Smoot-Hawley II has started (or not?)

Discussion in 'Business & Economics' started by Billy T, Sep 21, 2010.

?

How long before depression in US?

  1. Before 31 October 2014 (as Billy T has long predicted)

    57.1%
  2. None coming in the foreseeable future.

    14.3%
  3. No ideas as to when or if

    28.6%
  1. Billy T Use Sugar Cane Alcohol car Fuel Valued Senior Member

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    23,198
    "... But Smoot-Hawley definitely set off a global trade war that began even before the bill became law. By September 1929, the Hoover administration had received protests and threats of retaliation from 23 US trading partners. Canada was the first to strike: In May 1930, it raised tariffs 30% on US exports to Canada.

    From 1929 to 1933, as the Great Depression bit and other countries raised tariffs to protect their own industries—or found alternatives to trading with the United States—US exports fell 61%. US imports fell even faster, by 66%. World trade collapsed as well, sinking 66% from 1929 to 1934. ..." (Quote from link at end.)

    Billy T notes:
    Japan has followed China's led and intervened in their Yen exchange rate last week to favor their exports (and reduce their imports).

    US is placing up to 90% import duty on Chinese steel pipe and already has large (I forget percent) duty on importing their rubber tires. - China retaliated to that with high duty on US chickens and some of Boeing's products. (They now make their own large airplane* and don't want more established imports.)

    All nations are now, like in 1929, helping their exporters and reducing their imports. It sure seems humans can't learn from the past as Smoot-Hawley II is being put into place, but without official legislation (except for the "Buy American" clauses in some government contracts.)

    Note also that now, like back then, US imports are falling faster than exports - why the trade deficit narrows when it does.

    Read more here: http://www.moneyshow.com/investing/Jubak_Journal.asp?aid=Jubak_Journa-20822 the source of my initial quote.

    *

    Please Register or Log in to view the hidden image!

    And a larger one that I can not re-find the photo of.
     
    Last edited by a moderator: Sep 21, 2010
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  3. Carcano Valued Senior Member

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    This is exactly what Donald Trump has been advocating for years...that America get tough with countries who use either price fixing (OPEC) or currency suppression (CHINA) to exploit the prevaling passivity in Washington.

    Watch: http://www.youtube.com/watch?v=kAnGBwjwpHI
     
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  5. nirakar ( i ^ i ) Registered Senior Member

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    Some time in the 1950s or 1960s the cause of the Great Depression was rewritten in history books to absolve business cycles and Wall Street's excessive use of leverage of blame and shift the blame onto government. Smoot-Hawley did not cause the depression. The Idea that Smoot-Hawley was significant was a revisionist lie that managed to become conventional wisdom and get into history books.

    The reason financial speculation was called "Arbitrage" by the 1980s was because of the stigma against financial speculation that came out of the Great Depression. By now we have almost completely forgotten the lessons from the Great Depression though Wall Street's behavior in inflating the housing bubble should have been a reminder.

    But Wall Street speculation alone did not cause the Great Depression Main Street was also speculating. The business cycle went wild during the roaring 20's inflating many bubbles when the use of credit for everything reached new peaks in borrowing.

    This next depression will be a bit different because it is the long term borrowing of the USA as a nation (people business and government) rather than short term borrowing and speculation that has caused the unsustainable trade patterns that must collapse. The problem is still exaggerated business cycles caused by borrowing but the type of borrowing and type of business cycle are different. This is a long business cycle that contains multiple shorter business cycles.

    Clinton's tech boom was probably the peak of this long cycle of the US domestic economy being inflated by International borrowing. While the borrowing has continued to rise the stimulative effect of the borrowing increasing capability to consume and therefore increasing consumption seems have been overtaken by depressing effect of demand for domestic labor falling and thereby decreasing the demand for consumption. The Wealthy consume less per dollar received; they just bid up asset prices. From here forward putting more that has international borrowing as it's original source in the hands of the America wealthy probably won't simulate the American economy enough to make up for the lost stimulation of American workers spending their pay checks.



    Below graph from a good article from 2001 called "Does the Trade Deficit Matter" at http://www.slanker.com/report/id39.htm

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    Everything that was true in 2001 is still true; but it's worse now.

    You can pick dates in the 1960's or 1980 as the beginning of this long cycle.

    You can measure the borrowing in borrowed dollars, borrowed gold, or borrowed labor hours. The trade deficit looks worse if measured in exchanged labor hours. On the other hand as a consumer trading a few of our hours for many of their hours looks good.

    If protectionism causes the foreign lenders to stop lending to the USA then protectionism will be the trigger for the next great depression but it won't be the cause of the next great depression. The borrowing and foreign lending itself is the cause of the next great depression.
     
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  7. Billy T Use Sugar Cane Alcohol car Fuel Valued Senior Member

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    Nirakar, Thanks for your very plausible, informative, educational, post 3. I think I had fallen victim to Wall Street’s “revisionism” that shifted blame to government legislation instead of the business cycle and the excessive borrowing in its peak phases.

    It seems an inherent aspect of human to be optimistic when others are. To not want to be left behind when fortunes are being made by investing as much as you can in booming value assets, even if you are going into debt to do so. Often the investment vehicle is real estate. Florida land has had several boom/ bust cycles in the last 100 years.

    The low interest rates of the FED in the final phase of the last real estate boom cycle, and when trying to stem the dot.com bubble’s burst were national boom / bust cycles, extended and exaggerated in amplitude by the FED’s interest rate policies. Too bad those bubbles grew as large as the did before bursting. We are years trying to recover, and in fact are as we are recovering the more realistic real estate and dot com stock values that existed prior to the crazy inflation of their prices.

    When the “dot com” bubble burst, I explained the details of why in the “6L cycle” post* (Liquidity, Loans, Linkage, Liability, Leverage, Liquidation and back to Liquidity again to get a new boom cycle started.); however this 6L cycle is the basic stages in all business cycles, but I did not fully realize that as I was focused on the dot com bubble in that post. All these bubble are really the same process just applied to different assets classes (real estate, dot com stocks, or now Treasury bonds**).
    --------------
    *See that post: here: http://www.sciforums.com/showpost.php?p=1502039&postcount=1

    ** The bond bubble is a little different and probably much more dangerous as it is not just people who are going insane in their expectations but governments too, especially the US government, which is borrowing (printing thin air money is borrowing from future generations) to invest – I.e. bidding up bond prices unreasonable high (lowering the interest rates) in this bubble.

    When this bubble burst all those fools (and their children who are stuck with the US's debts) will be badly hurt when many realize that the bonds were not safe in terms of getting your purchasing power back.*** I.e. the governments nominal repayments, in full face value, will be made, but the dollars paid will be rapidly dropping in value. –Otherwise called a run on the dollar. I expect that will end in the worst depression ever at least for the US & EU, but probably not China and the suppliers of the raw materials China needs to keep serving its growing domestic demand (and supplying all the railroads, ports, power plants, etc. it has promised in contracts for years of shipments of material wealth, mainly from Africa, to China).
    ----------------
    *** Some have already realized that and are bidding up the price of Gold and silver, etc. trying to preserve their purchasing power. Perhaps commodities will be the next bubble to burst, when people are too poor to buy commodities, even adequate food.
     
    Last edited by a moderator: Sep 28, 2010
  8. Billy T Use Sugar Cane Alcohol car Fuel Valued Senior Member

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    "... The House of Representatives passed legislation on Wednesday aimed at putting pressure on China to let its currency rise faster, fanning the flames of a long-running dispute over trade and jobs.

    The bill, passed 348-79 with heavy support from Democrats but Republicans more divided, treats China's exchange rate as a subsidy. That would open the door to extra duties on Chinese goods entering the United States, some of which are already subject to special levies.

    The measure could play well in the U.S. congressional election on November 2, with voters worried about their jobs and a sluggish economy. But it must win Senate approval and be signed into law by President Barack Obama -- by no means a sure bet. ..."

    From: http://news.yahoo.com/s/nm/20100929/ts_nm/us_usa_china_14

    Billy T comments:
    IMHO the politicians are playing with explosives for electorial gains. The US has trade deficits with almost every one. The problem is not basically that the Yuan is under valued, but with the US's high wages and now sustainable living standards (disproportionally consuming oil and everything else by printing dollars.) As already noted in this thread, a trade war with China is starting. That will hurt the US much more than China. The US still needs to give China a reason to finance the US's growing debt (I.e. import a lot more from China than the US sells to China so then they ship dollars back to the US in purchases of Treasury bonds.)

    It is even possible to plausibly argue that they Yuan is over valued, at least from the needs of the China's CCP. There has been a huge increase in real estate prices in China, which many have been calling a bubble for some years. It is appears that China, by carefully tighten credit, etc.* may be letting some of the air out of that bubble, fortunately for all; However, if it should burst, somewhat like the real estate bubble in the US did, then the Chinese would greatly contract their domestic buying as happen in the US.

    Their efforts to switch to a domestic driven economy would collapse and only exports would keep Chinese employed. Then the value of the Yuan would need to be lowered, not raised. I.e. if the recent US real estate history does repeat in China, the CCP will conclude that the currently the yuan is too STRONG (for the CCP to stay in power, keep Chinese with jobs, etc.)

    SUMMARY: The US economy is in trouble, yes, but blaming China will not cure that. The US probably cannot repair the damage already done but starting a trade war with China will just bring the depression sooner.

    Obama is smart, probably understands this which 95+% of the population does not. I predict he will not sign this bill even if the Senate passes it. He is not going to run again so need not be too concerned with the political damage not signing will do to him. IMHO, Obama's number 1 goal is to delay the coming depression until his first and only term as POTUS is over.

    ----------------
    * "... The Chinese Government asked banks to stop providing loans
    to buyers of third homes and extended a requirement of at least a 30%
    downpayment for mortgages to all first-time home buyers. Also, according
    to Bloomberg, China announced that it will speed up the introduction of a
    trial property tax in some cities and then expand it to the whole country
    to try to help stem the surge in property prices. ..."

    From: C. Schwab's Morning Market View for September 30, 2010, sent to me as Email so don't have better link I can give out.
     
    Last edited by a moderator: Sep 30, 2010
  9. Carcano Valued Senior Member

    Messages:
    6,865
    The argument here is that the US should continue to lose hundreds of billions to China because the US government NEEDS even more debt than the astronomical levels it has already.

    Sounds like Bush's strategy...the same strategy that created the problem.

    The trade war is not starting, it has already been won...and the US has lost!
     
  10. Billy T Use Sugar Cane Alcohol car Fuel Valued Senior Member

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    23,198
    Not what I was trying to state. Perhaps, to be more clear I should have said: "The US still needs to give China dollars (via trade deficit) with which to finance the US's growing debt." instead of: "The US still needs to give China a reason to finance the US's growing debt" The original version focused on trade imbalance from China's POV - I.e. the REASON they finance US debt is to keep exporting to the US.

    China does not want the US economy to collapse, YET. They will want that in a few years when they are mainly serving their domestic market (and contractual obligations signed in long term contrast for supplies of oil and other raw materials they will need 20 years from now). When that is the case China would like the US and EU to be in deep depression so only China & India will be the major buyers of oil, etc. There ain't gona be enough for all at affordable prices then.

    I suspect the US & EU will be in deep depression before China has fully converted to a domestic economy, due to a run on the dollar; but if that has not happened when US & EU demand for oil etc. is inflating price very rapidly, China has the power to send US & EU into deep depression by causing a run on the dollar.
    I was referring to great and rapid contraction of trade such as the more than 60% contraction of US exports that Smoot-Hawley caused in less than a year, not a chronic trade imbalance as US has now.
     
    Last edited by a moderator: Sep 30, 2010
  11. madanthonywayne Morning in America Registered Senior Member

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    12,461
    I think you're overestimating president Obama. If the Senate passes the bill, I predict Obama will sign it. Unions are one of his biggest constituencies, and they love protectionism.

    But hopefully the bill won't even be passed by the Senate. I doubt the new (more Republican and perhaps Republican controlled) Senate would pass it. But who knows what the lame duck congress will do when they come back after getting trounced in November. They may engage in all kinds of mischief since they'll have nothing to lose.
     
  12. nirakar ( i ^ i ) Registered Senior Member

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    I don't think Union clout compares in political power to Wall Street clout. Wall Street likes a high dollar.

    A small rise in China's currency will just make the USA's situation worse. You can double the value of China's currency and that will not send any jobs back to the USA or stop more jobs from leaving the USA. The USA and China do not compete with each other. But China can't afford much of an increase in their currency's value because China would start losing jobs to other emerging market nations if they allowed their currency to rise.

    I don't think Obama and Congress understand anything. They are smart enough to figure things out for themselves but they trust the smart people they have surrounded themselves with rather than thinking for themselves. And those smart people they have surrounded themselves with just want to sound smart so they say what the other smart people are saying rather thinking for themselves. They all could think logically but they chose not to and what they are doing has worked for them so why should they change.

    We get the same economic cliches for the same reasons for decade after decade and most smart people believe these cliches and we assess other people's intelligence by whether they can repeat the cliches in the correct context but we don't stop and examine whether the cliches are correct.

    from : http://www.bbc.co.uk/news/business-11424864
    28 September 2010 Last updated at 05:16 ET
    Currency 'war' warning from Brazil's finance minister
    Guild Mantega Guido Mantega says Brazil has an "arsenal" of tools to weaken its currency

    An "international currency war" is underway, Brazil's finance minister, Guido Mantega, has warned.

    His comments follow a series of interventions by governments to weaken their currencies and boost export competitiveness.

    Japan, South Korea, and Taiwan are among those that have recently tried to cut the value of their currencies.

    In a speech in Sao Paulo, Mr Mantega said the competitive devaluations were effectively a new trade war.

    "We're in the midst of an international currency war," he told a meeting of industrial leaders. "This threatens us because it takes away our competitiveness.

    "The advanced countries are seeking to devalue their currencies."

    Mr Mantega has been trying to talk down the value of Brazilian real.

    The currency is at a 10-month high against the dollar, and has been described by analysts at Goldman Sachs as the world's most overvalued major currency.

    Last week's $70bn share offering by state-oil company Petrobras has contributed to a massive inflow of dollars to Brazil, which is attractive to foreign investors because of high interest rates and its rapid economic growth.

    Mantega said the country still had an "arsenal" of tools available to weaken the real, although he did not explicitly talk about intervention to weaken the currency.



    from : http://www.bbc.co.uk/news/business-11308351
    15 September 2010 Last updated at 10:28 ET
    Japan moves to combat rising yen
    Continue reading the main story
    US DOLLAR V JAPANESE YEN
    Last Updated at 30 Sep 2010, 18:40 ET USD:JPY one month chart
    $1 buys change %
    83.5550 -
    -0.15
    -
    -0.18
    More data on this currency pair

    Japan's leading shares rose as much as 3% after authorities intervened in the currency markets to weaken the value of the yen against the dollar.

    The central bank stepped in to sell yen and buy dollars, a day after the yen hit a 15-year high against the dollar.

    It is the first time in six years that the Bank of Japan has intervened, and further action has not been ruled out.

    A strong yen makes Japanese exports more expensive, and reduces profits when earnings are repatriated.

    The dollar was up 3.1% to 85.63 yen, on track for its biggest daily gain in nearly two years. The euro was also up 2.9% at 111.10 yen.

    Currency strategists suggested this was a sign of the move's initial success, but cautioned about making early judgements.

    Japan did not reveal the size of the intervention, but analysts suggested its authorities could have sold as much as 1 trillion yen ($11bn; £7.5bn), one of the largest amounts it has spent in a single day.



    The US mostly does not compete with China but it does compete with Japan and the EU. Japan is attacking American Jobs to save Japanese jobs. But while Europe and Japan understand the need for economic warfare the USA does not. The USA has some crazy idea that we are simply superior and don't have to worry because our superiority will make everything OK. Part of the reason the USA does not worry about currency wars is because Wall Street likes the high Dollar because it allows them to buy whatever they like in the way of foreign assets and it makes the American rich richer.

    If Congress understood anything they would be concerned with the value of Japan's currency and Europe's currency rather than be concerned about the value of China's currency. What are we going to do tell China to increase the value of their currency to 8 times it's current level? That would only help if the rest of the emerging market nations also increased their currency values dramatically. The USA should be like the other nations and just worry about reducing the value of it's own currency.
     
  13. nirakar ( i ^ i ) Registered Senior Member

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    As for the Poll, my belief that a depression is definitely coming but probably not before 2015 is not a poll option.

    Maybe in 2018. Maybe in 2025. We might even get two stagnant recoveries and another bad recession in before the big depression hits. To the degree to which world leaders are dealing with reality they are just trying to buy time and avoid immediate problems. If they are willing to work together and if they are willing to make future problems worse to avoid problems now they might be able to stall off a depression for quite a while.
     
  14. Billy T Use Sugar Cane Alcohol car Fuel Valued Senior Member

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    23,198
    Following is my extract of much longer article on the Rare Earth problem. It focuses on the supply and the military implications (but has obvious extension into the electric vehicle area too.) Rare Earths are one very effective way (for at least a decade) China can fight the trade war (and make greater profits while doing it):

    “… A generation after Chinese leader Deng Xiaoping made mastering neodymium and 16 other elements known as rare earths a priority, China dominates the market, with far-reaching effects ranging from global trade friction to U.S. job losses and threats to national security.
    The U.S. handed its main economic rival power to dictate access to these building blocks of modern weapons by ceding control of prices and supply, according to dozens of interviews with industry executives, congressional leaders and policy experts. China in July reduced rare-earth export quotas for the rest of the year by 72 percent, sending prices up more than sixfold for some elements.
    Military officials are only now conducting an inventory of where and how U.S. suppliers use the obscure but essential substances -- including those that silence the whoosh of Boeing Co. helicopter blades, direct Raytheon Co. missiles and target guns in General Dynamics Corp. tanks.

    “The Pentagon has been incredibly negligent,” said Peter Leitner, who was a senior strategic trade adviser at the Defense Department from 1986 to 2007. “There are plenty of early warning signs that China will use its leverage over these materials as a weapon.”
    The U.S. Congress’s investigative arm, the Government Accountability Office, in April warned of “vulnerabilities” for the military because of the lack of domestic rare-earth supplies. The House of Representatives Armed Services Committee will hold a hearing in October, the same month a Pentagon report on how to secure future supplies of the metals is due.
    “The department has long recognized that rare-earth elements are important raw material inputs for many defense systems and that many companies in our base have expressed concern regarding the future availability of the refined products of these elements,” Brett Lambert, director of the Pentagon’s Office of Industrial Policy, said.

    While two {non Chinese} rare-earth projects are scheduled to ramp up production by the end of 2012 -- one owned by Molycorp Inc. in California and another by Lynas Corp. in Australia -- the GAO says it may take 15 years to rebuild a U.S. manufacturing supply chain. China makes virtually all the metals refined from rare earths, the agency says. The elements are also needed for hybrid-electric cars and wind turbines, one reason supply may fall short of demand in 2014 even with the new mines, according to Kingsnorth of Imcoa.
    Just how far U.S. manufacturing has waned is apparent at a factory in Valparaiso, Indiana. This brick plant on Elm Street once made 80 percent of the rare-earth magnets in laser-guided U.S. smart bombs, according to U.S. Senator Evan Bayh, a Democrat from Indiana. In 2003, the plant’s owner shifted work to China, costing 230 jobs.

    The rare earths are chemically similar elements, with names such as yttrium and dysprosium. China has the largest share of worldwide reserves, about 36 percent, and the U.S. is second, with 13 percent, the U.S. Geological Survey says. While the elements aren’t rare, they’re less frequently found in profitable concentrations, expensive for Western producers to extract and often laced with radioactive elements. China produced 120,000 tons, or 97 percent, of the world’s 124,000-ton supply last year, according to the GAO. Half of that came from Baotou, said Kingsnorth. The raw elements have many applications. Neodymium is used by Chinese companies including magnet makers, who sell to U.S. suppliers of defense contractors.

    Export quotas and taxes for overseas buyers that the GAO says can reach 25 percent are pushing up prices of elements even in relatively large supply. For example, the cost of a kilogram of samarium powder, needed for the navigation system of General Dynamics’ M1A2 Abrams tank, jumped to $34 in early September, from $4.50 in June, according to U.K. researcher Metal Pages Ltd. It’s taking as long as 10 weeks to get neodymium magnets, double the previous wait time, said Joe Schrantz, group supply chain manager at Moog Inc. in East Aurora, New York. He said the company buys hundreds of thousands of magnets a year to make motors for cars, trucks and weapons including Raytheon’s AMRAAM -- or Advanced Medium-Range Air-to-Air Missile -- and Boeing’s Joint Direct Attack Munition, a tail fin kit for making precision-guided “smart” bombs out of ordinary weapons.

    Neodymium, a silvery metal, is essential in a magnetic alloy developed separately by engineers at General Motors Co. in Detroit and Sumitomo Special Metals Co. in Japan in the 1980s. The magnets are now in millions of stereo speakers, computer disk drives and motors.
    In missiles, they replace a hydraulic system of pumps and fluids that was costlier and heavier. Motors in weapons like the JDAM might be three times as big without advanced magnets, said Todd Brewster, senior design engineer at Kollmorgen, a unit of Washington-based Danaher Corp. The JDAM has been used extensively in Iraq and Afghanistan.

    A Chinese supplier makes neodymium magnets for hybrid- electric motors the Navy is developing to cut fuel use of Arleigh Burke-class destroyers, according to the GAO. The agency also says Lockheed Martin Corp.’s SPY-1 radar on Aegis destroyers contains samarium-cobalt magnets that will need to be replaced over 35 years. China is virtually the only supplier of yttrium needed for laser gun sights in the General Dynamics Abrams tank, the U.S. Geological Survey says. ... “There is a particular need to focus on rare-earth minerals,” said Alexis Allen, spokeswoman for the Aerospace Industries Association, an Arlington, Virginia-based lobby group for defense contractors. “The Department of Defense should consider many alternatives to reliable access.” …

    Complicating matters is that even the Pentagon has been unsure of its own needs. Stephen Luckowski, chief of materials manufacturing and prototype technology at the U.S. Army’s Picatinny Arsenal in New Jersey, told participants at a February conference in Cleveland that it took him a month to learn that rare-earth metals are in the nose of the Excalibur missile, and he still wasn’t certain of the exact supply route. Luckowski, a metallurgist, was sure the Army needed the rare earths. “That may be a case where you have no substitute,” he said.
    China’s dominance in the materials comes as it scours the planet for resources to feed its economy, which is expanding more than 10 percent this year while the U.S. struggles with an almost 10 percent unemployment rate. The country has been snapping up oilfields, buying copper mines and investing in wind power. China is also expanding its military, developing an aircraft carrier, nuclear-powered submarines and ballistic missiles, the Pentagon said in an August report. …

    Deng set China on its path with a 1986 initiative whose goals included acquisition of technology in “exotic materials” such as rare-earth metals, … That year Zhu Weiheng, an electrical engineer at the Chinese Academy of Sciences, wrote a report to Chinese officials suggesting they control exports of rare-earth minerals because of their high value in manufacturing. …
    In 1990, Zhang Hong, the Chinese academy’s deputy director of technology, visited Magnequench, a GM unit in Indiana that used a spinning wheel to quench, or cool, the molten alloy into flakes to make magnets.* Five years later, a group including then state-owned San Huan New Materials and Hightech Inc. agreed to buy Magnequench…The company opened a new plant in Tianjin in 1998 and shut a former GM operation in Anderson, Indiana, four years later. Magnequench also purchased and later closed the factory in Valparaiso, ... That plant’s tools were shipped to three San Huan operations in China, according to Shannon Song, a Beijing-based executive at Magnequench. “What they were basically doing was replicating the production lines in China,” said Leitner, the former Pentagon official.

    Indiana’s Bayh and Hillary Clinton, now U.S. secretary of state, both cited Magnequench as an example of the U.S. losing jobs and expertise to China. In the 1990s a dozen U.S.-based suppliers of magnets employed 6,000 people. Today there are four, employing 500, said Ed Richardson, vice president of Thomas & Skinner Inc. in Indianapolis, one of the survivors. …”

    From: http://noir.bloomberg.com/apps/news?pid=20601109&sid=a8eYONm3_OIM&pos=10
    --------------
    *I think I know more about this. They also let molten metal, mostly iron, fall on the edge of a rapidly spinning and quite cold disk. A thin glassy state ribbon is produced. It has much lower hysterhious and eddy current loses than normal crystalline iron alloy used in transformers. I.e. instead of building the conventional laminated sheet transformer they wrap up many layer coiled transformer. Losses in transformers were cut in half by these better glassy iron cores.
     
    Last edited by a moderator: Oct 1, 2010
  15. Carcano Valued Senior Member

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    6,865
    Ok, but how do we know that the entire 60% export reduction was caused by import tariffs...as opposed to the increasing value of the US dollar during a deflationary period?

    Whats important here is not the level of trade but the balance of trade.

    What was the percentage of contraction in imports to the US under Smoot/Hawly?
     
  16. Billy T Use Sugar Cane Alcohol car Fuel Valued Senior Member

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    23,198
    ON (1): I don't think the value of the dollar changed much. It was still tied to gold. Certainly only a timy fraction of the 60+% contraction in about a year.

    ON(2): No it is more important to keep the volume of trade high. Even if is not balanced, both sides still benefit as Adam Smith explained long ago. You import item "a" because it would cost you more to make item "a."

    ON(3): I don't recall (from article I read) but on the order of 40% I think.
     
  17. Carcano Valued Senior Member

    Messages:
    6,865
    When we look at the balance of trade we are looking from a national point of view...not an individual's point of view.

    In which case it doesnt matter if an individual can buy something cheaper from China than from another individual within his own country.
     
  18. Billy T Use Sugar Cane Alcohol car Fuel Valued Senior Member

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    23,198
    Like Adam Smith, in Wealth of NATIONS, I was speaking of the national POV, not the individual's. I.e. the cost to the nation is less when it imports "a" than when the nation make item "a"

    What American don't like (and have been able to ignore) is that if you constantly import more than you export, your currency will lose value and normally this will reduce your imports and increase your exports to achieve a balance again on average.

    This has not happen for many decades as the dollar also has a special role in the global economy, but ultimately it will lose that roll and most of its value, quite suddenly. I.e. the normal correction of currency value has been postponed in the dollars case for some decades while the US ran a chronic trade deficit. When it corrects, the sudden adjustment (the collapse of the dollar) will be very painful.
     
  19. Carcano Valued Senior Member

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    6,865
    Nations dont import or make things, individuals within nations do.

    An 'individual' in this context can also be a corporation or government body.

    Whats important is the ratio between how much money leaves the country vs. how much money enters the country.

    When USA individual A purchases something from USA individual B the money exchanged remains in the US.

    If USA individual A purchases something from Chinese individual B the money exchanged leaves the US.

    The fact that A might have paid less for it than the domestic price does not benefit the overall wealth of his country.
     
  20. Billy T Use Sugar Cane Alcohol car Fuel Valued Senior Member

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    23,198
    That is the balance of payments and not due only to trade. FDI is often larger. That total cash flow difference accumulates and for most nations other than the US will relatively promptly be reflected in changes in the value of their currency. These changes in currency will be such as to drive the net flow of money back to zero - all as I and Adam Smith have already explained -I.e. it is self correcting stable system for most nations.

    To give an example: Brazil is a popular place to invest now and has a large positive FDI, so the value of its currency is growing stronger (The dollars etc. entering must buy Real to be used in Brazil. - thus there is a surplus of dollars and shortage of Real. - Simple supply and demand is forcing value of dollar in Real terms down or value of Real in dollars up in dollar terms.) Thus, as a result, Brazilians are buying more imports with their stronger Real, making more trips to Paris, etc. The system is SMOOTHLY correcting the relative values of the currencies.

    FALSE - You are confusing wealth with flow of funds. Yes the wealth of a nation does increase if an individual spends less of his hours of labor to buy item "a" even if it comes from China. He has more wealth left with which to buy item "b" or invest, etc. Here is simple mathematical proof that the individual or the nations wealth does increase by buying cheaper from China:

    For example if you (or everyone = the nation) have an annual income of 10X but must or do buy items totaling 9X annually your wealth increases by X that year. If you discover that you can buy those same items from China for 8X then your wealth will increase by 2X that year you buy from China.

    Again your fundamental confusion is to treat funds flow as if it were wealth.. As just illustrated sending more money to a cheaper than domestic supplier for what you buy INCREASES your wealth.

    The reason Americans have such a high standard of living (are so wealthy) compared to those in other countries is because they have been able for decades to send money to other cheaper labor countries for goods they consume, without that causing the value of the dollar to drop in the normal smooth correction that occurs when you import more than you export. (The FDI into the US has been positive for decades as the US WAS the best place to invest, but now China or some other fast growing Asian countries are.)

    Normally the net export of a country's currency for decades (trade imbalance and FDI) will put more of it in the hands of foreigners than they want to hold. - Put it into surplus and lower its value. In the US case, foreigners have been willing to accumulate and hold something on the order of 5 trillion dollars, but now they are growing less willing to do this. For example in the last 12 months China has REDUCED it holding of dollars by 100 billion.

    The normal, smooth adjustment process of changing the value of the dollar has not happened. When the long delayed decrease in dollar's value does come, it will be violent and very painful - perhaps in less than a year, the dollar will have less purchasing power than a dime does today.

    For decades Americans lived very well consuming the labor of grossly underpaid Chinese, etc. but they are no longer willing to work long hours for little pay so that Americans could buy cheaply their production at Wal-Mart etc. Real wages in Coastal part of China, where the factories are, are increasing at about 20% per year. FoxComm (worlds largest maker of electronic items like the iPad) has raised wages at least 30% and still can not get all the workers it needs so has moved two factories to the interior where they can.)

    Again precisely because Americans could send more dollars to China etc. the wealth of Americans was very large. Your confusion between wealth and funds flow has badly mislead you.

    PS the main point of Adam Smith's book,The wealth of nations which most economist have understood for 300 years, is that trade benefits both traders, EVEN IF THERE IS LACK OF TRADE BALANCE. i.e. both become wealthier due to the trade. You have the out dated mercantile POV that thinks wealth is how much money/ gold you can hoard.* True wealth is how well you can live, not the gold in some box. Americans have been very wealthy (compared to others) precisely because they could buy more than they sold without the normal downward movement of the dollar's value. - The long delayed correction is coming and will not be smooth.

    *Spain when it discovered the "new world" and took many boat loads of gold back home was the the most successful mercantile nation in history; but that gold did not make them wealthy in the sense of living better - it did just the opposite it destroy their economy. The ability of the average Spaniard to live well. Gold held is a box is not true wealth.
     
    Last edited by a moderator: Oct 2, 2010
  21. Carcano Valued Senior Member

    Messages:
    6,865
    Again, you are still confusing the national wealth with an individual's wealth.

    In your first example 9X goes to a domestic seller and all 10X stays in the host country.

    In the second example, 8x goes to China leaving only 2X in the host country.

    Of course, trade is neccesary in that certain agricultural product and other commodities can only be produced in certain places.

    For example, oranges dont grow in Canada and Japan has no oil reserves, so these nations must import...and ideally export an equal or greater value of their own products to balance the flow of wealth.
     
  22. Carcano Valued Senior Member

    Messages:
    6,865
    Spain's economy would be destroyed only when all their gold was finally spent on imports....as their own domestic productive capacity would have withered away. Until that time, they enjoyed one of the wealthiest empires in the world.

    A modern example would be Saudi Arabia, who will have no economy left when the oil's all gone.

    Glittering palaces inhabited by the unskilled and unemployed.
     
  23. Billy T Use Sugar Cane Alcohol car Fuel Valued Senior Member

    Messages:
    23,198
    No I told you more than once that I was speaking of the nation:

    You said: "When we look at the balance of trade we are looking from a national point of view...not an individual's point of view. ..."

    and I replied: "Like Adam Smith, in Wealth of NATIONS, I was speaking of the national POV, not the individual's. I.e. the cost to the nation is less when it imports "a" than when the nation make item "a" ..."

    I proved that too, for both individuals and nations:
    "Here is simple mathematical proof that the individual or the nations wealth does increase by buying cheaper from China:
    I said: "For example if you (or everyone = the nation) have an annual income of 10X but must or do buy items totaling 9X annually your wealth increases by X that year. If you discover that you can buy those same items from China for 8X then your wealth will increase by 2X that year you buy from China. ..."

    As noted in the parenthetical clause "you", which can be singular or plural, (Why southerns often say "you all" to be clear it is plural) is referring to both or either the individual or the nation.

    It is not necessary to consider individuals or their internal transfers of money as they (to first order) only transfers wealth between individuals. Thus I was never speaking of individuals when I said things like if there is a chronic net transfer of funds (by trade and FDI) normally the value of the currency will decrease to bring that net funds flow back towards zero. You then said that nations don't import things, individuals do. It is you and you alone that are wanting to focus on individuals, instead of nations.

    Balance of trade, or of funds flow is clearly national not individual.

    I am not confusing individual wealth with the wealth of the nation; however I will now note that if the sum of all individual wealth changes is positive then the wealth of the nation increasing.
     
    Last edited by a moderator: Oct 2, 2010

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