Boeckh Nails It, But Opposes the Solution

by: Howard Richman

J. Anthony Boeckh nailed it (Increasing Risks (.pdf)). The world economy is heading downhill because of the failure to rebalance trade. His graphs clarify. His investment recommendations seem sound. If his 2010 book is as perceptive (The Great Reflation) then it is well worth buying. Here is his summary of how mercantilism is sapping U.S. growth at the moment:

Effectively, the surplus countries [e.g., China, Germany, Japan, etc.] are stealing growth from the deficit countries [e.g., the United States, Greece, Portugal, etc.] and not allowing them to adjust to external and internal disequilibrium. In the U.S., this can be seen most clearly by the simultaneous rise in the savings rate, the trade deficit and the deterioration in labor market data. When the natural forces of the adjustment process to economic disequilibrium are blocked, political tension must necessarily increase. In an election year, you can expect vulnerable politicians to act.

Boeckh fears that U.S. policy makers choose his "third option":

The third option is for the U.S. to opt for non-market solutions—tit-for-tat mercantilism—to boost domestic demand and employment at the expense of foreigners. Trade protection can be employed via competitive devaluation, tariffs, non-tariff trade restrictions, etc. It was last tried in the 1930s when surplus countries didn’t allow deficit countries to adjust. It would be a far more dangerous option now because the U.S. is a large foreign debtor. The U.S. has net liabilities of over $3.5 trillion, most of which are held in short-term instruments by central banks who could try to dump them in retaliation. The international monetary system is seriously flawed as it was in the 1930s, although there is the important difference that domestic money supplies are not rigidly linked to central bank holdings of gold or foreign exchange assets. Nonetheless, great instability with the major reserve asset of the world—dollars—would be catastrophic.

Boeckh is focusing here upon the damage that anti-mercantilist American action could do to the world economy. He foresees that U.S. action will be unsystematic and will result in a "tit for tat" trade war. Perhaps he does not know about our scaled tariff proposal which would be systematic and preclude "tit for tat" retaliation.

As we noted in our recent American Thinker commentary (U.S. Growth Slows Due to Trade Deficit), the tariff rate of our proposal would be scaled to our trade deficit with each mercantilist country. Doing so would enforce IMF rules, comply with WTO rules, end mercantilism, reduce American imports, and increase American exports. We wrote:

Some fear a trade war with China and some of the others which would reduce trade. But, we have little to lose from a decline in one-sided trade which would stimulate American factory production. If these countries were to react with counter-tariffs instead of taking down their barriers to our products, they would face increasing tariff rates on their products. If they were to react by rapidly selling off their U.S. Treasury bonds, there are plenty of buyers including the Federal Reserve. And what would China do with the dollar proceeds? Sell them and drive the dollar down and make us more competitive around the world?

Essentially, Boeckh sees the world realistically and his advice to investors seems sound. But, he appears to oppose the U.S. solution that would work. He would give away our economic future for the good of the world. But doing so insures that the Communist government of China dominates the future, supporting brutal dictatorships worldwide, just as they are currently doing in Burma, North Korea, Sudan and Iran. Ending mercantilism would produce an economically growing United States which could continue to spread democracy worldwide.

Disclosure: I own Chinese yuan through CYB