and – yes – punishing surtaxes on high earned incomes.

The “drill and sell” strategy for short term deficit payback buys us a decade at best. To the extent we choose to divert the temporary liberated resources to ANY non-productive activities (think union subsidies, unneeded show projects and other payoffs to non-productive political allies) we are choosing to blow off our last, best chance at recovering the American Dream. The alternative: (a) Semi-permanent unemployment at deep recession levels, a dramatically impaired standard of living for our children (think of inflation reducing the value of the dollar by 60% coupled with incomes cut by 20%) and later generations. (b) Major assets ceded to the Chinese, including any shred of our functional policy independence.

Our major strengths are in aerospace and agriculture, medical technology and cyber miracles. Unless we act quickly and decisively, that list will shrink to agriculture and nothing new will emerge to add to the balance sheet. Our current infatuation with paper assets is a mass delusion, of a kind with the derangement of that homeless guy on the corner who honestly thinks that satellite spies have even noticed his existence.