The latest news is that Tim Geithner has declared a War on Currency. Sadly there is little evidence that victory will be any less elusive, or any less expensive, than the War on Terror, or the War on Drugs.
The idea is that many countries who export to America, such as China, have been artificially keeping their currencies low relative to the dollar, thus providing them with a competitive advantage. That, supposedly, explains why they sell more “things” to USA than USA sells to them; which is, apparently why so many Americans are unemployed.
As with so many “calls to arms”, the urgent case for war is big on rhetoric. But the actual evidence is not any more persuasive than the evidence that there were weapons of mass destruction in Iraq ready to be launched on USA and UK, with 45 minutes notice. You got to remember also, that the geniuses who worked all that out (Remember Rumsfeld’s Bunkers), are the same geniuses that are running America now.
But the story has a nice ring to it. And in American politics, that’s what’s important, it’s all about the sound-bite.
In case anyone cares, the reality is that, depending on the price of oil, 50% to 70% of US imports are hydrocarbons.
75% of those are refined by US oil companies outside of USA, so the value-added happens in places like India which has the largest old refinery in the world, and is a bit more relaxed about pollution that the EPA, plus the judicial system is quite relaxed…remember Bhopal.
Messing with the exchange rate to other currencies won’t affect, in relative terms, how much Americans pay for hydrocarbons. If the dollar is devalued relative to the rest of the world, oil prices, in dollars, will go up.
So forget about the relative value of currencies to each other, as individual central banks try out clever monetary magic tricks to gain a competitive advantage. The new Gold Standard is the Oil Standard, which is ultimately what every currency is benchmarked against.
There are two simple ways America could address the issue of how much it imports, and the economic cost of dependence, without declaring war on anyone, (a) raise taxes on petroleum products and gasoline which is hugely subsidised, up to the sorts of levels that are applied in Europe, and (b) copy the French idea of subsidizing the construction of nuclear power plants (75% of France’s electricity comes from that source), thus providing an alternative, long-term, to dependence on imported hydrocarbons.
The upside of such a strategy would be to provide employment for the millions of construction workers who were previously employed building houses that currently, no one wants to buy.
That of course would be politically impossible to achieve in the Two-Year windows of power enjoyed by American legislators, which is why logic does not prevail.
It’s much quicker to go to war than to take the long road. And the best part is you can leave the clearing up after the war is started, to the next guy; wars are popular, the process of extracting yourself from one, are not…so that’s like a Golden Chalice.
The “slam-dunk” argument against taxing hydrocarbons is that it would cause “inflation”, and that would be a “bad thing”.
Although it’s not clear how come the Federal Reserve is, as we speak, doing everything in its power to create inflation via monetary policy, and thus help to inflate away the 300% or so of GDP of private-sector debt that some Americans owe, to (mainly) other Americans (denominated in dollars)?
Perhaps they need some more communication? Like one department is trying to create inflation, and another department is trying to do the opposite.
If it works, Ben’s policy will benefit the Americans who owe money, to the detriment, of the Americans who are owed money. No one can be sure how that game will play out, but the simple truth is that more Americans owe money than are owed, thus in a democracy, it is likely that the majority will prevail, even if that is to the detriment of the long-term prospects of the country as a whole.
Regardless, the logic is that somehow the surge of unemployment in construction workers, real estate professionals, and securitization “engineers” was caused, not by the un-sustainability of lunatic lending tainted (perhaps) with fraud, but by China.
It is true that much of the success of China, and also other exporting nations, such as Germany, has been won at the cost of employment in USA. Nowadays, if you take out military procurement (which is a closed shop), value added in manufacturing in America is less than in Germany, a country with a quarter of the population (and GDP).
But that’s got nothing to do with exchange rates, or currency manipulation. There are two reasons that stand out.
1: The Blindness of Power:
50% of the world’s military spending is done by America.
That’s why America surely is able to strut-its-stuff. It has aircraft carriers, stealth bombers, nuclear missiles, and GI Jane, and it isn’t even a signatory of the 1977 Protocol One of the Geneva Conventions (that’s the one about protecting civilians in wartime).
So it can happily do water-boarding on civilian “suspects”, and do as much “collateral damage” as it wants. And it can hand out Presidential Pardons to the soldiers at Mai Ly…and that’s “legal” and even better, it’s all in the name of “World Peace”.
But with all that power at its fingertips, America was lulled into a false sense of security.
That’s because foreigners were buying dollars, thus the effect of the trade deficit on the dollar (which would normally push it down), was offset by the flow of dollars into the country.
But although popular legend says, that was due to foreigners buying US Treasuries; in reality the big-ticket item was securitized debt which from 2000 to 2007 generated over 20% of the “net” flow of dollars into USA.
Of course the idea was those dollars would be paid back one day, which is why those transactions were not included in the calculation of the current account deficit.
But now there is a level of uncertainty now about whether they will be paid back, in which case those ($3.5 trillion transactions ought to have been booked as “exports”. Of course if those debts are paid back, then that represents a ticking time bomb for the net current account balance in the future, but that’s something the next guys can deal with.
Regardless; that “export” business is defunct; dead as a dead parrot, so there are no more flows of funds into USA coming from that great export success story, in the near future.
2: Then the Rats leave the ship:
But why did so many American companies close down their production facilities in USA and export the technology and know how (without remitting the payment for that to USA), and put the profit that could be made from access to developed and branded lines of distribution, offshore?
Come again…how does that work?
Well I got a factory that makes sports shoes, everyone knows the brand, I got distributors, a great R&D team, etc. The thing is that as far as the tax man is concerned the value of my brand, my established distribution into retail etc is precisely zero. He just taxes my profits and allows a certain level of depreciation on any capital expenditure I make, to offset against the profit I declare, to him.
So I put the manufacturing in a special economic zone in China and fire all my workers in America, my company in USA is worth nothing now, and well its not hard to persuade the US tax man that the profit I make on something valued at zero, is…zero.
And all my profits are made in my SEZ company; and to be safe I subcontract out the manufacturing, and the thing about an SEZ company, is I don’t pay tax, so there is no audit.
50% of all the earnings of S&P 500 companies are made outside of USA, outside of the beady eye of the US tax-man, and if (horror) there is a case brought against me in USA under the delicious US Tort system, well, my assets in USA are worth…zero. So “Come and GET me!!”
That’s what really cut into the jobs market.
Clearly it wasn’t the cost of labour; when you do manufacturing you simply increase the level of technology and automation, in line with labour costs. That’s why workers in Germany and Japan are the best paid (and most skilled) in the world, and they still manage to compete.
It wasn’t that America does not have technology, or a “can-do-attitude”, and it certainly wasn’t due to a lack of availability of finance.
How to turn that around? Well for a start you could have Special Economic Zones…in America, that way all the trickle-down gets spent, in America.
How about Exports?
In India, if you want to get anything done, you have to pay off the correct politicians, and the trick there is to pay-off the right ones, which is an art.
The problem is that India is a “democracy” (of sorts), and so the politicians change with alarming frequency. That’s why you need to pay-off both the guy in power (he gets 60%) and the guy who is not in power, but might be in the future (he gets 40%).
That’s the 60:40 Law; ignore it at your peril!!
There are similar arrangements that need to be made in China, Indonesia, Vietnam, Pakistan, Azerbaijan, to name a few. It is a “good thing”? Absolutely not; does it repress ordinary people and keep them locked into abject poverty? Absolutely; can you do business without playing the game? Sorry to say, absolutely not.
USA is complaining bitterly, that it can’t get proper access to developing markets and that “governments” are blocking the path of their exporters with “red-tape” and “rules” and “regulations”. Well sure, they are, but it’s not “The Government” of China or India that are doing that, it’s individual politicians and party officials, breaking the law of their land…with impunity.
But thanks to the Foreign Corrupt Practices Act (OTCPK:FCPA), it’s illegal for Americans, or American companies to do that sort of thing. So they set up companies in Special Economic Zones in China or set up their head office in places like Dubai (like Halliburton did), and they appoint agents, so that there is no way their hands can be tainted.
If an American company sells a desalination plant (say) to a third party in say Khazakstan, and it pays no inducements or bribes to that company, and closes its eyes to what that company does with the goods after they own them, then it is “clean”. But a German or Japanese company can (legally, if it is not listed in a US Stock Market), deal direct with the “customer”, pay the bribes, and get the business, and since they have a direct line to the customer, their chances of winning the business, are better.
Here is a snippet from an analysis of that written by a “Think Tank” in early 2010.:
In contrast to the FCPA, European enforcement has been sporadic. A decade ago, bribes to foreign government officials were not prohibited in many EU jurisdictions, and in some cases were tax-deductible. The relevant UK legislation was archaic, dating back to the late 19th andearly 20th centuries, and had not been applied to a single overseas corruption case. Recentdevelopments have suggested, however, that the US-EU enforcement gap may be closing.
The operative word there is “the gap”, plus of course there is no mention of Japan and China (yes China exports into markets US companies go after too)).
No one can criticise USA for the Foreign Corrupt Practices Act. It is very laudable and a great initiative. But if no one else is following that law, then all it does is shoot American companies in the foot, big time.
You don’t control corruption in developing countries by having one “clean” country, not pay bribes. The crooks just find other countries to shake down, you control corruption by going after the crooks, and the best way to do that is by going after the money that they take out of their country, because the know that it’s not safe in their own country…regimes change.
Right now it costs 20% to get money out of India, that’s a price well worth paying; and of course if you took a kickback on a government procurement contract, the money never came into India.
Perhaps America should make FCPA applicable ONLY if companies from other countries that compete in the same market; are following the same rules? And by all means, lobby for everyone to follow the “rules”.
Do that; and America’s exports could double in five years, it’s called a “level playing field”.
Disclosure: "No Positions"