[MrBill]

Strategy is knowing what not to do. Competing on price is a losing game as there can only be one lowest cost producer. The most profitable products trade on features, advantages and benefits for the buyer or user. Erecting trade barriers will just reward poor workmanship at the expense of innovation. Trust me, it has been tried by many developing countries who wrongly pursued import substitution policies - like India - and their economies only started to bloom once they embraced open economies, inward investment and trade.

I am not an idealist. I am very pragmatic. I know the difference between free trade and fair trade. Between a comparative advantage and currency manipulation.

The USA has been running a large current account deficit for the past thirty five years that has now reached unsustainable proportions. That is a net wealth transfer out of the domestic economy. And after a few decades those outflows start to add up to some serious money.

That Americans - including its various levels of government - collectively spend more than they make (individuals -0.30% for the past 15-years) is the problem. Not jobs going offshore or trade per se. Of course, if you are importing BOTH goods AND capital to subsidize immediate consumption today at the expense of saving and investment then no matter how large the domestic economy or how many jobs it creates it will never be enough. That is why a weak US dollar cannot close the trade deficit alone.

In other words no matter how much money you make you can always spend more. But when you're deep in debt and have painted yourself into a financial corner then obviously you are very vulnerable to any external shock. In this case in the form of a falling US dollar; increasing inflation; falling asset prices; a refinancing boycott; a collapse in the value of collateral backing loans; and finally rising unemployment as firms cut back in expectation of falling demand as well as due to their own liquidity problems.

The Capital Structure Trap



A fundamental disequilibrium that has been building up over time is suddenly forced to break.

Exogenous Shock

Price of index asset drops

Corporations experience declining revenues and increasing debt costs
Investors see a reduction in asset values

Corporations hedge against index
Investors hedge against index or sell assets

Sell index assets

Price of index asset drops

Etc.

(continued)

5. The very act of closing out the position, of course, causes further price declines, which increase the number of actors that fall into the trap. The process is self-reinforcing until all actors are either fully hedged or in default. It is only then that the market stabilizes - perceptions of underlying value have very little to do with it.

Source: The Volatility Machine, Micheal Pettis, Oxford University Press, 2001, pg. 134-135

Of course, it would be a perfectly poor public policy response to a financial crisis caused by capital imbalances to erect protectionist trade barriers instead. Never mind that the US is the world's largest manufacturer and that its exports are at record breaking levels. The same mistakes were made by policy makers in the 1930s with the Smoot Harley Act. It did not prevent The Great Depression it just made it longer, deeper and infected the rest of the world. But, hey, protectionist policies are popular in election years! ; - ))

[Doly]

Erecting trade barriers will just reward poor workmanship at the expense of innovation.

There is one thing to be said in favour of trade barriers: they favour local products. Which might just be a good thing if the prices of transport are going up anyway because of peak oil.

[MrBill]

Erecting trade barriers will just reward poor workmanship at the expense of innovation.

There is one thing to be said in favour of trade barriers: they favour local products. Which might just be a good thing if the prices of transport are going up anyway because of peak oil.

Wrong!

[MacG]

Erecting trade barriers will just reward poor workmanship at the expense of innovation.

There is one thing to be said in favour of trade barriers: they favour local products. Which might just be a good thing if the prices of transport are going up anyway because of peak oil.

Wrong!

I suggest listening to Dr Ha-Joon Chang. Quite a blast. He talks about experiences from the real world, particularly Asia.

[Gerben]

I suggest listening to Dr Ha-Joon Chang. Quite a blast. He talks about experiences from the real world, particularly Asia.

He compares developing markets in Asia with the US. There are large differences. The US are already world leaders in a lot of different industrial products. US companies are technological leaders with a lot of products. If US wages continue to go down then those companies will reopen production in the US to serve the north american (and possibly European) market rather than serve this market from asia. Even if cost in the US are a litle higher. Outsourcing also has its cost.
If you look at Japan you can see an example on how protecting your market no longer works once you have reached a certain level of development.

[threadbear]

I suggest listening to Dr Ha-Joon Chang. Quite a blast. He talks about experiences from the real world, particularly Asia.

He compares developing markets in Asia with the US. There are large differences. The US are already world leaders in a lot of different industrial products. US companies are technological leaders with a lot of products. If US wages continue to go down then those companies will reopen production in the US to serve the north american (and possibly European) market rather than serve this market from asia. Even if cost in the US are a litle higher. Outsourcing also has its cost.
If you look at Japan you can see an example on how protecting your market no longer works once you have reached a certain level of development.

Protecting key sectors, worked very well, to stave off the ravages of a depression, for Japan. The US didn't raise more of a stink about it, because it was in their best interest not to. We're not talking textbook economics here, but what kind of lifeboat a society will take in order not to drown. Japan wasn't in a position to get all precious about what works best, in theory, nor will the U.S. be.

[MrBill]

threadbear wrote:

Protecting key sectors, worked very well, to stave off the ravages of a depression, for Japan. The US didn't raise more of a stink about it, because it was in their best interest not to. We're not talking textbook economics here, but what kind of lifeboat a society will take in order not to drown. Japan wasn't in a position to get all precious about what works best, in theory, nor will the U.S. be.

The political solution to any economic problem may or may not be the best one. There is no evidence that policy steps taken by the BOJ, MOF or MITI either made the Japanese slowdown less painful nor the recovery any faster.

Quite the opposite. There is a great deal of evidence that only Japan's export sector quickly recovered to become more efficient and externally competitive, while coddled domestic companies and industries languished.

The result is world beating companies on one hand, and on the otherhand a domestic economy that has suffered through 15-years of low, slow, no growth with three going on four official recessions. That is not a recipe for success. That is not the policy approach that any country should emulate.

I am not trying to be rude, but usually anytime that someone says textbook theory does not work in the real world likely knows very little about either. If you are trying to say that poor public policy can swamp good economic theory then I would agree. There are more than enough examples of this including the US' experiment of running current account deficits for the past thirty five years, and consuming more than it produces on borrowed time and money. But, of course, when it blows up, we'll blame economic theory and not public policy as usual! ; - ))

[threadbear]

threadbear wrote:

Protecting key sectors, worked very well, to stave off the ravages of a depression, for Japan. The US didn't raise more of a stink about it, because it was in their best interest not to. We're not talking textbook economics here, but what kind of lifeboat a society will take in order not to drown. Japan wasn't in a position to get all precious about what works best, in theory, nor will the U.S. be.

Quite the opposite. There is a great deal of evidence that only Japan's export sector quickly recovered to become more efficient and externally competitive, while coddled domestic companies and industries languished.

It was the big exporting companies, I previously mentioned that were protected. The domestic economy, of course, languished. But there wasn't mass starvation, major rioting in the streets etc.. etc...

[threadbear]

double post

[threadbear]

From Newsweek article 1999:

"A confident Japan would import goods from devastated economies elsewhere in Asia. A defensive Japan will do what it always does: export its way out of trouble. And as the flood of Japanese products to the United States increases, the danger grows of a trade war with Washington".

Looks like raising trade barriers and trying to export your way out of trouble works best. Witness the lack of bloodshed in Japan, and count on the US to try to do the same thing. It will reindustrialize with a cheap dollar, close it's doors to foreigners, when and where it can. Some of the transnational corporations won't like it, but you know, they can all...how can I put this in genteel economic terms....get stuffed?

[paimei01]

Right now on http://edition.cnn.com/

Dow 12422 -0.41 (-0.00%)
Nasdaq 2308 -16.45 (-0.71%)
S&P 1341 +0.28 (+0.02%)

So when it's -0.41 the variation it to small and they write -0.00, but at +0.28 they write +0.02
No need to panic !
I say it's all engineered not to gain money, those in power have enough, their goal is population reduction and 1984

http://video.google.com/videosearch?q=e ... itesearch=

And I think they want to keep the people's confidence in the system, just as long as they need it, then they will let the "market" fall to 0

[MrBill]

From Newsweek article 1999:

"A confident Japan would import goods from devastated economies elsewhere in Asia. A defensive Japan will do what it always does: export its way out of trouble. And as the flood of Japanese products to the United States increases, the danger grows of a trade war with Washington".

Looks like raising trade barriers and trying to export your way out of trouble works best. Witness the lack of bloodshed in Japan, and count on the US to try to do the same thing. It will reindustrialize with a cheap dollar, close it's doors to foreigners, when and where it can. Some of the transnational corporations won't like it, but you know, they can all...how can I put this in genteel economic terms....get stuffed?

Two points. One I do not disagree with you that the US' knee jerk reaction will protectionist. I just disagree that this is the best course of action.

Secondly, Newsweek? That is like the news lite version of The Economist! ; - )

[threadbear]

From Newsweek article 1999:

"A confident Japan would import goods from devastated economies elsewhere in Asia. A defensive Japan will do what it always does: export its way out of trouble. And as the flood of Japanese products to the United States increases, the danger grows of a trade war with Washington".

Looks like raising trade barriers and trying to export your way out of trouble works best. Witness the lack of bloodshed in Japan, and count on the US to try to do the same thing. It will reindustrialize with a cheap dollar, close it's doors to foreigners, when and where it can. Some of the transnational corporations won't like it, but you know, they can all...how can I put this in genteel economic terms....get stuffed?

Two points. One I do not disagree with you that the US' knee jerk reaction will protectionist. I just disagree that this is the best course of action.

Secondly, Newsweek? That is like the news lite version of The Economist! ; - )

I used to read the Economist, until I realized that their biases are no different than the mainstream press. They do, however offer a lot of newsworthy information, if one can discount those biases. I prefer a wider range of perspective, now, and find that AsiaTimesOnline is the best, by far, out there.

Protectionism may be a band-aid or a tourniquet, hard to say. The globalization process is perfect for an infinite world of plentiful resources, in a fair minded world. The free flow of capital can spur growth, and necessary movement of capital, rather than have it stagnating as hoarded wealth. In which case, some of the distortions and dislocations it causes, are sad but necessary wounds that are part of a proper functioning circulatory system, within the economic body, that gets an occasional cut or bruise.

Lacking civic mindedness, or allegiance to national govts, the business elites have effectively cut off the circulatory system from the many regulatory systems that keep the overall body healthy. The economic body starts to hemorrhage. Whether protectionism is a bandaid or a tourniquet, is a question. At the least, it discourages behaviour of the completely selfish.

That's how I'm looking at the situation today.

The Economist still represents the goals of an Anglo-American mindset that is pro circulatory system, at the expense of the over all body

(My dog just finished getting over a bout of hemorrhagic intestinal gastritis, so am starting to see some parallels here!) She's okay now---the vet imposed protectionist measures!

[Scactha]

The Economist is biased towards liberalism and anglo-saxon´s but they don´t claim anything else. Just read on with that thought fresh in your mind and it´s alright.

As a dilettante in macroeconomics I´ll offer no opinion but agreeing to Mr Bills that a knee-jerk protectionist reaction is most likely.

[roccman]

I see a wave of protectionism coming that could revitalize Detroit automakers and revitalize domestic manufacturing.

Thoughts?

With the onset of PO, PC, PNG, PU....

I don't see much of anything being revitalized.

Tyson backed out of a million gallon a day ethanol plant in Idaho recently.

Coal plants are being tabled because of costs (and new CO2 regs).

I just don't think the New Deal II has a chance in hell.

[patience]

This guy agrees Roccman,Depression

And so do I.

[DantesPeak]

This guy agrees Roccman,Depression

And so do I.

I mostly agree with Parks, and I'm glad to see a professor where I earned my Masters degree get some attention.

A depression is coming, but I'm not sure how soon. However the part I agree with Shilling is that the government will take rather extreme measues to hold back the fall of the economy, probably in the second half of this year. The Fed/Treasury/Executive will take these measures without Congressional approval becuase it will be perceived as an emergency.

[EnergyUnlimited]

The Fed/Treasury/Executive will take these measures without Congressional approval becuase it will be perceived as an emergency.

Can they succeed?

[KevO]

There you have it.
It is official. we are literally entering the Mad Max zone.
And we always thought that peak oil would have been the end of it all.
And it's going to go on FOREVER - unless something like a WW3 or Bird flu pandemic came along, then we'd be OK again one day.

Go party

America's mortgage crisis has spiralled into "the largest financial shock since the Great Depression" and there is now a one-in-four chance of a full-blown global recession over the next 12 months, the International Monetary Fund warned today.

The US is already sliding into what the IMF predicts will be a "mild recession" but there is mounting pessimism about the ability of the rest of the world to escape unscathed, the IMF said in its twice-yearly World Economic Outlook. Britain is particularly vulnerable, it warned, as it slashed its growth targets for both the US and the UK.

The report made it clear that there will be no early resolution to the global financial crisis.

The Shit has Hit Article in full

[jlw61]

Sorry, but I'm really not that concerned about a global financial crisis that predicts a $1 trillion loss when that is less than 10% of the global GDP. Yeah, it will hurt, yeah it will suck, and yeah, the various governments will do everything they can mitigate it but in the end will only make it worse.

Now tell me we're well and truly past the oil production plateau, or that there is a pandemic, or even that there are green space aliens landing and I'll start cleaning my guns.

IMHO we've been long overdue for a global financial crisis with all of the rampant BS in the markets. Building wealth by passing paper and promises only lasts as long as there are enough suckers. How the hell does anyone think they can do that and keep it going?

The US has a recession every 10 (or so years) whether we need it or not. This one is a little early, but it happens. Is refusing to read history books and understand the idea of corrections one of the requirements to become a speculator in the market?