Friday, February 20, 2009

Unbalanced International Trade Caused Economic Collapse

The current financial and economic collapse we are experiencing are the direct result of a decade of international trade folly. Most educated people are still repeating the free trade slogans of yesteryear, and have not adjusted their ideological outlook to the contemporary situation. We need to correct this deficiency in knowledge in order to prepare for long term sustainable solutions.

Why did we have a financial bubble? In short, because of unbalanced international trade. Our finance and banking industry has grown out of control relative to its historical share of the economy because of the pattern of international trade. Here is how it went down:

China's Communist political agenda was to modernize their nation through manufacturing protectionism and currency controls. In the classic theory of international trade, foreign trade advances both economies. In short, an import is not bad for the American economy, because it saves the American consumer money, and the money has to eventually return to the American economy in the form of Chinese spending, a win-win situation.

However, Chinese governmental policy subverted this natural balance of trade. Rather than purchasing goods or services (the basis of the real economy) from America, the Chinese hoarded their dollars, investing them in U.S. debt. Thus, the manufacturing industry in America shrunk, while the financial industry expanded, leading to the inevitable bubbles as an excess of money chased a smaller pool of investments.

Obviously, it does not take an economic genius to realize that an economy cannot be based on financial services. In fact, financial services are essentially parasitic (much like government), providing a necessary service by transferring wealth, but not creating any. Banking, like government, may be necessary up to a certain level, but when it grows too large, it destroys the real economy.

Following their protectionist policies, the Chinese built their manufacturing industry, and America built its financial and governmental industries, using the oversupply of cheap money and debt financing.

It is obvious that neither trend is sustainable. The Chinese are now being forced to scale back their export efforts, and build up a sustainable economy based on internal demand. America, likewise, is being forced to scale back financial and governmental efforts, and build up a sustainable economy based on internal supply.

The only long term sustainable economic policy for any nation is through a balance of trade. Free trade only makes sense if it is fair trade. American economic power and stability cannot be separated from the productive capacity of the American people, and it should be American governmental policy to build that productive capacity, not allow it to be undermined.

Back in Henry Ford's day, the interests of American capitalist and worker were aligned, since the workers had to have the income to purchase the capitalist's products. In our era of government-enabled false globalism, when the capitalist can freely outsource labor to cheaper countries, what happens to the American worker? As we can see, falling real income levels have been the real result, which is a sign of disaster for the American economy and way of life. Government policy should sustain and protect the American worker (who is also the American consumer!!!) by re-aligning the interests of American capital and labor. Fair and balanced trade, in real goods and services, must be the end result of any country that seeks to trade with our nation. This is not destructive protectionism, this is common sense.

Reflexive protectionism in time of economic depression is not the cause of the depression, it is a healthy and natural reaction to the global imbalances that led to the depression. Today's free-trader ideologues are like the doctors of old who would apply leeches to their sick patients. At the very door of death, the wise patient rips the leeches off, rather than following the destructive advice of a quack expert who is in fact making the problem worse.

1 comment:

Anonymous said...

There has to be a constitutional amendment for this. I've drafted one. I have sent it along to Dr. Michael Hudson, too.

Anyone who might like to can contact me: