Low U.S. Manufacturing Investment = Eventual Dollar Collapse

On September 4, the BEA released the latest statistics for investment in US manufacturing. They show that America has been failing to put modern productive processes into place for the last six years. The decline over the past twelve years stems from the US government's policy of letting China steal market share from American industry through currency manipulations. President Obama is the third president in a row to adopt this policy.

As shown in the following graph, gross fixed investment was 1.43% of our GDP in 2008, continuing at the depressed level of the previous five years:

As shown in the following graph, net fixed investment (after subtracting for the wearing out of equipment) was a miniscule 0.29% of our GDP in 2008:

Economists hope that American exports will increase and drive US economic growth. But, given our dearth of manufacturing investment for the past six years, increased exports are unlikely.

Unless we stop China from fixing the dollar at a rate where US manufacturing investment is unprofitable, America's trade deficits will likely grow, leading to an eventual dollar collapse.

Disclosure: No positions.

Comments

[dcb]

Lets see gernmany has a high tech, high labor esporting economy that is the envy of the world. euro's better than dollar. Huh? this has much more to do with american savings rates, reinvestment rate, governrnment policy that exchange rates. It has do with value added by your people. strong dollar could mean lower input prices, competitiave advantage if you add vaule to the product. we have ahd a deliberate policy of gitting the currency, which helps out the banking class. We have exported key technologies to the chinese for nothing in return. Multinational corps don't care about the state of the domestic economy. they have multinational inputs, and the goal is pure profit. export tech to cheap labor, cut costs, loose fixed investment, increase profits, policies that discourage savings (low interest rates and tax policy) you have a long term recipe of disaster. Boeing just brough their manufacturing back in house, why, because they add suffucient vale to the product. our problem is in value added, not a anything else.

2009 Sep 07 12:25 PM

[Donald Ingram]

Not only a failure to invest in manufacturing capital goods by the domestic market, but a general flight of foreign investment out of the country continues at a higher rate. Not only out of capital goods but out of corporate bonds also. A look at a recent graph of foreign investment shows it falling off a cliff.

2009 Sep 07 12:42 PM

[Michael Clark]

DCB: Right on the money. Pure profit; no social ethic; no connection to the local economy (except as another cow to milk).

"Multinational corps don't care about the state of the domestic economy. they have multinational inputs, and the goal is pure profit. export tech to cheap labor, cut costs, loose fixed investment, increase profits, policies that discourage savings (low interest rates and tax policy) you have a long term recipe of disaster."

2009 Sep 07 01:11 PM

[parky]

All the Feds have to do is to give a tax credit for new mfg. investments and add accelerated depreciation for tax purposes on the new plant and equipment. More jobs, less unemployment. At some point our govt. must take the Chinese down a peg or two but I doubt if its going to be the current administration. A trillion today is no big deal, is it???

2009 Sep 07 01:12 PM

[Tom E.]

Increased productivity without reinvestment of the extra profit in the US will mean a lower standard of living. Right now, companies are either sending the money overseas or sitting on it.

2009 Sep 07 10:13 PM

[derryl]

Howard wrote, "Unless we stop China from fixing the dollar at a rate where US manufacturing investment is unprofitable, America's trade deficits will likely grow, leading to an eventual dollar collapse."

I won't comment on the exchange rate issue but the persistent trade deficits cannot continue forever. At some point foreign exporters are going to look at the dollars they're receiving for their oil, commodities and consumer goods and wonder what they will ever be able to buy with those dollars.

In the short term this could lead to demanding more dollars for their trade goods which, as nuclear1929 points out above, is already happening with devaluation of the US$. So the prices of energy and the other commodities that the US imports to produce its own goods rise, making US goods even more expensive in dollar price along with more dollar expensive imported consumer goods. This creates CPI inflation in the US which, along with a stagnant economy, causes stagflation which hammers the domestic economy.

I am beginning to suspect that China is working towards the emergence of IMF SDRs as a complementary or alternate global reserve currency to the dollar, partly as a way to get full value for its dollar holdings. I think China is hoping to use dollars to buy IMF bonds which would also be convertible into yuan as well as the other currencies in the IMF basket. In this way China might be able to trade in its dollars at par rather than watch their value inflate away.

But one way or another I can't see how the US can continue to pay for stuff from the world with dollars rather than US trade goods. There is that dominant military, of course, but I don't think any of us want to see that sword come out of its sheath to impose US hegemony rather than earn it.

2009 Sep 07 10:40 PM

[Dave Wrixon]

Why do you think that Kraft are going for Cadbury at this time?

You will see a lot of US firms going for big mergers and acquisitions of foreign companies as a means of reducing the impact of dollar collapse on their balance sheets.

2009 Sep 08 01:48 AM