The Australian dollar is likely to edge closer to parity with the US dollar during the next 8 months as the Reserve Bank of Australia (RBA) maintains a tightening bias, attracting investors searching for higher-yielding currencies, Commonwealth Bank chief currency strategist Richard Grace said Friday.
Grace said he has raised his year-end and mid-2008 forecasts to 92.50 US cents and 95 US cents respectively as strength in the global economy and continued robust economic growth in Australia increase the chances of the RBA tightening interest rates. The RBA last raised its target cash rate by 25 basis points to 6.5 percent in early August.
The Australian dollar traded as high as 90.61 US cents overnight, the highest level since the currency was floated in 1984, on roaring carry-trade demand.
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Friday, October 12, 2007
Thursday, October 11, 2007
Faulty Numbers: Trade Reports Are Using Bad Information
On Aug. 28, the Cato Institute in Washington, D.C., published a report, "Thriving in a Global Economy: The Truth About U.S. Manufacturing and Trade." The report confuses a company's offshored products with its import competition and wrongly concludes that U.S. companies with the most import competition are the companies that are thriving.
This extraordinary mistake results in an incorrect conclusion. The Cato report finds that revenues, profits and value added rose most for industries most exposed to import competition and mistakenly attributes this result to the beneficial workings of free trade.
The Cato report did not set out to prove the benefits to corporations of offshoring. The goal of the report is to combat protectionist sentiments in Congress that might result in trade restrictions. Thus, you have a report that attributes the health of U.S. manufacturing to import competition.
Congress and most economists are as confused about the issues as the Cato report. Today, the profit motive causes capitalists to create job opportunities and GDP in low-wage foreign countries instead of their own. Every job that does not require a "hands-on" presence can be offshored. Charles McMillion and I have pointed out for years that the nonfarm payroll jobs data from the Bureau of Labor Statistics show that the U.S. economy can only create net new jobs in domestic nontradable services.
The Cato report does not acknowledge that the financial prosperity of U.S. capital is at the expense of U.S. labor. The report does not explain how an $800 billion trade deficit can be closed when domestic corporations face powerful incentives to offshore, and it shows no awareness of Susan Houseman's findings that productivity gains and output growth that result from offshoring, and which occur abroad, are mistakenly being counted as U.S. GDP and productivity growth. This phantom U.S. output and productivity growth would explain the disconnect between rapid productivity growth and U.S. real median family income, which is lagging far behind.
The financial prosperity that U.S. corporations are enjoying from offshoring increases the U.S. trade deficit and makes American consumers increasingly dependent on imports. In 2006 (the most recent annual data), the U.S. trade deficit in manufactured consumer durable and nondurable goods was 3.4 times greater than the U.S. trade deficit with OPEC. The U.S. "superpower" has a massive trade deficit in consumer manufactured goods and even has a deficit in capital goods, including machinery, electric generating machinery, machine tools, computers and telecommunications equipment.
In 2006, the U.S. trade deficit with Europe was $142.538 billion. With Canada, the deficit was $75.085 billion. With Latin America, it was $112.579 billion (of which $67.303 billion was with Mexico). The deficit with Asia and Pacific was $409.765 billion (of which $233.087 billion was with China and $90.966 billion was with Japan). With the Middle East, the deficit was $36.112 billion, and with Africa the U.S. trade deficit was $62.192 billion. The trade deficit with OPEC nations was $106.260 billion.
The more U.S. corporations prosper by offshoring, the greater the U.S. trade deficit will grow and the more unbearable the pressure will be on the dollar's role as reserve currency.
At some point, crisis will force Congress, economists and think tanks to deal with the real issues.
*The above article has been excerpted from Paul Craig Roberts’ article “Cato's Trade Report: Blinded by Ideology.” Mr. Roberts is an economist. He served as Assistant Secretary to the Treasury in the Reagan Administration where he earned the nickname the “Father of Reaganomics.” He was an editor and columnist for the Wall Street Journal and Business Week. In 1993, Forbes Media Guide ranked him as one of the top seven journalists in the United States.
This extraordinary mistake results in an incorrect conclusion. The Cato report finds that revenues, profits and value added rose most for industries most exposed to import competition and mistakenly attributes this result to the beneficial workings of free trade.
The Cato report did not set out to prove the benefits to corporations of offshoring. The goal of the report is to combat protectionist sentiments in Congress that might result in trade restrictions. Thus, you have a report that attributes the health of U.S. manufacturing to import competition.
Congress and most economists are as confused about the issues as the Cato report. Today, the profit motive causes capitalists to create job opportunities and GDP in low-wage foreign countries instead of their own. Every job that does not require a "hands-on" presence can be offshored. Charles McMillion and I have pointed out for years that the nonfarm payroll jobs data from the Bureau of Labor Statistics show that the U.S. economy can only create net new jobs in domestic nontradable services.
The Cato report does not acknowledge that the financial prosperity of U.S. capital is at the expense of U.S. labor. The report does not explain how an $800 billion trade deficit can be closed when domestic corporations face powerful incentives to offshore, and it shows no awareness of Susan Houseman's findings that productivity gains and output growth that result from offshoring, and which occur abroad, are mistakenly being counted as U.S. GDP and productivity growth. This phantom U.S. output and productivity growth would explain the disconnect between rapid productivity growth and U.S. real median family income, which is lagging far behind.
The financial prosperity that U.S. corporations are enjoying from offshoring increases the U.S. trade deficit and makes American consumers increasingly dependent on imports. In 2006 (the most recent annual data), the U.S. trade deficit in manufactured consumer durable and nondurable goods was 3.4 times greater than the U.S. trade deficit with OPEC. The U.S. "superpower" has a massive trade deficit in consumer manufactured goods and even has a deficit in capital goods, including machinery, electric generating machinery, machine tools, computers and telecommunications equipment.
In 2006, the U.S. trade deficit with Europe was $142.538 billion. With Canada, the deficit was $75.085 billion. With Latin America, it was $112.579 billion (of which $67.303 billion was with Mexico). The deficit with Asia and Pacific was $409.765 billion (of which $233.087 billion was with China and $90.966 billion was with Japan). With the Middle East, the deficit was $36.112 billion, and with Africa the U.S. trade deficit was $62.192 billion. The trade deficit with OPEC nations was $106.260 billion.
The more U.S. corporations prosper by offshoring, the greater the U.S. trade deficit will grow and the more unbearable the pressure will be on the dollar's role as reserve currency.
At some point, crisis will force Congress, economists and think tanks to deal with the real issues.
*The above article has been excerpted from Paul Craig Roberts’ article “Cato's Trade Report: Blinded by Ideology.” Mr. Roberts is an economist. He served as Assistant Secretary to the Treasury in the Reagan Administration where he earned the nickname the “Father of Reaganomics.” He was an editor and columnist for the Wall Street Journal and Business Week. In 1993, Forbes Media Guide ranked him as one of the top seven journalists in the United States.
Restore U.S. manufacturing strength
As U.S. forces fought their way to victory during World War II, America demonstrated unprecedented manufacturing power at home. Our manufacturers quickly became one of our nation's greatest assets and represented what became known as the "Arsenal of Democracy."
Today, the Arsenal of Democracy is no longer what it once was. In fact, while serving as chairman of the House Armed Services Committee, I sent my team to locate more steel to protect our troops in Iraq against roadside bombs. They found one company left in the United States that could still make high-grade, armor plate steel.
The enticements and effects of a global, free market economy have exported the Arsenal of Democracy to countries around the world. U.S. corporations that once offered high-quality, high-paying jobs have either shifted their production overseas or closed their doors altogether due to the fact that they are incapable of maintaining their competitive edge.
Read Complete Story
Today, the Arsenal of Democracy is no longer what it once was. In fact, while serving as chairman of the House Armed Services Committee, I sent my team to locate more steel to protect our troops in Iraq against roadside bombs. They found one company left in the United States that could still make high-grade, armor plate steel.
The enticements and effects of a global, free market economy have exported the Arsenal of Democracy to countries around the world. U.S. corporations that once offered high-quality, high-paying jobs have either shifted their production overseas or closed their doors altogether due to the fact that they are incapable of maintaining their competitive edge.
Read Complete Story
Wanted: A president who will champion U.S. manufacturing
Before Newton became proud home to the Maytag Washing Machine Co., it already had much to boast about.
Newton was named for Revolutionary War hero Sgt. John Newton, known for "deeds of daring," including a famous rescue that saved fellow soldiers from the British noose.
For the past decade, what's in need of rescue are manufacturing jobs in Iowa and across America. They're at the mercy of forces over which the foot soldiers of industry - our nation's factory, tooling and foundry workers - have had little control.
Iowa's manufacturing sector has always been a significant contributor to the state's economic prosperity and sense of community. In the 1940s, manufacturing employed 31 percent of the state's population. It declined to 20 percent in 1990 and has fallen to about 10 percent today. Even while shrinking, the sector still employs 234,000 Iowans, employed by nearly 6,000 manufacturers.
Read Complete Story
Newton was named for Revolutionary War hero Sgt. John Newton, known for "deeds of daring," including a famous rescue that saved fellow soldiers from the British noose.
For the past decade, what's in need of rescue are manufacturing jobs in Iowa and across America. They're at the mercy of forces over which the foot soldiers of industry - our nation's factory, tooling and foundry workers - have had little control.
Iowa's manufacturing sector has always been a significant contributor to the state's economic prosperity and sense of community. In the 1940s, manufacturing employed 31 percent of the state's population. It declined to 20 percent in 1990 and has fallen to about 10 percent today. Even while shrinking, the sector still employs 234,000 Iowans, employed by nearly 6,000 manufacturers.
Read Complete Story
America's debt to other countries
As America's banks announce multi-billion dollar losses as a result of their (what shall we say?) incautious excursions into the sub-prime mortgage market, the New York Stock Exchange this week is nervous as a kitten.
Stocks wobbled on Monday and there are fears that a new cycle has begun from which only the brightest and the best will emerge unscathed.Bloomberg, the financial information giant two-thirds owned by New York mayor Michael J Bloomberg, interpreted events as follows:"
Skittishness over the US stock market's record-setting rally is reaching a crescendo among options traders who are preparing for a crash."
Oh dear. That doesn't sound good. If America is the locomotive that drags the rest of us along the economic track, what happens when the engine disappears up a branch line and hits the buffers?
Read Complete Story
Stocks wobbled on Monday and there are fears that a new cycle has begun from which only the brightest and the best will emerge unscathed.Bloomberg, the financial information giant two-thirds owned by New York mayor Michael J Bloomberg, interpreted events as follows:"
Skittishness over the US stock market's record-setting rally is reaching a crescendo among options traders who are preparing for a crash."
Oh dear. That doesn't sound good. If America is the locomotive that drags the rest of us along the economic track, what happens when the engine disappears up a branch line and hits the buffers?
Read Complete Story
Wednesday, October 10, 2007
Free Trade is an Idealist Theory
Free trade is a persistent theory or ideal. It is persistent because it is attractive to those who long for a world without meanness, where all parties benefit from human interaction.
Indeed, opening national borders to all imports, as advocated by free trade believers, would benefit all nations, provided that trade is balanced – imports and exports equal. This little requirement, however, is violated by deliberate actions by some nations and is achieved by circumstance by others. In every case, unequal trade results in winners and losers from international trade.
Japan became an economic powerhouse, with the second largest economy in the world, primarily because of the ingenuity, intelligence and work habits of their population. It is also clear that the Japanese economy was organized and directed with a clear purpose - to create capacity to export manufacturing goods to the rest of the world. To that end, in the period after WW II., their government diverted scarce capital resources to the steel industry, combined with tariffs on foreign steel, so that the Japanese manufacturers of goods fabricated from steel would have a comparative advantage over manufacturers in other countries.
The Japanese economy became a spectacular success, in part because they first subsidized heavy industry and they refused to open their borders to all imports. Japan became a winner from international trade because their governmental policies and other characteristics unique to their culture enabled them to produce products which they could sell on the international market AND their unwillingness to purchase products made in other countries helped generate trade surpluses which they then used to upgrade their manufacturing capabilities. Success breeds success.
Free trade theory is also pernicious as well as persistent. It diverts attention away from the real consequences of international trade. International trade is one of the ways nations compete with each other. A realistic government policy, for every nation, is to arrange their trade so that their nation becomes more successful in producing goods and services that other nations want to buy.
This does not require “beggar thy neighbor” policies. Equal trade will insure that all countries benefit from trade. A realistic foreign trade policy would recognize that equal trade does not come automatically, but must be created, just as the current world trading system, with low tariffs, did not arrive automatically, but was created by governments.
It will be up to the U.S. and Great Britain, the countries that created the current trading system by advocating and supporting mutually agreed reductions in tariffs, to recognize that the benefits of mutually agreed reductions in tariffs that are achievable have already been achieved and that the world now needs to move toward equal trade. This will require placing free trade theory on the shelf – to be treated as an idealistic theory that could not be implemented because of the large gains from trade generated by trade surpluses.
Indeed, opening national borders to all imports, as advocated by free trade believers, would benefit all nations, provided that trade is balanced – imports and exports equal. This little requirement, however, is violated by deliberate actions by some nations and is achieved by circumstance by others. In every case, unequal trade results in winners and losers from international trade.
Japan became an economic powerhouse, with the second largest economy in the world, primarily because of the ingenuity, intelligence and work habits of their population. It is also clear that the Japanese economy was organized and directed with a clear purpose - to create capacity to export manufacturing goods to the rest of the world. To that end, in the period after WW II., their government diverted scarce capital resources to the steel industry, combined with tariffs on foreign steel, so that the Japanese manufacturers of goods fabricated from steel would have a comparative advantage over manufacturers in other countries.
The Japanese economy became a spectacular success, in part because they first subsidized heavy industry and they refused to open their borders to all imports. Japan became a winner from international trade because their governmental policies and other characteristics unique to their culture enabled them to produce products which they could sell on the international market AND their unwillingness to purchase products made in other countries helped generate trade surpluses which they then used to upgrade their manufacturing capabilities. Success breeds success.
Free trade theory is also pernicious as well as persistent. It diverts attention away from the real consequences of international trade. International trade is one of the ways nations compete with each other. A realistic government policy, for every nation, is to arrange their trade so that their nation becomes more successful in producing goods and services that other nations want to buy.
This does not require “beggar thy neighbor” policies. Equal trade will insure that all countries benefit from trade. A realistic foreign trade policy would recognize that equal trade does not come automatically, but must be created, just as the current world trading system, with low tariffs, did not arrive automatically, but was created by governments.
It will be up to the U.S. and Great Britain, the countries that created the current trading system by advocating and supporting mutually agreed reductions in tariffs, to recognize that the benefits of mutually agreed reductions in tariffs that are achievable have already been achieved and that the world now needs to move toward equal trade. This will require placing free trade theory on the shelf – to be treated as an idealistic theory that could not be implemented because of the large gains from trade generated by trade surpluses.
American Consumers Are Losing Their Crown
With the U.S. Dollar Index breaking decisively below its long-term support level, the sun is finally setting on the golden age of American consumption. As America’s economic dominance fades, so too will the faith in the central thesis that has explained its apparent success and has shaped the majority of recent economic theory.
At issue is the belief that a nation can grow and prosper by borrowing from abroad in order to consume imported goods. To consume at the pace that it has, America exchanges income producing assets, such as companies or property, or interest bearing IOUs, such as Treasury notes or mortgage-backed bonds, for foreign made clothes, toys and electronics. Economists call these transactions “growth”. But rather than discovering a new path to prosperity, America has simply stumbled on a short cut to financial ruin.
For years America has convinced the emerging market countries that their prosperity is a function of our consumption. It is argued that their export oriented economies would falter if not for the insatiable American willingness to consume (a “virtue” that is assumed to be uniquely American). As the dollar falls into the abyss, this myth will be shattered.
As gold surpasses $700 per ounce, oil tops $80 per barrel, and wheat prices exceed $9 per bushel, Americans are already getting a taste of things to come. Prices for these and other commodities are rising as a direct result of the weakness in the dollar. As this weakness intensifies in the months ahead, commodity price increases will accelerate. However, as their own currencies rise, many foreign buyers will actually experience price decreases. The result will be even greater demand for commodities from abroad just as domestic demand subsides.
Further, as the world stops exporting so much of its savings to America, there will be far more capital available to foreign entrepreneurs to invest productively. Think of the crowding out effect of so much of the world’s savings being lent to American consumers. Now imagine the foreign investment boom that would follow as foreigners reclaim access to their own savings.
The world economy will not be brought to its knees simply because Americans stop consuming. Rather it is America’s service sector economy that will collapse once the rest of the world stops propping it up.
*The above article has been excerpted from Peter Shiff’s article, “American Consumers are Losing their Crown.”
At issue is the belief that a nation can grow and prosper by borrowing from abroad in order to consume imported goods. To consume at the pace that it has, America exchanges income producing assets, such as companies or property, or interest bearing IOUs, such as Treasury notes or mortgage-backed bonds, for foreign made clothes, toys and electronics. Economists call these transactions “growth”. But rather than discovering a new path to prosperity, America has simply stumbled on a short cut to financial ruin.
For years America has convinced the emerging market countries that their prosperity is a function of our consumption. It is argued that their export oriented economies would falter if not for the insatiable American willingness to consume (a “virtue” that is assumed to be uniquely American). As the dollar falls into the abyss, this myth will be shattered.
As gold surpasses $700 per ounce, oil tops $80 per barrel, and wheat prices exceed $9 per bushel, Americans are already getting a taste of things to come. Prices for these and other commodities are rising as a direct result of the weakness in the dollar. As this weakness intensifies in the months ahead, commodity price increases will accelerate. However, as their own currencies rise, many foreign buyers will actually experience price decreases. The result will be even greater demand for commodities from abroad just as domestic demand subsides.
Further, as the world stops exporting so much of its savings to America, there will be far more capital available to foreign entrepreneurs to invest productively. Think of the crowding out effect of so much of the world’s savings being lent to American consumers. Now imagine the foreign investment boom that would follow as foreigners reclaim access to their own savings.
The world economy will not be brought to its knees simply because Americans stop consuming. Rather it is America’s service sector economy that will collapse once the rest of the world stops propping it up.
*The above article has been excerpted from Peter Shiff’s article, “American Consumers are Losing their Crown.”
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