Customs Duties or Interest Rate Hike?

March 6, 2005

Warren Buffet thinks trade policy should be used to correct the U.S. current account deficit. I do think this is the wrong way.

The evidence grows that our trade policies will put unremitting pressure on the dollar for many years to come
…

Without policy changes, currency markets could even become disorderly and generate spillover effects, both political and financial.
…
A country that is now aspiring to an “Ownership Society” will not find happiness in – and I’ll use hyperbole here for emphasis – a “Sharecropper’s Society.” But that’s precisely where our trade policies, supported by Republicans and Democrats alike, are taking us.
…
.. in effect if not in intent, the rest of the world is practicing mercantilism in respect to the U.S., an act made possible by our vast store of assets and our pristine credit history. Indeed, the world would never let any other country use a credit card denominated in its own currency to the insatiable extent we are employing ours. Presently, most foreign investors are sanguine: they may view us as spending junkies, but they know we are rich junkies as well.
Letter to Berkshire Hathaway shareholders (pdf), page 19f.

Buffet does not say what instrument of trade policy should be used. Increased import duties on Chinese goods is one that is currently discussed in Congress.

These would lead to trade wars in which all sides would loose. It is the wrong policy to decrease the U.S. overspending. Higher interest rates would help to achieve this and would be a far more effective and system compatible way to do so.

This is also the way credit-card companies handle overspending debtors (plus pressing them with myriads of unmoral contract clauses). They ask for risk compensation, but do not tell the debtor what and where to buy. Setting interest rates is Greenspan’s task. But for party political reasons, he is obviously not willing to fulfill it.

Buffet has now invested more than $20 billion in foreign currencies. In 2004 Berkshire made $1.8 billion through foreign exchange contracts. More than half of its pre-tax gain.

Posted by b on March 6, 2005 at 21:59 UTC | Permalink

Comments

in general, i like the idea of trade wars. it slows down the fluidity of multinational companies’ movement of money and goods. this would hopefully give poorer countries and supporters of social and labour reform in the third world a chance catch up to companies taking advantage of slave labour. hey! i can dream.;-)

Posted by: lenin’s ghost | Mar 6 2005 23:08 utc | 1

And….: Taxes are a way of curbing addictive, foolish, irrational, wasteful, exploitative behavior (are not just a redistribution mechanism.)

Posted by: Blackie | Mar 6 2005 23:18 utc | 2

Being a fan of Jane Jacobs, I too think import duties can be an excellent tool for helping to regulate an economy.
Yes, I know I am a broken record. But check out “Cities and the Wealth of Nations” and “The Economy of Cities”.

Posted by: Ferdzy | Mar 6 2005 23:37 utc | 3

wouldn’t an interest rate hike, while addressing the trade deficit, also increase the cost of borrowing by the our gov, making our federal budget deficit much worse… and so lead (potentially) to more cutbacks in social services?
mind you, i’m not advocating against increasing interest rates (i’m too ignorant)… i am trying to understand the risks…

Posted by: selise | Mar 7 2005 0:07 utc | 4

I must say, I totally disagree with your cure b. We must punish China for not letting the currency adjust. Every time the dollar go’s down, the yuan go’s down and makes Chinese goods cheaper, thus widening our trade deficit more. A large tarriff to equalize the currency is badly needed.
Buffet is absolutely correct in that the US will be a sharecropers society with other nations, including Europe owning so much of our debt. At the current rate, wee likely owe more than the country is worth. I realize you Euro’s would love to see the US put in it’s economic place, but, if we fall, the rest of the world falls harder.
Another factor is, what can the US do to stop the tide unless we have tariffs and the US start producing for itself the goods it needs. Canada builds more GM cars that Michigan now. 98% of all clothes the US wears are foriegn made.
Corporations must be brought under control also. Half of the worlds largest 100 economies are corporations. With that much power, especially that of US corps, the US will never dig out of it’s current problems. The US is wholely owned subsidiary of Corp America. It is to their advantage to keep policies as they are. That gets to my final point. Campaign finance is the greatest threat to the US. Until we break the campaign contribution cycle the US will continues it’s current policy direction in direct contrast to the peoples needs. Go read Kos and Santorums new assualt on the US worker.

Posted by: jdp | Mar 7 2005 0:22 utc | 5

@selise
wouldn’t an interest rate hike, while addressing the trade deficit, also increase the cost of borrowing by the our gov, making our federal budget deficit much worse… and so lead (potentially) to more cutbacks in social services?
Why think cutback, why not think of raising those taxes Bush did cut down?
There are always two ways. Cut expenditure or raise revenue.

Posted by: b | Mar 7 2005 0:37 utc | 6

b – yeah, but can you see THIS administration raising taxes? me neither.

Posted by: selise | Mar 7 2005 1:12 utc | 7

Ask any Socialist and they’ll tell you: we need a class conciousness.

Posted by: The Key | Mar 7 2005 2:07 utc | 8

You got a major point there, Key.
I was watching an old Twilight Zone episode a while back and was thinking how remarkable it is, the class consciousness expressed in that show. By today’s standards that hokey old series seems almost radical 🙂 Despite the devastation wrought on US TV and film by McCarthy and HUAC, somehow Serling and the gang managed to preserve some of the flavour of the 30’s and early 40’s film making — film noir for example — in which Big Money was generally untrustworthy and often Bad, and stories were centred on the lives of ordinary working stiffs, not on spoilt Beverly Hills brats (or allegedly “ordinary families” who happen to live like spoilt BH brats).

Posted by: DeAnander | Mar 7 2005 2:48 utc | 9

I played “Trade Wars” on a local gaming BBS in the late ’80s…
Somebody tell me how any of the major players are anymore than grasping and corrupt Ferrengi…
Just askin’.

Posted by: Kate_Storm | Mar 7 2005 3:56 utc | 10

An increase in interest rates domestically will completely stall the American economy and will do nothing to change American competitiveness vis-a-vis the Chinese. So long as the yuan is pegged against the dollar at an artificially low rate, then Chinese imports will continue to flood in and manufacturing jobs will emigrate to China. The US is even hurting the rest of the world, because as the US dollar depreciates against other global currencies, the yuan automatically decreases against other nations’ currencies, putting pressure on them as well.
The Chinese are essentially following the “beggar thy neighbor” devaluation policies which occurred during the 1930s Great Depression, albeit in a rather stealthy way. Such policies generate tremendous resentment and eventually backlash. Undoubtedly they are hoping to get away with it as long as possible to prevent their victims from being able to take effective action against the policy. US corporations are committed to investment in China and are willing to accept any deal the Chinese offer, just so long as they can eventually continue to operate there. They will sell their old US base out in a heartbeat. Why Jeff Immelt, CEO at GE, just recently said the future of GE is: “China, China, China.” The corporate aristos are fleeing a sinking ship and they have no concern about the abandoned crew.

Posted by: PrahaPartizan | Mar 7 2005 4:55 utc | 11

@Kate I always got a laugh out of the Ferengi, or at least the ST TNG take on the Ferengi. What the script writers didn’t seem to understand (dare I say “grok”) was that in some imaginary interstellar polity of the future, the Ferengi would be us 🙂 Those kind, wise, non-profit-oriented, noble starship voyagers played by Terrans on TV, must in reality be some other species. It’s the Ferengi who act most convincingly like the human race (sigh).
It’s also interesting (in passing) that I suspect they may have derived the “Ferengi” name from the Turkish word for “white people” or “Westerners,” “Farangi” (from “Franks”, i.e. reps of the HRE). [This is called taking refuge in trivia, I fear, but a tired brain must find r-and-r where it can.]

Posted by: DeAnander | Mar 7 2005 5:29 utc | 12

@Praha, wouldn’t it be better to tax the Pirates @100% of the wage differential bet. xAm. & China/India etc? The head of Cisco, said he was “in the process of re-inventing Cisco as a Chinese Co.”. Andy Grove, founder of Intel, said in 10 yrs. the Pirates will have destroyed the entire xAm. IT sector, moving it to China & India.
Another study, from Bureau of Labor Statistics said in the coming decade, few jobs will require a college education – that’s the profile of a 3rd World Nation.

Posted by: jj | Mar 7 2005 6:40 utc | 13

B: I’m not sure. If the point is to stop overspending, then the only good thing to do is a sizable tax hike which will stall US consumption – and mankind will gain a few more months of depleting resources.
If you want to stop jobs being shipped to China, then tariffs is probably the way to go. I mean, in 19th century, UK was all for abolishing tariffs because it produced most of the goods, and the US implemented a draconian high-tariff policy to protect its growing industry. It worked, and in 1910s, the US was the biggest industrial country. Then it promoted free-trade because it suited US economy – and the rest of the world would’ve been well-advised to put high tariffs on US goods for the rest of 20th century.
So, I think that dumping WTO and these stupid agreements may be a good thing. But of course I also gleefully delight at seeing the US get its due at long last and get the nasty bitter taste of its own medicine – which makes me wish the govt continues with its braindead policy until the whole country is bankrupt.
“if we fall, the rest of the world falls harder.”
Actually, no. This is the real trick. If the US falls, the free-trade system, the capitalist system, fails completely as the bankrupt ideology it is, and the rest of the uber-capitalist economy falls as well – just as the pseudo-communist Stalinist tyranny fell with USSR. This is the first and necessary step toward building a new and fairer society, a fairer world – because hoping to fight the system from inside is doomed to fail, as the Dems amply prove it, as even the European socialists prove it numerous times in the last 25 years, in pretty much every country.

Posted by: Clueless Joe | Mar 7 2005 10:39 utc | 14

And Utopia shall arise from the ashes of the previous civilisation, just as it always has before. We shall climb to Utopia on the backs of our billions of radioactive, charred. starved martyrs, who sacrificed themselves, er, were sacrificed so that we might live in a perfect world.

Posted by: Colman | Mar 7 2005 11:53 utc | 15

of course I also gleefully delight at seeing the US get its due at long last and get the nasty bitter taste of its own medicine
but who is likely to suffer the most? certainly not the people most responsible… it is the weak, the young, the poor.
cluelesss joe, i almost always agree with you. but not this. to wish a revenge fantasy on the guilty with no regard for the millions who are likely to also suffer…. isn’t that the same bloodlust frenzy that overtook the usa on 9/12/01? and that we rightly condemn?
or maybe you were being as sarcastic as colman… and i’m too stupid to get it. peace.

Posted by: selise | Mar 7 2005 12:44 utc | 16

Quote:
“if we fall, the rest of the world falls harder.”
Actually, no. This is the real trick. If the US falls, the free-trade system, the capitalist system, fails completely as the bankrupt ideology it is, and the rest of the uber-capitalist economy falls as well – just as the pseudo-communist Stalinist tyranny fell with USSR.
————–
Interesting thought… but contrary to USSR that was more or less isolated (economically and politically) from the rest of the world (except East Europe, Cuba, Albania and then isolated China) , USA (influence and capital) is spread economically and politically practically all over the world…
Basically there is no country except probably North Korea that would not suffer if USA falls.
But it’s going to happen anyway it’s just a matter of time…they (greedy multinational corporations) are pushing us (world) back in times of slavery and economic lawlessness …history does not know about anything like that being possible…

Posted by: vbo | Mar 7 2005 14:13 utc | 17

Stephen Roach: From Jobless to Wageless

.. real wage stagnation keeps American consumers under considerable pressure. Over the first 38 months of this recovery, the wage and salary component of personal income has risen just 5% in real terms — far below the 14% average gain over comparable periods of the previous five cycles. This dramatic shortfall of real labor income is an outgrowth of both subpar hiring and real wage stagnation.
…
Such an outcome leaves hard-pressed consumers with little choice other than to keep relying on asset-based spending strategies and going further into debt to fund such tactics. As a result, real wage stagnation is a recipe for persistently low income-based personal saving.
…
..the resulting shortfall of labor income keeps pressure on the US current account deficit as the principal means to compensate for a shortfall in domestic saving. That ups the ante of America’s imbalances — putting downward pressure on the dollar and upward pressure on US real interest rates. Persistent real wage stagnation also puts pressure on the political arena, as hard-pressed workers are likely to demand increasingly protectionist “remedies” from their elected representatives; such an outcome would also put the dollar and real interest rates under pressure. My best guess is that prospective trends in long-term interest rates ultimately will be more influenced by the bearish considerations of the current account adjustment and trade frictions rather than by the bullish implications of well-contained inflation.
…
Record twin deficits and surging debt underscore the heightened vulnerabilities of a saving-short US economy. The need to normalize real interest rates raises warning flags for the immediate future. A new and exceedingly powerful strain of e-based globalization rewrites the sourcing equation as never before. Despite these extraordinary pressures, the hope all along has been that the sustenance of growth would shift away from the artificial support of policy stimulus and asset appreciation back to the organic support of labor income generation. But as the character of America’s recovery now morphs from jobless to wageless, the likelihood of such a “handover” looks exceedingly dubious. That raises serious questions about the hopes and dreams in financial markets of a benign rebalancing of the US and the US-centric global economy.

Posted by: b | Mar 7 2005 15:56 utc | 18

It occurs to me that it’s not accidental that Congress just screwed working people even more by making bankruptcy even more onerous – just as interest rates are about to climb climb climb. It’s only endless borrowing that’s kept xAmericans afloat & depoliticized.
VISA/MASTERCARD in the pocket is what’s kept Americans from seeing how they’ve been screwed since the Friedmanites took over in ’80. Arguably it’s the single most devastating & reactionary political development that’s come down the pike. Take that away & Elites could never have gotten away w/this Class War.
I read in Chase Econometrics newsletter in early ’80’s that discretionary income of middle classes was about gone.
Now that the jig is up, interest rates can’t be kept down any longer & vast numbers of Americans are going to go bankrupt, credit card companies went screaming to Congress …..Hey, we don’t want to get stuck footing the bill, just ‘cuz it was our fault in the first place……And of course, it’s now too late to reverse this disastrous economic system they’ve imposed on us…..

Posted by: jj | Mar 7 2005 21:13 utc | 19

deanander….i’ve been watching some of the ’50’s and ’60’s shows recently. most of them have a social/moral message unlike nearly all of tv today.
thx for the ferengi factoids!
yeah, kate….damn greedheads!

Posted by: lenin’s ghost | Mar 8 2005 7:11 utc | 20

I’ve posted a closely related diary on Kos about Greenspan’s bubbles. There are already enough active threads, so I suggest to use this one to continue the economic discussion.
Sorry to not have been around in recent days. As some of you have seen, there’s been quite a storm over at dKos over my recent posts there on Sgrena…

Posted by: Jérôme | Mar 8 2005 10:49 utc | 21

Nice firestorm you started over there, Jérôme!

Posted by: Colman | Mar 8 2005 12:38 utc | 22

On Greenspan, perhaps he’s trying to disprove the contention that interest rates don’t make that much difference!

Posted by: Colman | Mar 8 2005 12:45 utc | 23

Jérôme, that shitstorm was pretty ludicrous – and the cartoon in your last diary was spot on. Beside, I tend to be wary of anyone who goes with “Sure, the US sucks, but we Europeans suck as well and as much”. These guys probably have some Bush-loving anti-European feelings 😉
/irony off

Posted by: Clueless Joe | Mar 8 2005 13:18 utc | 24

The Bubbles Mr. Greenspan has Created! by Marc Faber (04/2004) is a good pick on Greenspan.
Following the markets:
Marc Faber newest piece of investment advice is the usual good read too.
As is todays deconstruction of the official GDP and CPI numbers by Jim Puplava.

Posted by: b | Mar 8 2005 14:20 utc | 25

b – just went through them now – fascinating links!

Posted by: Jérôme | Mar 10 2005 10:17 utc | 26

Concerning the US-Centric World,
What is so U.S. Centric about the World Economy at present?
The U.S. imports around 17 percent of the world’s total and export about 9 percent of the world’s totals so combining the two we account for 13 precent of the world’s total international trade amounts. Our GDP(PPP) totals as compared to world totals accounts for around 18 percent and that will most likely fall as other economies continue to grow around the world.
The U.S. had almost 50 percent of the world’s economy in the early 1980’s.
We were the largest creditor Nation.
The largest manufacturing country.
The largest oil producer until the 1970’s.
We grew the most crops.
Had the world’s largest exports in both Manufactured Goods and Farm Goods.
Now we are the World’s largest debtors.
Our manufacturing sector is a shell of It’s former self. We have a 700 Billion dollar current account deficit annually and growing.
The U.S. can only manufacture 50 precent of It’s own needs let alone other countries needs.
We import more Farming Products then we export now.
Import over 60 percent of our oil needs.
The European Union now is the World’s largest economy, close to 15 trillion U.S. Dollars and as they add more countries, what do you think will happen?
Russia and Europe are becoming the best of friends, the largest economy in the world teaming up with the World’s largest storehouse of natural resources.
E.U. is the world’s largest exporter and now with the inlargement, largest Importer.
The E.U. is the World’s largest investors.
Largest Investors in China also.
The largest Aid Givers.
The World’s Second largest military and nuclear armed.
Currently they have 500 million citizens and with future inlargements prehaps over 700 million within the next 15 years.
They have a trade surplus and 1/3rd the consumer debt of Americans.
Their budget deficit is around 2.5 percent, not bad for the huge tranfermation that is occuring, very expensive process to upgrade countries from near 3rd world statutes to first.
The amount of people offically in the Workforce between the ages of 18 and 65 in the European workforce is around 63 percent, in the U.S. around 61 percent. In the U.S. when you do not find a job within 6 months you disapear from the stats, so they officially have a 5.6 percent unemployment rate but It is higher.
China’s economy in GDP(PPP)terms is now close to 8 trillion dollars and growing fast.
So as things are now we have Europe Already a economic and Military Superpower, China becoming a Superpower, Both with very close relations with one another.
This is not an American Centric world, the last century for the most part was, but over the last 25 years, the U.S. has declined.
Now It is becoming a European-Chinese Centric world.

Posted by: thomas riccardo | Apr 4 2005 16:02 utc | 27

@jj
Link to BLS study please?

Posted by: liz | Apr 4 2005 18:18 utc | 28

Back to Main