By the end of the current month of January 2013, public debt of the United States of America will amount to somewhere around $ 16.5 trillion, or approximately 110% of Gross Domestic Product. There is no lack of hysterics around the subject, not to mention political gamesmanship, so I thought some facts could be in place to illuminate the subject.
Since one man's debt is another man's asset, let us take a look at who holds this public debt, and the likely consequences thereof.
FEDERAL RESERVE & INTRA-GOVERNMENTAL HOLDINGS
For starters, close to half the public debt, or nearly $ 8.0 trillion, is held by the government itself - at the Federal Reserve in consequence of current monetary policies, and as intra-governmental holdings mainly as the result of borrowings from a surplus in the Social Security Fund. Since government cannot by definition owe money to itself, this very substantial portion of the public debt is nothing but accounting smoke and mirrors.
FOREIGN & INTERNATIONAL HOLDINGS
These are equivalent to approximately one third of total nominal debt, or something short of $ 5.5 trillion, amost all of which is denominated in U.S. currency. This debt is fundamentally resulting from the fact that, since the 1980s, the United States has consistently been running a negative balance of trade with the rest of the world, currently amounting to some $ 550 billion per year. It means that we consume more than we produce, and that the rest of the world continues to accept U.S. Treasury IOUs in payment. It should be mentioned that this trade deficit is partly offset by some $ 100 billion of annual net positive inflows stemming from U.S. assets held abroad.
Incidentally, for those wailing about the United States of America being entirely in hoc to China, that country owns about 20% of the public debt held abroad, or somewhat in excess of $ 1.0 trillion.
Well, you may say, $ 5.5 trillion in public debt to the rest of the world is not peanuts. What would happen if the holders of this debt decided to divest themselves of U.S. dollar assets? Actually, nothing much, because the dollars would not evaporate into thin air, they would simply be held by someone else. If enough dollars started changing hands, the likely effect would be that the price of those dollars - the exchange rate relative to alternative currencies - would fall, something which has indeed been going on at a steady clip for the last ten years.
This is actually good for the United States. A cheaper dollar helps making American goods and services more competitive on the world market - and conversely - makes imported goods and services relatively less competitive against alternatives produced in the U.S. This will help increasing U.S. employment and reduce the trade deficit, the root cause of foreign indebtedness in the first place. Until then, the public debt held abroad will just keep growing and could eventually become a real problem.
However, a wholesale liquidation of dollar assets is not so easy, for lack of viable alternatives. 85% of all world foreign exchange transactions take place in U.S. dollars, a market involving an eye-watering $ 4 trillion plus per day! 60% of all the world's official foreign exchange reserves and 50% of all foreign debt securities are denominated in U.S. dollars. In other words, while a depreciating dollar may do the United States some good, there is a lot of counterparties out there on the losing end of this deal and therefore not that keen to see it happen.
Theoretically, the foreign holders of U.S. Treasuries could swap them for other U.S. assets - corporations, real estate or stocks - which would drive prices up of said assets if practiced on a large enough scale. Nice for the current U.S. owners of same, but political implications aside, let us not bet on this ever happening in a big way.
PUBLIC DEBT HOLDINGS AS INSTRUMENTS OF SAVINGS
The remaining 20% or so of the $ 16.5 trillion nominal debt, or $ 3.3 trillion, are held in the United States by state and local governments, insurance companies, pension and mutual funds and their likes, generally for the purpose of funding future pension and casualty obligations. These holders of the public debt will not evaporate. To the contrary, they will steadily increase their holdings pretty much in lock-step with GDP growth.
But what is currently a huge advantage for the federal government of being able to borrow money at what effectively are negative interest rates, is an equally huge time bomb for those holders of Treasuries that depend on the interest income to fund future liabilities with a present value - discounted at these low rates - way in excess of current funding values on hand.
SUMMA SUMMARUM (ON THE WHOLE)
Let us therefore stop waxing hysterical about the size of the public debt. It is at best nothing more than a political ploy to divert attention from the real underlying problems.
Which are: what to do about the trade deficit and, much more importantly, what to do about the time bomb of unfunded future entitlement benefits.
Sunday, January 6, 2013
Friday, January 4, 2013
AMERICA AND ITS GUNS
On December 14, 2012 we witnessed the wanton murder of 20 children between the ages of 6 and 7, as well as 6 adults, at an elementary school in Newtown, Connecticut. The perpetrator was an emotionally disturbed 20 year old man with automatic assault weapons, lifted from his divorced mother's ample gun collection. after having first murdered her in the home where they lived together.
There have been 61 mass shooting incidents in the United States since 1982, 30 since the Columbine incident in 1999, and 10 in the year 2012, alone. The record alone is shocking - the time-line trend even more so.
With about 30,000 gun-related deaths per year, of which about 17,000 are suicides, about 12,000 are homicides and the remaining 1,000 mostly killimg of innocent bystanders, this places the United States at 4.5 times the per capita average of all OECD nations.
How can a country justify combining its status as the most overtly Christian nation on earth with this record of violent behavior? Is it a problem of too many firearms at large, is violence an integral part of the American cultural DNA, or is it all of the above?
GUN OWNERSHIP
The Second Amendment to the United States' Constitution, enacted in 1791, states:
"A well regulated militia being necessary to the security of a free state, the right of the people to keep and bear arms shall not be infringed"
These few words have ever since been the subject of much political and judicial discord, often bordering on hysterical irrationality, particularly on whether the amendment should be interpreted as a right in the context of forming state militias, or as a wholly independent and personal right. The U.S. Supreme Court in 2008 ruled, in a narrow majority decision, that the amendment should indeed be interpreted as an individual right to bear arms.
Well before the enactment of the Second Amendment, common law, as well some early state constitutions, already affirmed people's right to keep and bear arms. There should be of little doubt that James Madison drafted this particular amendment with the purpose of securing the votes of moderate Anti-Federalists towards fullfillment of his wish to establish a centrally governed United States of America. Political expediency was not born yesterday.
But the Supreme Court in its 2008 ruling also afirms:
"Like most rights, the Second Amendment right is not unlimited. It is not a right to keep and carry any weapon whatsoever in any manner whatsoever and for whatever purpose." (Italics mine).
Herein lies the seed of the reasonable, as well as maybe the possible, within the context of U.S. politics: a ban on private ownership of semi-automatic assault weapons which can fire multiple rounds of high caliber ammunition without the need for reloading. The only plausible end use for this category of arms is to kill people, as many as possible and in the shortest time possible.
My concern, however, is that this will not be the logical outcome from the fact that, for once, the nation has been shaken to the core by the Newtown massacre of small children. We may well end up with nothing more than a call for stricter background-check rules to keep firearms out of the hands of mentally disturbed people, the most likely perpetrators of mass shootings.
The uselessness of such a measure should be evident to anybody. There is no national database over mentally disturbed people. In most cases we do not even know who they are before it is too late.
Therefore, the only viable remedy is to make it more difficult for anybody to lay their hands on assault weapons, preferrably also making it a criminal offense to sell and own one.
A CULTURE OF VIOLENCE
This is where the country faces its biggest challenge - this unfathomable fascination with violence in so many aspects of daily life - in movies, television, video games, sports - and in the glorification of gun ownership.
It is interesting to note that in countries such as Finland, Sweden, Norway, France, Canada, Austria and Germany - all with long hunting traditions - in every one of them we find a gun ownership ratio of almost exactly 30 per 100 inhabitants.
It would be reasonable to believe that the gun-ownership-for-hunting ratio is similar in the United States. That leaves us with another 60 guns per 100 inhabitants, or close to 190 million firearms, laying around at the average of nearly two for every American household.
Since the actual number of households owning guns is situated somwhere between one third and one half the total, depending on who you believe, you may readily conclude that quite a few households contain lots of guns. For what purpose other than hunting? Self-defense?
There are no reliable statistics or credible studies attesting to the beneficial value of keeping or bearing guns for self defense. The conclusions reached by such studies are all over the map, depending on the authors' bias.
It is in most cases a criminal offense to kill an unarmed person under any circumstance, and your chances of successfully confronting and out-gunning an already armed perpetrator ready to pull the trigger is as close to nil as any odds can be.
On the other hand, we should be reminded of the 17,000 annual gun-related suicides. Shooting oneself is the least complicated way of committing suicide, and ready access to a gun in the home in the moment of ultimate despear certainly have an influence on the number of successful suicides actually carried out.
Furthermore, a substantial proportion of the annual 12,000 gun-related homicides occur in the home, perpetrated by familily members or persons known to the victim, frequently as a result of momentary personal altercations and by use of the victim's own weapon.
Anybody believing that the key to making America a safer and less violent place is more, rather than less, guns out there should have his head examined. Gun ownership for purposes other than hunting, as well as the level of gun violence, already exceed by a wide margin those of any other well established democracy. That alone should be proof enough that more guns does not make for a safer society.
The United States of America has many great attributes to be proud of and that the world would do well to emulate. Its attitudes to gun ownership and violence are not among them.
There have been 61 mass shooting incidents in the United States since 1982, 30 since the Columbine incident in 1999, and 10 in the year 2012, alone. The record alone is shocking - the time-line trend even more so.
With about 30,000 gun-related deaths per year, of which about 17,000 are suicides, about 12,000 are homicides and the remaining 1,000 mostly killimg of innocent bystanders, this places the United States at 4.5 times the per capita average of all OECD nations.
How can a country justify combining its status as the most overtly Christian nation on earth with this record of violent behavior? Is it a problem of too many firearms at large, is violence an integral part of the American cultural DNA, or is it all of the above?
GUN OWNERSHIP
The Second Amendment to the United States' Constitution, enacted in 1791, states:
"A well regulated militia being necessary to the security of a free state, the right of the people to keep and bear arms shall not be infringed"
These few words have ever since been the subject of much political and judicial discord, often bordering on hysterical irrationality, particularly on whether the amendment should be interpreted as a right in the context of forming state militias, or as a wholly independent and personal right. The U.S. Supreme Court in 2008 ruled, in a narrow majority decision, that the amendment should indeed be interpreted as an individual right to bear arms.
Well before the enactment of the Second Amendment, common law, as well some early state constitutions, already affirmed people's right to keep and bear arms. There should be of little doubt that James Madison drafted this particular amendment with the purpose of securing the votes of moderate Anti-Federalists towards fullfillment of his wish to establish a centrally governed United States of America. Political expediency was not born yesterday.
But the Supreme Court in its 2008 ruling also afirms:
"Like most rights, the Second Amendment right is not unlimited. It is not a right to keep and carry any weapon whatsoever in any manner whatsoever and for whatever purpose." (Italics mine).
Herein lies the seed of the reasonable, as well as maybe the possible, within the context of U.S. politics: a ban on private ownership of semi-automatic assault weapons which can fire multiple rounds of high caliber ammunition without the need for reloading. The only plausible end use for this category of arms is to kill people, as many as possible and in the shortest time possible.
My concern, however, is that this will not be the logical outcome from the fact that, for once, the nation has been shaken to the core by the Newtown massacre of small children. We may well end up with nothing more than a call for stricter background-check rules to keep firearms out of the hands of mentally disturbed people, the most likely perpetrators of mass shootings.
The uselessness of such a measure should be evident to anybody. There is no national database over mentally disturbed people. In most cases we do not even know who they are before it is too late.
Therefore, the only viable remedy is to make it more difficult for anybody to lay their hands on assault weapons, preferrably also making it a criminal offense to sell and own one.
A CULTURE OF VIOLENCE
This is where the country faces its biggest challenge - this unfathomable fascination with violence in so many aspects of daily life - in movies, television, video games, sports - and in the glorification of gun ownership.
It is interesting to note that in countries such as Finland, Sweden, Norway, France, Canada, Austria and Germany - all with long hunting traditions - in every one of them we find a gun ownership ratio of almost exactly 30 per 100 inhabitants.
It would be reasonable to believe that the gun-ownership-for-hunting ratio is similar in the United States. That leaves us with another 60 guns per 100 inhabitants, or close to 190 million firearms, laying around at the average of nearly two for every American household.
Since the actual number of households owning guns is situated somwhere between one third and one half the total, depending on who you believe, you may readily conclude that quite a few households contain lots of guns. For what purpose other than hunting? Self-defense?
There are no reliable statistics or credible studies attesting to the beneficial value of keeping or bearing guns for self defense. The conclusions reached by such studies are all over the map, depending on the authors' bias.
It is in most cases a criminal offense to kill an unarmed person under any circumstance, and your chances of successfully confronting and out-gunning an already armed perpetrator ready to pull the trigger is as close to nil as any odds can be.
On the other hand, we should be reminded of the 17,000 annual gun-related suicides. Shooting oneself is the least complicated way of committing suicide, and ready access to a gun in the home in the moment of ultimate despear certainly have an influence on the number of successful suicides actually carried out.
Furthermore, a substantial proportion of the annual 12,000 gun-related homicides occur in the home, perpetrated by familily members or persons known to the victim, frequently as a result of momentary personal altercations and by use of the victim's own weapon.
Anybody believing that the key to making America a safer and less violent place is more, rather than less, guns out there should have his head examined. Gun ownership for purposes other than hunting, as well as the level of gun violence, already exceed by a wide margin those of any other well established democracy. That alone should be proof enough that more guns does not make for a safer society.
The United States of America has many great attributes to be proud of and that the world would do well to emulate. Its attitudes to gun ownership and violence are not among them.
Monday, November 19, 2012
MEDICARE
There are currently about 48 million people enrolled in the government-run comprehensive Medicare program covering people 65 years and older, at a projected annual 2012 cost of $585 billion, equivalent to $12,200 per person enrolled.
Overall annual health care expenditures in the United States are approximately $2.7 trillion, or $8,600 per capita. It would be only logical to accept that health care costs per individual for the elderly would be more expensive than for the population at large, but the statistics hide some startling facts compiled by the Health Care Financing Administration (HCFA).
40 percent of Medicare dollars cover care for people in their last month of life, at an annual cost of $234 billion. If we add people in the last two months of life we are looking at a cost in excess of $300 billion.
Furthermore, 10 percent of Medicare beneficiaries account for 70 percent of program spending, which is equivalent to $85,300 per beneficiary.
Thus, the cost of covering the remaining 90 percent of beneficiaries is actually a surprisingly low $4,100 per person given the age group in question, less than half the per capita cost for the population at large.
From this we may allow ourselves to draw some conclusions:
(1) In terms of the famously expensive United States health care system, government-run Medicare turns out to be not only comparatively cost efficient. It is also a program universally loved by the country's elderly, yours truly being among them.
(2) It makes no sense whatsoever to try saving program costs by increasing the age of eligibility, because it is not generally at this lower end that the larger expenditures occur. In addition, it would throw people in the 65 - 70 age bracket onto the mercy and good graces of the private for-profit health insurance industry. And you can imagine the premium cost at that age. That is, if you were lucky enough to be accepted.
(3) The problem lies squarely in the end-of-life-care decisions a society makes, and this is not unique to the United States. The medical community of my native Norway is debating whether, and how, to place monetary restraints on end-of-life care, an issue which the country's politicians are not eager to embrace. We need only recall Sarah Palin's "Death Panels".
We talk of the health care industry's mission to save lives as if life was eternal, while all one can hope for is to prolong a life. In the overwhelming number of cases this is a sacred mission, but not indiscriminately and under any circumstance.
Placing value on human life is humanly impossible, so in the end common sense and humility must prevail.
When my time comes I wish to go gracefully, at the least possible expense to my family and the community at large.
Overall annual health care expenditures in the United States are approximately $2.7 trillion, or $8,600 per capita. It would be only logical to accept that health care costs per individual for the elderly would be more expensive than for the population at large, but the statistics hide some startling facts compiled by the Health Care Financing Administration (HCFA).
40 percent of Medicare dollars cover care for people in their last month of life, at an annual cost of $234 billion. If we add people in the last two months of life we are looking at a cost in excess of $300 billion.
Furthermore, 10 percent of Medicare beneficiaries account for 70 percent of program spending, which is equivalent to $85,300 per beneficiary.
Thus, the cost of covering the remaining 90 percent of beneficiaries is actually a surprisingly low $4,100 per person given the age group in question, less than half the per capita cost for the population at large.
From this we may allow ourselves to draw some conclusions:
(1) In terms of the famously expensive United States health care system, government-run Medicare turns out to be not only comparatively cost efficient. It is also a program universally loved by the country's elderly, yours truly being among them.
(2) It makes no sense whatsoever to try saving program costs by increasing the age of eligibility, because it is not generally at this lower end that the larger expenditures occur. In addition, it would throw people in the 65 - 70 age bracket onto the mercy and good graces of the private for-profit health insurance industry. And you can imagine the premium cost at that age. That is, if you were lucky enough to be accepted.
(3) The problem lies squarely in the end-of-life-care decisions a society makes, and this is not unique to the United States. The medical community of my native Norway is debating whether, and how, to place monetary restraints on end-of-life care, an issue which the country's politicians are not eager to embrace. We need only recall Sarah Palin's "Death Panels".
We talk of the health care industry's mission to save lives as if life was eternal, while all one can hope for is to prolong a life. In the overwhelming number of cases this is a sacred mission, but not indiscriminately and under any circumstance.
Placing value on human life is humanly impossible, so in the end common sense and humility must prevail.
When my time comes I wish to go gracefully, at the least possible expense to my family and the community at large.
Monday, October 8, 2012
U.S. JOB MARKET PROSPECTS
I have been hearing Mr. Mitt Romney, nominee of the Republican party to the U.S. presidential elections in November, refer to the "fact" that a 3 percentage point drop in the unemployment rate, from current 8 percent to 5 percent, would create nine million new jobs. Whether this is a fib or lack of knowledge of basic labor market statistics, such statements are equally disturbing when coming from someone who's aim it is to lead the world's foremost economy.
The population of the United States is at the moment of writing around 312 million, and Mr. Romney's statement would be approximately correct if unemployment statistics were based on this total. However they are not, as that figure includes some 75 million persons under the age of 18 and around 41 million who are 65 years or older.
The unemployment rate is defined as the percentage of the labor force out of work at any one time.
The United States labor force currently numbers a bit above 153 million, which in turn represents 78 percent of the population's 18-to-64 age group segment.
So, if Mr. Romney's - so far unknown - economic policies were to bring the unemployment rate down to the 5 percent level, we are not talking about 9 million jobs, but rather about half that figure. Not an unsubstantial difference.
Mr. Romney is also pledging to create 12 million new jobs during the first four years of his presidency, were he to be elected. This is another statement that takes some credulity.
U.S. labor statistics indicate the total number of unemployed in 2011 to be about 13.7 million. A 5 percent unemployment rate is generally equated with full employment, and historically the rate seldom dips under this threshold. The math to refute Mr. Romney's 12 million new jobs claim is therefore not overly complex. He is again overstating the situation by a factor of two.
In this context it is also important to note that, during the remaining part of the decade, the 18-to-64 age segment - the main source of new labor - will only grow by less than a compounded 0.3% per year, primarily due to retirement of the baby-boom generation born during the years immediately following WWII.
On the opposite side of the political spectrum the incumbent presidential candidate, Mr. Obama, pleads with the electorate for the opportunity of another four years term to finish what he has begun, while admitting that there is still much to be done with respect to the level of employment.
When it comes to the jobs market, current trends actually do not bode badly for an Obama second term.
The dramatic increase in unemployment witnessed in the United States during the period 2008-10 was primarily rooted in the collapsing housing market, subsequently cascading over into plummeting state and local government employment levels forced on by shrinking tax revenues.
The housing market crash was a combined consequence of over-building and a simultaneous price bubble, aided and abetted by irresponsible and outright fraudulent financial market lending practices, leaving behind a household rate of debt never before experienced in the United States.
The long term rule of thumb for annual U.S. housing starts has been about 4.5 new units per 1,000 inhabitants. During the period between 2000 and 2006 this ratio climbed steadily to a peak of about 6.0, creating a situation of substantial over-supply. Subsequently, between 2006 and 2009 housing starts fell off a cliff, bottoming out at 1.2 units per 1,000 inhabitants.
When one realizes that housing starts - including attendant household goods industries - in normal times represent roughly 3 percent of U.S. Gross National Product, it is not hard to imagine what sort of impact sharp fluctuations in this market segment do to levels of national employment, in either direction.
The good news is that the 2000-06 housing over-supply has by now been corrected by the 2006-09 implosion of activity. The housing market is coming back to life, although still hampered by so-called "under water" mortgages, where the value of loans exceed the market value of the property.
With the supply over-hang out of the way, now would be a good time for the government to double down on unraveling the financial impediments still blocking the way to full recovery.
Further good news is that the U.S. auto sales, falling to 10 million units in 2009, is currently at some 15 million units and on its way back to the annual average16 million units prevailing in the early 2000s. This is further strengthened by a revitalized U.S. auto industry and a small but steady trickle of returning manufacturing jobs from overseas.
Darkness is greatest during the hours before dawn, and the United States deserves to be lead back into the sunlight by a leader who gets the facts straight.
The population of the United States is at the moment of writing around 312 million, and Mr. Romney's statement would be approximately correct if unemployment statistics were based on this total. However they are not, as that figure includes some 75 million persons under the age of 18 and around 41 million who are 65 years or older.
The unemployment rate is defined as the percentage of the labor force out of work at any one time.
The United States labor force currently numbers a bit above 153 million, which in turn represents 78 percent of the population's 18-to-64 age group segment.
So, if Mr. Romney's - so far unknown - economic policies were to bring the unemployment rate down to the 5 percent level, we are not talking about 9 million jobs, but rather about half that figure. Not an unsubstantial difference.
Mr. Romney is also pledging to create 12 million new jobs during the first four years of his presidency, were he to be elected. This is another statement that takes some credulity.
U.S. labor statistics indicate the total number of unemployed in 2011 to be about 13.7 million. A 5 percent unemployment rate is generally equated with full employment, and historically the rate seldom dips under this threshold. The math to refute Mr. Romney's 12 million new jobs claim is therefore not overly complex. He is again overstating the situation by a factor of two.
In this context it is also important to note that, during the remaining part of the decade, the 18-to-64 age segment - the main source of new labor - will only grow by less than a compounded 0.3% per year, primarily due to retirement of the baby-boom generation born during the years immediately following WWII.
On the opposite side of the political spectrum the incumbent presidential candidate, Mr. Obama, pleads with the electorate for the opportunity of another four years term to finish what he has begun, while admitting that there is still much to be done with respect to the level of employment.
When it comes to the jobs market, current trends actually do not bode badly for an Obama second term.
The dramatic increase in unemployment witnessed in the United States during the period 2008-10 was primarily rooted in the collapsing housing market, subsequently cascading over into plummeting state and local government employment levels forced on by shrinking tax revenues.
The housing market crash was a combined consequence of over-building and a simultaneous price bubble, aided and abetted by irresponsible and outright fraudulent financial market lending practices, leaving behind a household rate of debt never before experienced in the United States.
The long term rule of thumb for annual U.S. housing starts has been about 4.5 new units per 1,000 inhabitants. During the period between 2000 and 2006 this ratio climbed steadily to a peak of about 6.0, creating a situation of substantial over-supply. Subsequently, between 2006 and 2009 housing starts fell off a cliff, bottoming out at 1.2 units per 1,000 inhabitants.
When one realizes that housing starts - including attendant household goods industries - in normal times represent roughly 3 percent of U.S. Gross National Product, it is not hard to imagine what sort of impact sharp fluctuations in this market segment do to levels of national employment, in either direction.
The good news is that the 2000-06 housing over-supply has by now been corrected by the 2006-09 implosion of activity. The housing market is coming back to life, although still hampered by so-called "under water" mortgages, where the value of loans exceed the market value of the property.
With the supply over-hang out of the way, now would be a good time for the government to double down on unraveling the financial impediments still blocking the way to full recovery.
Further good news is that the U.S. auto sales, falling to 10 million units in 2009, is currently at some 15 million units and on its way back to the annual average16 million units prevailing in the early 2000s. This is further strengthened by a revitalized U.S. auto industry and a small but steady trickle of returning manufacturing jobs from overseas.
Darkness is greatest during the hours before dawn, and the United States deserves to be lead back into the sunlight by a leader who gets the facts straight.
Saturday, September 8, 2012
GLOBALIZATION AND FREE TRADE
In 1776 Adam Smith wrote in his "Wealth of Nations"
If a foreign country can supply us with a commodity cheaper than we ourselves can make it, better buy it of them with some part of the produce of our own industry, employed in a way in which we have some advantage.
The underlining is mine.
Trade is by definition the exchange of different commodities of equal value, and this is what Adam Smith refers to in his defense of free trade vs mercantilism. Adam Smith was a moral philosopher - the term economist was yet to be coined - and from a moral-philosophical point of view his thesis makes good sense. In practice, however, it has invariably been mercantilism which has propelled nations to prosperity and created those advantages which Adam Smith assumes to be phenomena of moral logic.
Adam Smith, and later David Ricardo, lived and wrote in agrarian times and were mainly concerned with the British Corn Laws which imposed prohibitive import duties on cheap foreign grains, a policy greatly favored by England's land owning classes who also happened to control Parliament. This kept food prices high and landowners comfortably rich, but in time it would come to affect required living wage levels in the factories of the nascent industrial revolution.
The rapidly growing class of industrial capitalists wished labor costs to be as low as possible, so as to develop export markets for their products. When these newly rich industrialists and tradesmen finally gained the political upper hand, the Corn Laws were abolished in favor of a new form of mercantilism, this time bent on protecting industrial export markets through monopoly corporations which became the backbone of the now defunct British Empire.
Industrialization has always been the driving force behind national economic development and wealth creation, and in every important instance it has been the consequence of mercantilism, the economic doctrine which states that government control of trade is of paramount importance to the prosperity of a nation, in particular by demanding a positive balance of trade. Thus, modern economic globalization began with England's industrial revolution.
In no small degree, British mercantilism lead to the American Revolution and the creation of a new nation which promptly adopted similar policies, in reverse. High tariffs on imported goods were the main source of U.S. Federal revenue from 1790 to 1914, often exceeding 90% of total revenues collected. Behind these tariff walls and aided by abundant cheap immigrant labor and bountiful natural resources, thus arose the world's mightiest economy. The United States ran consistent surpluses in foreign trade through the 1970s and was an ardent free-trade advocate. The country has since become a substantial net importer and a less enthusiastic economic globalizer.
Nascent Germany under Otto von Bismarck was an early adherent to the American form of mercantilism and has basically stayed on track to this day, favoring policies of substantial foreign trade surpluses to the detriment of its partners in the European Community, from which Germany now demands commensurate punishment for not being able to pay their bills. Japan chose a similar course and was not so long ago considered an invincible economic force.
Brazil started to stir in the 1950s, adding a new twist to barriers against imports, namely national content laws with the purpose of provoking inwards transfer of foreign capital and industrial know-how. China did the same a generation later, adding numerous other non-tariff barriers as well as foreign exchange rate manipulation to their bag of mercantilistic tricks.
Unfortunately, global free trade is an illusion except in the minds of moral philosophers. In the real world it is most ardently bandied about by trade surplus nations - the mercantilists - that have everything to gain from free and unfettered access to everybody else's markets.
That is not to say that trade is not advantageous - of course it is - so long as it is clearly for the reciprocal enrichment of the trading parties involved. This is patently what Adam Smith alludes to in the passage quoted above.
But a system of world trade based on a number of nations running consistently large trade surpluses - the hallmark of mercantilism - must necessarily lead to a number of nations running up equally large and negative balances of trade, financed by the creation of excess, and ultimately irredeemable, credit.
Exactly where we find ourselves today.
If a foreign country can supply us with a commodity cheaper than we ourselves can make it, better buy it of them with some part of the produce of our own industry, employed in a way in which we have some advantage.
The underlining is mine.
Trade is by definition the exchange of different commodities of equal value, and this is what Adam Smith refers to in his defense of free trade vs mercantilism. Adam Smith was a moral philosopher - the term economist was yet to be coined - and from a moral-philosophical point of view his thesis makes good sense. In practice, however, it has invariably been mercantilism which has propelled nations to prosperity and created those advantages which Adam Smith assumes to be phenomena of moral logic.
Adam Smith, and later David Ricardo, lived and wrote in agrarian times and were mainly concerned with the British Corn Laws which imposed prohibitive import duties on cheap foreign grains, a policy greatly favored by England's land owning classes who also happened to control Parliament. This kept food prices high and landowners comfortably rich, but in time it would come to affect required living wage levels in the factories of the nascent industrial revolution.
The rapidly growing class of industrial capitalists wished labor costs to be as low as possible, so as to develop export markets for their products. When these newly rich industrialists and tradesmen finally gained the political upper hand, the Corn Laws were abolished in favor of a new form of mercantilism, this time bent on protecting industrial export markets through monopoly corporations which became the backbone of the now defunct British Empire.
Industrialization has always been the driving force behind national economic development and wealth creation, and in every important instance it has been the consequence of mercantilism, the economic doctrine which states that government control of trade is of paramount importance to the prosperity of a nation, in particular by demanding a positive balance of trade. Thus, modern economic globalization began with England's industrial revolution.
In no small degree, British mercantilism lead to the American Revolution and the creation of a new nation which promptly adopted similar policies, in reverse. High tariffs on imported goods were the main source of U.S. Federal revenue from 1790 to 1914, often exceeding 90% of total revenues collected. Behind these tariff walls and aided by abundant cheap immigrant labor and bountiful natural resources, thus arose the world's mightiest economy. The United States ran consistent surpluses in foreign trade through the 1970s and was an ardent free-trade advocate. The country has since become a substantial net importer and a less enthusiastic economic globalizer.
Nascent Germany under Otto von Bismarck was an early adherent to the American form of mercantilism and has basically stayed on track to this day, favoring policies of substantial foreign trade surpluses to the detriment of its partners in the European Community, from which Germany now demands commensurate punishment for not being able to pay their bills. Japan chose a similar course and was not so long ago considered an invincible economic force.
Brazil started to stir in the 1950s, adding a new twist to barriers against imports, namely national content laws with the purpose of provoking inwards transfer of foreign capital and industrial know-how. China did the same a generation later, adding numerous other non-tariff barriers as well as foreign exchange rate manipulation to their bag of mercantilistic tricks.
Unfortunately, global free trade is an illusion except in the minds of moral philosophers. In the real world it is most ardently bandied about by trade surplus nations - the mercantilists - that have everything to gain from free and unfettered access to everybody else's markets.
That is not to say that trade is not advantageous - of course it is - so long as it is clearly for the reciprocal enrichment of the trading parties involved. This is patently what Adam Smith alludes to in the passage quoted above.
But a system of world trade based on a number of nations running consistently large trade surpluses - the hallmark of mercantilism - must necessarily lead to a number of nations running up equally large and negative balances of trade, financed by the creation of excess, and ultimately irredeemable, credit.
Exactly where we find ourselves today.
Saturday, June 30, 2012
ARE THE UNITED STATES LIVING OFF CHINESE MONEY?
Not infrequently we see and hear statements from allegedly authoritative sources that the United States is deeply in debt to China and is living from day to day thanks to borrowings from that country.
Here are the facts as they currently stand.
As of May 2012, U.S. government debt held by the public stood at $11.0 trillion, while intra-governmental debt amounted to $4.76 trillion to give a combined outstanding public debt of $15.76 trillion. (One could ask whether monies that the government owes to itself is debt in the true meaning of the word).
As of February 2012, $5.1 trillion of the debt held by the public was owned by foreign investors, the largest of which were China and Japan with just over $1.0 trillion each. Other substantial foreign investors, although on a smaller scale, are Brazil, Switzerland, United Kingdom and Singapore.
So, China is only the source of approximately 10% of U.S. public debt, and there has not been any significant change in the size this debt for some time.
Not so dramatic and humiliating as some will have us believe.
Here are the facts as they currently stand.
As of May 2012, U.S. government debt held by the public stood at $11.0 trillion, while intra-governmental debt amounted to $4.76 trillion to give a combined outstanding public debt of $15.76 trillion. (One could ask whether monies that the government owes to itself is debt in the true meaning of the word).
As of February 2012, $5.1 trillion of the debt held by the public was owned by foreign investors, the largest of which were China and Japan with just over $1.0 trillion each. Other substantial foreign investors, although on a smaller scale, are Brazil, Switzerland, United Kingdom and Singapore.
So, China is only the source of approximately 10% of U.S. public debt, and there has not been any significant change in the size this debt for some time.
Not so dramatic and humiliating as some will have us believe.
TRUTH IN ADVERTISING
Advertising laws are aimed at protecting consumers by requiring advertisers to be truthful about their products and to be able to substantiate their claims. All businesses must comply with advertising and marketing laws, and failure to do so could result in costly lawsuits and civil penalties.
The Federal Trade Commission (FTC) is the main federal agency that enforces advertising laws and regulations. Under the Federal Trade Commission Act advertising must be truthful and non-deceptive, advertisers must have evidence to back up their claims, and advertisements cannot be unfair.
Hundreds of millions of dollars are being expended on political advertising which not infrequently is patently untruthful, deceptive and unfair. Should not political advertising adhere to the same standards as the ones set for corporate America?
One could so wish, but purchase of political advertising is not held to such commercial standards, because their statements are considered "political speech" which falls under the protection of the First Amendment. The noble idea underpinning this different approach to advertising standards is the belief that voters have a right to uncensored opinion on which to base their political decisions.
A logical extension of this is that one also believes voters at the receiving end of the opinion are universally capable of separating the wheat from the chaff. I will let you be the judge of that.
Furthermore, "opinion" (from Latin opinionem - what one thinks) is defined in the dictionary as "the expression of a belief that is held with confidence but not substantiated by positive knowledge or proof", or otherwise, "a personal belief or judgement that is not founded on proof or certainty".
In other words, one has the right to broadcast one's opinion, but no obligation to be truthful or factual.
Caveat emptor - or, "Let the voter beware!"
The Federal Trade Commission (FTC) is the main federal agency that enforces advertising laws and regulations. Under the Federal Trade Commission Act advertising must be truthful and non-deceptive, advertisers must have evidence to back up their claims, and advertisements cannot be unfair.
Hundreds of millions of dollars are being expended on political advertising which not infrequently is patently untruthful, deceptive and unfair. Should not political advertising adhere to the same standards as the ones set for corporate America?
One could so wish, but purchase of political advertising is not held to such commercial standards, because their statements are considered "political speech" which falls under the protection of the First Amendment. The noble idea underpinning this different approach to advertising standards is the belief that voters have a right to uncensored opinion on which to base their political decisions.
A logical extension of this is that one also believes voters at the receiving end of the opinion are universally capable of separating the wheat from the chaff. I will let you be the judge of that.
Furthermore, "opinion" (from Latin opinionem - what one thinks) is defined in the dictionary as "the expression of a belief that is held with confidence but not substantiated by positive knowledge or proof", or otherwise, "a personal belief or judgement that is not founded on proof or certainty".
In other words, one has the right to broadcast one's opinion, but no obligation to be truthful or factual.
Caveat emptor - or, "Let the voter beware!"
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