Free Trade and the US


By Duncan Whitmore

In a recent article published on this blog1, Ilana Mercer commented on the Trump administration’s policy towards free trade amidst the introduction of heightened tariffs and the departure of chief economic adviser Gary Cohn. A considerable part of Candidate Trump’s “America First” programme was devoted to distinctly anti-free trade measures, such as increased protectionism and tax penalties for firms relocating jobs overseas. Free trade, after all, has come to be associated with the globalisation agenda of the liberal elite, i.e. the Hillary Clintonites whom the American electorate rejected with glee in November 2016. Also, however, it is held responsible for yawning trade deficits embodied by the shipping of jobs and production overseas where cheaper labour and cheaper raw materials can be exploited, leaving at home nothing but crumbling factories and swathes of unemployed workers. Trump’s ability to tap into this economic concern while the left wallowed in identity politics2 may well have been the keystone of his election victory. To the horror of committed “free traders” such as Mr Cohn, President Trump now appears to be making good on these promises.

What should be the reaction of Austro-libertarians to these “America First” policies? Do we not believe that free trade is almost the very essence of freedom and the fountain of prosperity? Should we not oppose any attempt to restrain trade by either tariffs or regulations? Do trade deficits matter? On the other hand, what are we to do when such policies are seemingly associated with nothing but destitution and misery for a significant proportion of the population?

Insightfully, Ilana Mercer highlighted the difficulties of attempting to form judgments of specific policies (or outcomes of those policies) when the underlying private property rights are themselves distorted. For libertarians to simply repeat, like a looping tape, that trade should be left “free” runs the risk of considering only surface phenomena while failing to examine deeper, underlying problems.

To illustrate, one could argue from a purely quantitative view of state interference that preventing the introduction of some regulations (or repealing existing ones) is better than nothing at all. In other words, if we are burdened by regulations A, B, C and regulations X, Y and Z, then surely we can achieve something by preventing or eliminating regulations X, Y and Z even if this means that we are left with regulations A, B and C?

The problem with such a simplistic view, however, is that it overlooks the possibility that regulations X, Y and Z may exist only as a response to the problems caused by regulations A, B and C. If, therefore, you repeal regulations X, Y and Z, the problems caused by A, B and C come back to the fore. When these problems reach a climax they are blamed, by the public, not on the underlying state interference through regulations A, B and C but, rather, on the repeal of regulations X, Y and Z.

For instance, banks are restrained from being “free” by heavy regulation and oversight because their lending activities have the tendency to blow up bubbles which lead to crippling busts. However, the reason for this tendency is that banks are, simultaneously, legally privileged (by the ability to hold only fractional reserves) and economically privileged (by being the first parties to receive new money that is freshly printed central bank – money which is itself, of course, subject to legal tender laws and of which the central bank is legally privileged as the sole issuer). It would be a travesty for Austro-libertarians to respond to any call for increased bank regulation by pointing out that such regulations are a violation of “freedom”. While this is true in and of itself, the real problem is clearly the state’s monopoly money and its dissemination through fractional reserve banking. To take another example, entities that are endowed by the state with a monopolistic or quasi-monopolistic privilege are normally able to charge higher prices to their customers and to pay lower prices to their suppliers. If, in response to the resulting “obscene” profits, the state proposes to regulate the prices of the entity’s products or tax away a significant portion of its profits, Austro-libertarians pointing out the pitfalls of price control and the injustice of taxation would be speaking the truth as far is goes. However, they would be ignoring the bigger, underlying problem which is the entity’s monopoly privilege, and that what is really needed is to rescind this privilege in order to open up the market to genuine competition. Only in this latter context is the freedom of firms to set prices both legitimate and economically beneficial.

In short, it can be very difficult to champion “freedom” when the players who are demanding it are doing so in order to be left free to curtail the freedom of other people. It might even be the case that if, going back to our previous example, regulations X, Y and Z are introduced in response to the effects of regulations A, B and C then repealing regulations X, Y and Z may not serve to remove any injustice at all; rather, it may serve to streamline the injustice of regulations A, B and C. In other words at least regulations X, Y and Z have a chance of making life more difficult for the beneficiaries of regulations A, B and C when they try to fleece the rest of us3.

With this in mind, let us turn our attention to a detailed discussion of the trade environment in which the US finds itself today.

In the first place we could point out, as Ms Mercer does, that any description of this environment today as “free trade” is patently false. The anti-globalists confuse political globalisation – the consolidation of and intensified co-operation between states and state institutions, which is a relatively new phenomenon – with economic globalisation, which is private institutions trading peacefully and voluntarily on terms agreed between themselves. The political globalists who masquerade as free traders, such as Mr Cohn, are not in favour of genuine free trade at all; rather, they promote heavily managed trade relationships – one governed by trade agreements, trade deals, and a complex myriad of rules and regulations which favour only large corporations and the politically well connected. Indeed, trade agreements and trade deals are the antithesis of free trade, the latter of which demands a complete absence of the state from any involvement in trade. The terms “free trade agreements” and “free trade deals” are therefore nothing more than meaningless doublethink. It is also true that US workers are burdened by minimum wage laws and employment regulations which, to any employer, make them relatively more expensive than workers overseas who may not be burdened by such interventions.

Nevertheless, these interferences in and of themselves do not explain the specific problems which Trump complains of – namely, perennial trade deficits (of which the US has the largest and most sustained in the world4) as well as jobs and production disappearing overseas. All of these phenomena are basically of the same ilk – America is buying from abroad yet it is failing to produce enough real goods and services in return to pay for them.5 In other words, America is living above its means.

Such a phenomenon is not a problem when the situation is temporary and indicative of investment in productivity. At the “micro” level it is perfectly legitimate, for example, to incur debt in order to, say, finance one’s education which will enable a higher, future earning power, or to invest in a productive asset which will generate returns sufficient to service the interest on and eventual repayment of the debt. Hence, trade deficits can be an indicator of an emerging prosperity and need not attract any criticism. On the other hand, living above one’s means permanently and/or taking on debt purely in order to consume rather than produce clearly is a problem. Trade deficits of this particular nature – which the US appears to be in today – can be very grave indeed.

Even so, however, if any of us tried to live a deficit lifestyle permanently then our bank managers would cut us off at some point and would cease lending more credit cards that they know will simply be maxed out in a few months. Why is this not happening to the US? What is the condition of the international trade environment that could possibly allow the US to avoid, continually, the need to pay for what it buys? Why would other countries appear to be so stupid as to allow such a situation to continue by giving the US free stuff as a seemingly permanent and irresponsible arrangement?

The explanation lies in the existence of one big, overarching problem that plagues today’s trade environment – a problem that is, arguably, more serious than direct interference with trade. This is the fact that trade today is facilitated by the exchange of state-issued, paper currency which can be expanded at will, rather than with “sound” money such as gold or silver. Moreover, the added complication in the case of the United States is that it is, currently, the issuer of the world’s reserve currency.

When the entire world is trading with “sound” money such as gold, prices (such as wages for labour) in the US on the one hand and overseas on the other each depend upon the relative supply and demand for gold and for labour in each location. If labour is cheaper overseas6 then it means that there is a relatively higher supply of money and a relatively lower supply of labour in the US while there is a relatively lower supply of money and a relatively higher supply of labour overseas. Employers therefore divert more of their funds to employing workers overseas in order to take advantage of the lower wages. This, however, is simply the correction of a disequilibrium which will reach its own natural limit. As money leaves the US then money there will become relatively scarcer while the amount of labour will remain the same, causing US wages to fall; the new money flowing into countries overseas, on the other hand, will cause wages there to rise. At some point wages both at home and overseas will equalise. Of course, if the reverse is the case – that wages are higher overseas than in the US – then the opposite process will occur, with money being drawn out of overseas countries and coming home to the US to bid up wage rates there. Absent any further state interference such as minimum wage laws and onerous employment regulations, all workers, both overseas and at home, will end up employed at the same wage rate (per unit of production). The same laws apply to goods also – all of this is part of the natural process of economising behaviour which seeks to employ resources across the world by directing them to their most highly valued uses in the places with the highest demand.

Thus, we can see that the self-correcting mechanisms of a sound money environment result in relatively stable trade relationships which would be devoid of continuous trade deficits and the permanent loss of jobs and production overseas.7 Moreover, it is in this kind of environment where one can say, broadly, that trade deficits (or living above ones means) “do not matter” or can even be a good thing, because at some point the piper must be paid. One cannot buy more and more from abroad with gold when that gold can only be obtained through productive effort, i.e. supplying real goods and services for sale.8

What happens, however, when we are trading not with “sound” money, such as gold or silver, but, rather, with a paper money which can be issued by the state at will? If one’s domestic state chooses to expand the supply of money then this will cause an effect similar to that we just outlined. The supply of money at home will increase causing local prices – including wages – to rise. Prices overseas, however, will not yet have risen on account of the fact that the new money has not yet reached there. This process takes places through the complicating factor of the exchange rates between currencies, which is itself, of course, a price and is subject to the same influences. If the US prints more money but the overseas country does not then the first firms to spend the newly printed money on foreign currency will benefit from the old exchange rate and will be able to obtain more foreign currency than they otherwise would have which they can then use for purchasing goods and labour from abroad. Firms will therefore divert more of their spending to importing resources and seeking foreign labour than they would domestic labour.9

For the majority of countries such printing of currency can have only a very limited effect. If the inflation is a one shot affair then, eventually, increased bidding for foreign currency with the newly printed money will cause the exchange rate to adjust, strengthening foreign currencies and weakening the domestic currency. Fewer units of foreign currency can be bought with the additional supply of domestic currency and so the attractiveness of foreign goods and services diminishes, vanishing entirely when the currencies reach purchasing power parity. If, on the other hand, the inflation is continuous then such continuation comes to be expected. This expectation of inflation will in and of itself cause a much quicker adjustment to the exchange rate than was previously experienced, thus nullifying, or at least blunting, the benefits to the recipients of the newly printed money, robbing them of the power to ship jobs and the supply of resources overseas. The only thing that is experienced is domestic price rises.10

Of course, if the continuous inflation becomes abusive then it sows the seeds of hyperinflation as bigger and bigger doses of inflation are required in order to “cheat” inflationary expectations until the inflation reaches such a degree that such cheating is no longer possible and price rises accelerate further from the rate of actual inflation. By this point, needless to say, a country has a lot more to worry about than jobs being shipped overseas.

Thus what we can see is that with both “sound” money and, to a lesser degree, independently issued, national paper monies, mechanisms exist which prevent permanent trade deficits, job losses and the sourcing of supplies from overseas.11

The situation is different, however, where the issuer of the paper currency happens to be the issuer of the world’s reserve currency. This is the dubiously privileged position in which the US and the US dollar find themselves today. For when a country is the issuer of the world’s reserve currency the price adjustment mechanisms that we outlined above are disrupted and allow for the creation of a large and permanent trade deficit.

The US dollar became the world’s reserve currency partly as a legacy of the Bretton Woods gold exchange standard, where the US pyramided the issue of US dollars on gold and the rest of the world pyramided its currencies on the US dollar. Today, however, the US dollar owes it reserve status largely to the petrodollar system – the agreement of oil exporting countries, led by their lynchpin, Saudi Arabia, to price and sell oil in US dollars – and the resulting domination of US based financial networks.12 The upshot of all of this is that in order the buy oil (which everybody needs) and in order to engage in international commerce, pretty much everybody everywhere must buy and hold a significant quantity of US dollar reserves. As the demand for oil has increased over the past forty years so too, in concert, has the demand for the US dollar. Thus there has existed a continuously buoyant demand for the holding of US dollars which has been sufficient to outstrip the increase in any supply of those US dollars. This buoyancy of demand is also maintained and strengthened by the fact that several countries, most notably China, until recently pegged their currency to the dollar in order to fuel export driven growth. In other words, they deliberately weakened their own currency by printing more of it to buy dollars, thus pushing up dollar demand and increasing renminbi supply. Moreover, most of those surplus dollars were “invested” in US Treasury bonds, giving the US government a continual tap of funding without having to resort to increased taxation.

This leads us onto the next problem and one that is most relevant to the recent past – that the reserve currency becomes a “safe haven” asset. The US dollar index, which tracks the value of the dollar against a basket of other currencies, has risen since 2011, particularly as a result of crises in the Eurozone which have served to weaken the world’s second most dominant currency, the Euro. Even though the dollar has now lost around a third of those gains since peaking in early 2017, every single major currency is lower against the dollar than it was five to seven years ago. Only the Swiss franc has put up anything resembling a fight during that time.13

The effects of all this are that when the Federal Reserve prints fresh, US dollars domestic prices will rise. However, because the dollar is able to maintain its strength on the world stage vis-à-vis other currencies, holders of US dollars find themselves in the continued position of being able to source goods and services cheaper from abroad than they can at home. Indeed, for several decades now the US dollar has effectively been able to buy more from abroad than it is really worth. People happily hand over goods and services in exchange for the medium with which they can trade oil and engage in international commerce. Because the US can buy what it needs by printing a currency which everyone wants, the result has been to push the US economy towards consumerism rather than one built upon production – an economy which has no need for jobs or the tools of production, helping to turn once prosperous and productive communities into rust belts.14 After all, why not just put all of those jobless people on welfare that can be paid for with printed dollars which will buy them cheap Chinese goods?

Indeed, in spite of the resilience of the American entrepreneurial spirit, the US is, today, a relatively difficult place in which to be a producer. According to a ranking by the World Bank15, the US was as low as the 49th best place in which to start a business; a paltry 36th best place in which to deal with building permits; ranked only 49th for the ease of obtaining electricity; 37th for registering property; 36th for taxes and 36th also for trading across borders. Yet, in full congruence with what we have explained here, the US was, apparently, the second best place in the world in which to obtain credit! Other rankings tell much the same story, with Forbes placing the US at 12th overall on their list of best places to do business in 2017 – not too bad, you might say, until you realise that it has slid from top of the list during the past twelve years.16

Needless to say, much of the global monetary situation may now be changing, particularly with moves by China – itself a big consumer of oil – to compete with the petrodollar system and to establish alternative trading mechanisms such as the recently introduced yuan oil futures contract. There are, however, one or two lessons that libertarians should take from this kind of analysis.

First, while it is true that free trade is not responsible for the US’s deep, endless trade deficits and the flight of jobs and productivity overseas, it is foolish and naïve for Austro-libertarians to defend today’s trade environment from surface phenomena, such as tariffs and other regulations, when the underlying property rights are far from free. When confronting issues that threaten our freedom, Austro-libertarians should remember to examine them on the deepest possible level and not simply react to what they see in plain sight. At the very least, challenging a particular instance of state interference requires a judicious approach that has an understanding of who is demanding that interference and why they are calling for it. On the other hand, throwing one’s arms in the air and repeating economic or political theory verbatim just because the state happens to be doing something may accomplish very little. The results of the underlying state interference for the average workforce are very real and were very pressing at the time of Trump’s election. Therefore, while Trump’s proposed and enacted responses fail to identify the real problem and are akin to healing a stab wound by pushing the knife in deeper, libertarians and other free market proponents who have chosen to chastise Trump fall woefully short if they ignore the wound that was there in the first place.17

Second is the related problem that state interventions usually build upon each other – i.e. each new regulation is a response to the bad effects caused by some previous interference. Thus, abolishing the regulations that are stacked on previous regulations simply leaves us with the bad effects of the regulations that remain and so provides an impetus for the state to blame deregulation and lack of oversight when catastrophes occur. This suggests that “reformist” attempts at achieving freedom – either cherry picking certain state interferences to abolish, or attempting to work with the state to reach compromise solutions – is likely to fail in the long run. Instead, libertarians should be willing to tread a more radical path that demolishes as much state interference as possible in one, fell swoop. We shall see in a later essay that it is precisely those kinds of circumstances that have given freedom the best chance to flourish.

Notes

1Ilana Mercer, Trade Deficits in the Context of State-Managed Trade and Systemic Debt, https://misesuk.org/2018/03/21/trade-deficits-in-the-context-of-state-managed-trade-and-systemic-debt/.

2For an extended discussion, see Duncan Whitmore, Identity Politics – The Good, The Bad, and the Ugly, https://misesuk.org/2018/02/24/identity-politics-the-good-the-bad-and-the-ugly/.

3Walter Block pointed out the same problem with the “libertarian” response to the draft during the Vietnam War, which was to propose its abolition and replacement by a “volunteer military”. Such a solution completely overlooked the aggressive, invasive and imperialist character of the US military in the first place. Notes Block: “If we mistakenly support voluntary methods of hiring people before we consider precisely what they are being hired to do, we may well become unwitting supporters of the efficient violation of liberties”. Walter Block, Against the Volunteer Military, in Joseph R Peden (Pub.), Murray N Rothbard (Ed.), The Libertarian Forum, August 15, 1969, Vol. 1, no. X (emphasis in the original).

4https://tradingeconomics.com/united-states/balance-of-trade

5Payment for everything that you buy is ultimately made in real goods and services. When you buy something from a shop your payment for it is not really the money you hand over; rather, it is the productive labour you expended in order to earn that money. Money simply allows you to make indirect exchanges so you do not literally have to work for the people who provide you with what you want. Thus if a country imports more than it exports for an extended period of time then it is not paying for those imports.

6By “cheaper” we mean that wages are lower per unit of production and not per hour. Wages in developed countries are higher per hour because labourers there can produce more in each hour on account of the relatively high amount of capital goods per worker – more tools, machines, factories and so on. Wages in poorer countries may be lower per hour because each worker can produce less per hour, but in equilibrium they would not be lower per unit of production. A failure to understand this difference misinforms moral arguments concerning the hiring of “cheap” foreign labour.

7Cf. Ludwig von Mises, the Theory of Money and Credit, pp. 249-52.

8Nor, for the sake of completion, can one furnish a permanent trade deficit in such an environment by selling assets, which must also be produced, or incurring debt, which must be settled in gold.

9This goes hand in hand with the “boom” inducing effects of credit expansion – easy money and the artificially stimulated demand for resources is bound to lead to a surge of imported raw materials and capital goods to feed the malinvestment.

10This is more or less what happens with most of the non-US issuers of popular fiat currencies – such as the Eurozone, the UK, Japan, Canada and Australia – which usually oscillate between trade surplus and deficit, or can sustain only relatively shallow deficits.

11This does not excuse, however, the distortions caused by the introduction of fiat money. The oscillations between surplus and deficit experienced by most countries have become more erratic since the last tie of state issued paper money to gold was severed in 1971 – in exactly the same way as boom and bust has become a regular feature of economic life.

12Needless to say, the omnipresent threat of the US military keeps its watchful eye over these arrangements.

13This is something that should urge US dollar doomsayers to exercise a degree of caution. While it is true that every paper currency will eventually reach its intrinsic value of zero, it is possible that other currencies will be abandoned first in the event of a crisis, causing an initial rise of the dollar. Yes, the dollar is being printed into oblivion, but so too is everything else; the dollar may just be the least rotten apple in the cart.

14A symptom of this fact has been the growth of household and government debt as a percentage of GDP: https://tradingeconomics.com/united-states/households-debt-to-gdp/forecast; https://tradingeconomics.com/united-states/government-debt-to-gdp/forecast. The cause of the decline of American manufacturing is, of course, multi-faceted, but the fact that blue collar workers of relatively low skill are the most easily replaceable has made them the biggest victims of dollar power relative to those working in services. Moreover, as we would expect from this dollar dominance, the decline in manufacturing as a percentage of GDP has been met by a specific increase in the value of financial services.

15http://www.doingbusiness.org/rankings.

16https://www.forbes.com/best-countries-for-business/list.

17For example, the following critiques of the Trump tariffs are all more or less correct as far as they go, yet fail to identify any deeper problem: Madsen Pirie, The Effect of the Trump Tariffs, https://www.adamsmith.org/blog/trump-tariffs; Tom Mullen, Economics was Invented to Refute Trump’s Tariff Arguments, https://fee.org/articles/economics-was-invented-to-refute-trumps-tariff-arguments/; Frank Shostak, Does President Trump Really Care About the US, https://www.cobdencentre.org/2018/03/does-president-trump-really-care-about-the-us/. The following article, on the other hand, presents an understanding of the fiat money context: Alistair Macleod, The Truth about Trade,

https://www.cobdencentre.org/2018/01/the-truth-about-trade/.

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3 comments

  • Very interesting and clear-sighted analysis.

  • Trump’s politics (as stated by him at least) ARE identity politics. They are just different ‘identities’ to what the (so called) ‘liberals’ approve of.

    Indeed you can’t get a better example of ‘identity politics’ than the Scottish National Party and Plaid Cymru (the Welsh Nationalists) in the UK. They however are thought to be acceptable to ‘liberals’, whereas UKIP is not.

    Plaid Cymru in Wales, is, in practice (and until recent decades overtly boasted of being), an ethnic Nationalist Party. The only places they win seats are where people speak a different language, and are of a select and distinct ethnic origin from the rest of Wales and the UK

    Many of its’ members are overty xenophobic and racist towards the English and Anglo Saxons,
    Plaid Cymru however say they are ‘progressives’. So that’s alright then.

    Both Plaid Cymru and the Scottish Nationalists campaigned to leave the EU in 1975. By 2016 they were madly, (to the point of insanity) in favour of staying in. The fact is that their political ‘identity’ is hatred of the English.

    Most ‘identity politics’ arises for hatred of someone or some thing. Again in the UK Jeremy Corbyn is defined by his hatred of Britain. Which is why he’s able to be so un-selfconsciously dishonest and inconsistent.

    There is no legal privilege associated with banks’ ‘fractional reserves’. Fractional reserve banking arose without the intervention of any relevant laws at all. To an extent it’s a Ponzi scheme. But that’s not to say it’s not a good idea.

    The ‘privilege’ arises from the fact that the customers (in practice usually rightly) assume that their deposits are guaranteed by the State.

    But this implied guarantee is inevitable, otherwise catastrophic systemic failure will happen. In an environment like that, State Regulation is inevitable.

    The banks are in effect contractors to the State, and none of us should delude ourselves into thinking that the entire capitalist economy as it’s developed since the 17th Century isn’t itself anything other than a creation of the State.

    Without fractional reserve banking, there’d be hardly any credit. People would have to pay to deposit their money in the banks, and the banks would simply store in a vault.

    The only interest people would ever be able to receive, would be if they found someone who was willing to borrow their money direct from them. How safe would that be? But even then a kind of cottage industry fractional reserve system exists. People promise people things, and secure their promises on promises they have received from others.

    No one can operate a bank profitably without being part of this fractional reserve arrangement, and by subscribing to the other features of banking system associated with it. But there’s nothing to stop someone trying.

    Most State monopolies are in connection with things which, by their very nature would still be monopolies if they were privately owned. In practice most of them are still better privately owned, but they are still monopolies.

    So they will always attract the attention of the State, otherwise they will themselves, simply exhibit all the worst features of the State.

    As for these so called ‘Free Trade Agreements’, some of them, are the exact opposite. They are Cartels which impose constraints upon Trade to which the Cartel members have to adhere, and charge tariffs upon, or ban imports from everywhere else. The EU is a prize example.

    The boldest and most rational thing the UK could do when we leave the EU is simply to declare Unilateral Free Trade with the whole world, and allow anyone living in the UK to buy whatever we like tariff free, from wherever we like.

    The reason the US has a large Trade Deficit is because of the activities of its’ Government, the fact that the US is a magnet for investment and migrants, and because it’s citizens have large profitable investments outside the US.

    The Balance of Payments ALWAYS balances.

    If your Government is attracting large amounts of foreign capital in the form of selling Government Bonds to foreigners, the US itself is attracting foreign investment, and has a large surplus on the net dividends its’ people receive from abroad, it is BOUND to have a Deficit on the Trade Account.

    Japan has the opposite. But is Japan healthier economically?

    The ultimate purpose of all investment is consumption.

    The point when the USA stops having a Trade Deficit, will be the point at which it stops advancing into a richer future.

    An economy is not like an individual where it reaches the end of its natural working life and retires. An economy can go on and on with a Trade Deficit and a Capital Account Surplus. When, for example did London last have a visible Trade Surplus with the rest of the UK?

    Gold is NOT ‘sound money’. The supply of Gold can expand and contract arbitrarily with new Gold finds, new methods of extraction, and sudden big purchases and sales, and by people hoarding it.

    It also encourages the States in particular, and to a lesser extent individuals who rely on it as money, to see the acquisition of the metal alone, as an end in itself and pursue wars in order to get it.

    Hence the relative failure of the economies which stuck to it for so long.

    • Duncan Whitmore

      I will respond only to the points which address directly the subject matter of the essay.

      Yours is precisely the kind of superficial analysis which the essay suggests has little of value to offer. Stating that “the Balance of Payments ALWAYS balances” and the fact that an influx of foreign capital is met by a trade deficit simply repeats truisms. It does not follow from such a repetition that either the causes or the precise composition of any balance and capital flows are inconsequential; nor does it necessarily follow that they indicate a “healthier” economy just because one can witness, on the surface, an apparently higher standard of living than in some other country.

      To illustrate, a company’s balance sheet will balance if it takes out a £1m loan to invest in more tools and equipment that increase future production. It will balance equally well if the directors spend that loan instead on a year long drinking holiday. It does not take much ingenuity to conclude that the former is likely to be more conducive to the long term health of the company than the latter. Moreover, the latter situation is likely to get worse if the bank makes another £1m loan the following year and the directors proceed to buy more whiskey. And if it happens again for a third, fourth and fifth year we may want to start asking questions about why the bank would be willing to sustain this absurd arrangement. It is also clear that there will be a profound effect on the company’s personnel – turning them from productive workers into alcoholics.

      Similarly, if the US attracts foreign capital which is invested in increasing the economy’s productive capacity, and if “it’s [sic] citizens have large profitable investments outside the US” then yes, we can say that this likely to be indicative of a healthy relationship. If, on the other hand, it is selling government bonds or assets to foreigners in order to fund consumption, and if net foreign assets are slipping further into the red (which they are), then the situation is markedly different. The fact that the latter is more likely to be the case is illustrated by the increase in government and household debt as a percentage of GDP, and the increasing proportion of the government budget that must be devoted to servicing the debt. In other words, the productive capacity of the economy is failing to keep up with the level of debt as it gets higher and higher.

      Consequently, like our drinking company, the US is not “advancing into a richer future” as much as it is spending merrily today at the expense of pain tomorrow, a pain which will come when its funds are cut off – with such a cut off being delayed because of the US dollar’s reserve status, a status which may now be in its twilight (as explained in the essay). Reciting the further truism that “the ultimate purpose of all investment is consumption” is meaningless if one is not investing in the first place.

      Moreover, just as our fictional drinking loans to the company would change the nature of the business from producers to drinkers, so too has the nature of the US economy switched from production to consumption – or, at least, from manufacturing to services at the expense of blue collar workers and to the benefit of financiers and money movers. It is in this context that Trump has proposed protectionist measures in a wrongheaded attempt to bolster American industry; a failure to understand that context is likely to render one’s commentary inert if not irrelevant.

      Regarding gold, the description of a money as “sound” has nothing to do with its supply being immune to change; it means that such changes result from the preferences of market participants, just like the supply of any other good or service. None of the causes of change you stated is “arbitrary” – their magnitude is constrained by real economic choices. New discoveries of gold must be accomplished by diverting real resources from other uses; every “sudden big purchase or sale” of a quantity of the existing gold stock must be the opposite side of a “sudden big purchase or sale” of some other useful good or service. Consequently, the value of commodity money has generally remained stable over time. This is in contrast to fiat money which is expanded by the will of the state purely out of this air, free of any constraints – leading to the c.97% loss of the dollar’s purchasing power since the advent of the Federal Reserve. As a result, my explanations of the different trading relationships under gold on the one hand and under fiat money on the other are correct.

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