War on Capitalism? Taking Aaron to Task and Policy Too ~ Steve Blitz Morning Notes
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Wednesday, July 8, 2009

War on Capitalism? Taking Aaron to Task and Policy Too

Aaron Task writes for thestreet.com and has a post today in Yahoo finance declaring Government stimulus as "War on Capitalism". Normally I let this nonsense pass unnoticed but its sheer repetition has too many believing it is true. First off, Obama and Bush II were saving capitalism not declaring war on it. If they wanted to declare war they would have let WB, MER, C, and BAC follow Lehman into bankruptcy, not done anything to unfreeze capital markets, and let the consumer and business spending implosion set off a debt/deflation cycle as debt underlying income and profit expectations turns onerous and assets subsequently need to be sold to raise cash. When Roosevelt was President his response to increased carping by bankers and the like was that "they sound like a man saved from drowning and then complains that his hat wasn't saved as well". More things change ……

The kick-off for the Task post is the possibility that another round of massive stimulus is coming – and the doubt that it even works. Fact is, stimulus worked well enough in the 1930s for the economy to exit recession in March 1933 and the country to fall back into recession in May 1938 when the stimulus was reduced. Looking back, the stimulus wasn't big enough until World War II solved that problem. As for the Japan example, it doesn't hold as a comparison because they took way too long to allow failed banks to recognize losses and merge into healthier ones, the necessary step to revive lending. Remember when Japan was going to rule the world and everyone was concerned about whether they would buy U.S. debt, etc? Turns out that they might yet as this nation in a 20-year malaise more and more supplants Western banking as the source of capital to finance the Asian economy.

As for the current run of U.S. macro policy, when the economy was collapsing last Autumn it became evident that a two-prong attack was necessary. Any stimulus package designed to replace imploding consumer and business spending with government consumption would fail if the capital markets remained closed. As for the quality of the packages, monetary and fiscal alike, they are a hodge-podge. For the spending package there was no choice if there was going to be increased spending now rather than later. Without Republican support Obama needed Democrats and no self-respecting politician was going to let $787 billion get spent without a favored project tossed in. Another package? Given the back loaded spending and signs of an abating recession, I doubt it will be necessary.

The crux of the issue for Mr. Task and like minded people is the massive amount of government debt to be financed and the overwhelming amount of outstanding Treasury debt on the books. The numbers are the numbers but none of it is particularly scary -- if the spending gets the country growing in terms of real growth. It is high real growth and low inflation that reduces the debt not inflation (see the 1990s).

Herein lies the issue, how does real growth revive? A decade long run of government infrastructure spending helps but it can't be the whole thing because bridges roads and tunnels are less important to growth than the Web and cell phones – see India and China. In addition, I am not exactly sure what the sum total of the government's plan is attempting to do other than avoid economic disaster today. An obviously worthy goal but how do we recognize when enough is enough. A better balanced economy is a less leveraged economy. This means policy cannot look to get back to 4.4% unemployment, 5.5% is a more sane target.

For the U.S. to have balanced growth our major trade deficit partners (China and Japan among them, Europe not) must allow their currencies to appreciate to market levels. They have kept their currencies too cheap and manufacturing costs cheaper in order to keep their export machines growing by buying more and more dollars. How do you think they ended up with too many Treasurys and the U.S. ended up with too much capital chasing too few investment opportunities. We do not have a free trade world with free floating currencies and acting as if we do is how the Fed helped create the mess the economy is in.


  1. Your point about currencies of China and India are true.

    However to take you to task ( no pun regarding the aforementioned "journalist" name)... so you think an economy can grow based on the web and websites? And cell phones of which most components are built in the far east.

    Doubtful. Economies grow on fundamental manufacturing which is gone from this country. Blog software, Twitter silliness does not an economy make!

  2. Contrary to popular belief, a falling dollar will do virtually nothing to reduce the trade deficit because the trade deficit is driven primarily by disparities in population density. (Consider that, in the past four decades, the dollar has declined vs. the yen by over 300% while, at the same time, our trade deficit with Japan has exploded.) Overpopulated nations desperately dependent on exports to sustain their bloated labor forces aren't going to let something trivial like currency valuation erode their share of the U.S. market.

    At this point, I should introduce myself. I am author of a book titled "Five Short Blasts: A New Economic Theory Exposes The Fatal Flaw in Globalization and Its Consequences for America." My theory is that, as population density rises beyond some optimum level, per capita consumption begins to decline. This occurs because, as people are forced to crowd together and conserve space, it becomes ever more impractical to own many products. Falling per capita consumption, in the face of rising productivity (per capita output, which always rises), inevitably yields rising unemployment and poverty.

    This theory has huge ramifications for U.S. policy toward population management (especially immigration policy) and trade. The implications for population policy may be obvious, but why trade? It's because these effects of an excessive population density - rising unemployment and poverty - are actually imported when we attempt to engage in free trade in manufactured goods with a nation that is much more densely populated. Our economies combine. The work of manufacturing is spread evenly across the combined labor force. But, while the more densely populated nation gets free access to a healthy market, all we get in return is access to a market emaciated by over-crowding and low per capita consumption. The result is an automatic, irreversible trade deficit and loss of jobs, tantamount to economic suicide.

    One need look no further than the U.S.'s trade data for proof of this effect. Using 2006 data, an in-depth analysis reveals that, of our top twenty per capita trade deficits in manufactured goods (the trade deficit divided by the population of the country in question), eighteen are with nations much more densely populated than our own. Even more revealing, if the nations of the world are divided equally around the median population density, the U.S. had a trade surplus in manufactured goods of $17 billion with the half of nations below the median population density. With the half above the median, we had a $480 billion deficit!

    Our trade deficit with China is getting all of the attention these days. But, when expressed in per capita terms, our deficit with China in manufactured goods is rather unremarkable - nineteenth on the list. Our per capita deficit with other nations such as Japan, Germany, Mexico, Korea and others (all much more densely populated than the U.S.) is worse. My point is not that our deficit with China isn't a problem, but rather that it's exactly what we should have expected when we suddenly applied a trade policy that was a proven failure around the world to a country with one fifth of the world's population.

    If you‘re interested in learning more about this important new economic theory, then I invite you to visit either of my web sites at OpenWindowPublishingCo.com or PeteMurphy.wordpress.com where you can read the preface, join in the blog discussion and, of course, buy the book if you like. (It's also available at Amazon.com.)

    Please forgive me for the somewhat spammish nature of the previous paragraph, but I don't know how else to inject this new theory into the debate about trade without drawing attention to the book that explains the theory.

    Pete Murphy
    Author, "Five Short Blasts"

  3. thank you both for commenting. my issue about dollar is not that it fixes the trade deficit the way we learned about it in school. for a country like ours, the capital account drives the current account when it comes to trade. so while a cheaper dollar vs yen or yuan may mean little in relative pricing, a cheaper dollar with those countries would raise real interest rates here and thereby slow credit creation and thus consumption and thus the trade deficit has to narrow -- just as it is right now. as for the population density argument, i would say it the way i have for many years -- it is not the american consumer that is in love with foreign product it is the american manufacturer that is in love with cheap foreign labor. you can also add the caveat that the u.s. trade deficit is the price for restrictive immigration policies. let every in to work and watch imports go down.

  4. So you are for more H1B employees? There are many employable people that would take lower wages in States with lower cost of living.

    Until the creeping double digit un-employment situation changes, the housing market will continue to fall. No incomes, no ability to buy a house. Loss of a job, need to sell a house and inventory creep up. That simple is
    the equation. The third addition way overtaxed even AMT which must be eliminated.

    Last the whole expectation of the American Economy must be changed. The Tech bubble from 1996 just into 2001 was not real. Now the housing bubble. Way to much excess. Dr. Doom sees little in way of investing in fundamental products and way too much in the new sporting event, buying stocks.

    Rambling post but it's a new world with two new giants in the world economy that this country must keep with.