The vanishing American consumer and the coming trade war … With American consumers pulling back, these other economies have also been slowing down. This means Obama won't easily find the export markets they need to create enough jobs to make up for the vanishing American consumer. President Barack Obama speaks about exports, jobs, and the economy, Wednesday, July 7, 2010, in the East Room of the White House in Washington. President Obama has vowed to double U.S. exports within the next five years. That's because exports are critical for rebooting the American economy. It's clear American consumers can't get the economy going on their own. They can't restart the jobs machine. They've run out of money and credit. It's not just that one out of four Americans is unemployed or underemployed (working part-time, overqualified, or at a lower wage than before). More significantly, the Great Recession burst the housing bubble that had let American consumers turn their homes into ATMs. Now the cash machines are closed. So the Administration figures foreign consumers will have to fill the gap. – Robert Reich's Blog/CS Monitor
Dominant Social Theme: It will get even worse for the West.
Free-Market Analysis: This is an interesting analysis because there hasn't been much discussion of trade wars lately. In the 1980s and 1990s, when the first wave of anti-Keynesian thinking was becoming popular, it was daringly revisionist to point out that the government initiated trade wars had aggravated and perhaps even caused the Great Depression. The Smoot-Hawley Tariff Act of 1930 became Exhibit A.
In retrospect, blaming the Great Depression on tariffs was a soft-libertarian solution. What do we mean by soft libertarian? We mean that proponents could make government the culprit without delving deeply into the real causes of the Great Depression. In a sense, trotting out the trade war explanation for the 1930's Depression is analogous to emphasizing tax cuts during the Reagan years as a means to create a healthy economy. As has been pointed out previously in these modest pages, the emphasis on tax cuts in a sense precluded an examination of other ways to cultivate a free-market economy, including most importantly spending cuts.
It is a kind of mini-meme, a sub-dominant social theme. "Trade wars turn recessions into depressions." From our point it is, in fact, a distraction. Trade wars and tariffs may aggravate a financial downturn, but there can be no doubt that financial crises are caused by the West's mercantilist central banks and the general distortions that they inflict on the economy. Here is some more from the article:
Last week I attended a conference with global business executives. When I asked them where they expected to find new customers to replace Americans who are pulling back, they all said China and India and quoted me the same number: 800 million new middle-class consumers from these and other fast-developing countries over the next decade.
Yes, but. As of now China and India are still relying on net exports to fuel their growth. Even if you think their middle classes will eventually become so big and rich they can buy everything these nations will be able to produce, that doesn't mean they'll also buy what the rest of the world produces.
Yes, global companies will do wonderfully well. General Motors is well on the way to selling more cars in China than it does in the U.S. But American workers won't get the jobs, and nor will workers in Europe, Japan, or the rest of the world. GM makes the cars it sells to Chinese consumers in China.
Meanwhile, the productive capacities of China and India will continue to grow: More workers, more factories, more high-tech equipment, more offices. The buying power of their middle classes will have to expand rapidly just to catch up with what these nations will be able to produce.
This means Obama and others won't easily find the export markets they need to create enough jobs to make up for the vanishing American consumer. When the world's productive capacities exceed the buying power of the world's consumers, every government wants to increase exports and discourage imports. That spells trade war.
It certainly sounds grim. But from our humble perspective, it puts the emphasis right where Reich – a socialist, leveling kind of economist and Democratic bureaucrat – wants it to be, with government. The trade explanation of financial downturns leads logically government activism. Government becomes the fount of economic growth. Let government negotiate "free-market" trade treaties and all will be well. Let the wrong types get into government, or let government not prove wise enough, and the free-market will be comprised. This also leads, by the way, to an emphasis on managed trade treaties that are presented as enhancing free-trade, when in fact they are not.
Using the color of government, mercantilist central banks inflate, printing money until the economy is so distorted that stock markets crash and many ventures are revealed as ruinous rather than profitable. People have been tricked. Now they are bankrupt. The economy takes a very long time to recover after one of these busts in the modern era because government is never content to allow the biggest private-market entities to go under as they should.
Instead, government prints more and more money, hoping to salvage the larger entities, and this in turn leads to yet another false recovery until the economy is finally so tortured it falls into a five or ten years "economic crisis." That's what is going on now. It has nothing much to do with a "trade war" either looming or consummated. The problem is the way that money is created in a fiat-money environment. The focus on tariffs and trade wars removes the emphasis from the deeper, underlying problem, which is lack of circulating gold and silver and the resultant phony circulation of delinked paper money.
The "trade war" meme is another seamless propaganda gambit. It puts the onus on government and shifts the responsibility from the market to government bureaucrats who must "get it right" else the "free-market" itself suffers. In fact, the trade war theme is joined at the hip with the immigration problem that is much in the news these days.
Both trade wars and immigration issues could be solved, theoretically, anyway, by placing private property fully in private hands. If property was mostly or wholly private, people and business could trade with whom they wanted to trade with and work with whom they wanted. But because so much is in public hands, and because the rhetoric has been skewed to generate yet more public involvement, private solutions are difficult to envision and even harder to implement. Government is always and inevitably involved.
No doubt, we shall read more about an incipient trade war as the Great Recession drags on. Such ephemera will likely incite portions of the electorate to be angry with countries such as China – which is having many of its own problems by the way. (Thus, it may be political practical for Chinese leaders to blame America as regards trade.) Certainly, there will be more discussions about incipient, cultural, American racism if this scenario were to unfold. Much breast-beating may ensue. All of this will help obscure the real issues having to do with the fundamental flaws of modern money and the destructiveness of modern Western finance.