I’m one of the few people who thinks that this is a good thing and not a bad one. Without a good legal system in place, engineers don’t end up doing very much useful.

I think that the mercantilism came first before the lack of investment. Mercantilism took the profits out of American production that competes with foreign production. The lack of investment follows from losing the profits.

Howard

You are correct in your depressing analysis of where we are headed if current trends continue.

However, I think there is an element of hope that you have overlooked. If something causes a surge of investment in America’s productive sectors, that investment could solve our trade problems.

Howard Richman, co-author
Trading Away Our Future
http://www.idealtaxes.com

1. As the number of banks participating in E-D increased, the E-D bankers discovered that the E-D deposits they created for borrowers often did not result in any diminution of their U.S. dollar balances – the System was merely shifting balances within itself. That is, drafts drawn on E-D banks increasingly were deposited in other E-D banks.

2. Thus was laid the economic basis of an international system of “prudential” reserve banking – the discovery that the amount of actual U.S. dollar reserves required to support the E-D bank’s convertibility commitment need be only a fraction of the volume of E-D loans made – and E-D deposits (money) created.

3. The E-D has been a superfluous and harmful addition to the already excessive national monetary stocks of the world. Moreover, the acceptability of the E-D is totally dependent on the acceptability of the U.S. dollar. The viability of the U.S. and Euro-dollar as international units of account is threatened by the huge trade deficits

4. The situation requires measures be taken which will reverse the deterioration of the dollar’s integrity. What is required is no less than an end to the chronic liquidity deficits in our balance of payments, and a halt to the excessive creation of U.S. and Euro-credit dollars.

1. The trade deficits, plus the unilateral transfers of funds by the Federal Government to foreigners, transformed this county from the world’s largest creditor to the world’s largest debtor.

2. Central Bankers are powerless to alter long-term factors that determine the supply of, and the demand for, any particular country’s currency. The chronic and accelerating deficit in our balance of trade is one such factor; all of their powers have a limited and short-term effect. With regard to deficits, the federal budget deficit or the foreign trade deficit, the powers of the Fed are marginal at best.

3. Rates now are determined in the open market subject to all of the vicissitudes of a competitive market. Consequently, the market registers many unwarranted speculative fluctuations. These fluctuations unnecessarily increase the costs and risks of doing business.

4. Reducing our internal deficit would reduce pressure on the capital markets, thereby reducing interest rates and the foreign demand for dollars. But this would have only a minor effect on the foreign exchange value of the dollar.

5. With a chronically depreciating dollar, foreigners will be much less inclined to invest in the U.S. on a creditor ship basis, thus pushing up interest rates. The rising cost and diminishing volume of imports will contribute to an increase in inflation, and the expectation of further inflation will also push up interest rates. This spells stagflation.

6. Obviously the dollar neither fulfills the standard-of-value function (the currency around which all other currencies fluctuate) nor can a depreciating currency serve as a reserve currency. While still the World’s dominant transactions currency, that role is also diminishing. Other countries are conducting more of its trade in terms of the EURO, etc.

7. Some have declared the dollar “overvalued”. The assumption being that if the dollar depreciates enough it will mitigate most of our “terms of trade” problems. Such reasoning ignores the basic fact that strong economies have strong, not weak and depreciating currencies: A country cannot be made strong by depreciating its currency.

8. A weak currency is not a cause; rather it is a symptom of a weak, noncompetitive economy. IN time, of course, a declining dollar will eliminate the deficit in our balance-of-trade. But the price exacted will be a sharp decline in imports and the purchase of foreign services, reflecting our relative poverty and inability to compete in the international economy.

9. The problem is that further depreciation of the dollar will not correct our foreign trade deficit. In fact, further depreciation will only make our stocks and land, urban and rural even cheaper and even more attractive. We have become a financial hostage to the Pacific Rim’s & Oil producing countries.

10. This is the first time that a reserve currency country could operate with chronic international deficits and not have its currency “dethroned”

11. We have no choice but to curtail those types of foreign military, and economic expenditures, which create a drain on the dollar… If we do not, the dollar will cease to be a convertible currency, will cease to be a reserve currency, and the United States will be forced into a high degree of economic isolation and perhaps into an increasingly totalitarian mold

12. Note that the “Pentagon’s” deficit is the most dangerous of all. Its expansion simultaneously increases both the federal deficit and the balance-of-payments deficit.

Declining interest differentials plus a falling dollar made creditor ship obligations relatively unattractive compared to stocks and real estate.

This is the principle reason common stocks and real-estate were propelled to levels that seem unjustified in terms of dollars, but are bargains in terms of our major trading partners.

In the longer term the problem of servicing all this debt, consumer, corporate, and federal poses daunting problems. And that is a gross understatement. We have temporarily concealed the underlying factors that will shortly push down the future standard of living of most people in the U.S. These circumstances, as we know, are of our own making. The country has not been invaded, and our productive resources have not been destroyed, or even impaired, by national calamities.

But concentration and new incentives for improvements in production, innovation, and product quality are required before we can overtake (increase our exports), or even maintain our trade position relative to our international competitors. And we are not operating with a level playing field. And we are currently at a disadvantage, e.g., there are more lawyers in the U.S. than engineers.

Your observation gives the answer as to where the excess demand for dollars, or hot money flows, (contribution to housing speculation) came from – it was fueled by foreigners.

But to avoid dire consequences in the future, it will be necessary to eliminate the trade deficit and operate with a trade surplus sufficient to eliminate the capital deficit and the “Pentagon’s” deficits.

This cannot be attained by allowing the dollar to continue to depreciate or by resorting to any type of financial gimmickry. To say the task is “Herculean” is an understatement.

Unless we are willing to make those fundamental reforms requisite to successfully competing in international markets, the continued decline of the dollar will finally force a payments balance on us.

Under these circumstances, we can expect a long-term deterioration in the standard of living of the vast majority of the people in this country.