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On Peter Schiff... / trade

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UptonStellington

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(Mods feel free to merge this with another thread, like ABCT)

Since sNerd posted the YouTube video of Peter Schiff making his spot-on predictions for the recession, I've spent the last two days reading everything I can about the guy. Whenever he's on TV (CNBC had him on last Thursday and mentioned the popular YouTube videos), he defends the idea that we have to produce before we can consume, that our money is becoming worthless, etc.

As an economics student, I'm constantly witness to professors selling the merits of a "service economy," and that the trend nowadays is for other countries to do the manufacturing while we do the services. But Schiff disagrees with that, constantly calling ours a "phony service-sector economy". In an interview, he said this regarding trade deficits:

The problem with our deficit is that we import consumer goods we can not afford to pay for with either exports or foreign earnings. As such we accumulate external liabilities that we will never be able to repay and our nation's future productive capacity continues to deteriorate. We are de-industrializing and are condemning ourselves and future generations to falling standards of living.

Tim: Can you elaborate more on the manner in which America is de-industrializing?

Peter: More Americans now work for government than in manufacturing. Most other Americans are employed in retailing, financial and other professional services, healthcare, and education. What we used to produce ourselves we now import. We "pay" for those imports with IOUs (dollars) yet we lack the industrial capacity to ever redeem them with genuine goods.

Can somebody clear this up for me? Don't we simply have the comparative advantage in the sectors Schiff named (on an international scale, in the financial and other professional services) -- do we really need to be the ones with industrial capacity?

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(Mods feel free to merge this with another thread, like ABCT)

Since sNerd posted the YouTube video of Peter Schiff making his spot-on predictions for the recession, I've spent the last two days reading everything I can about the guy. Whenever he's on TV (CNBC had him on last Thursday and mentioned the popular YouTube videos), he defends the idea that we have to produce before we can consume, that our money is becoming worthless, etc.

As an economics student, I'm constantly witness to professors selling the merits of a "service economy," and that the trend nowadays is for other countries to do the manufacturing while we do the services. But Schiff disagrees with that, constantly calling ours a "phony service-sector economy". In an interview, he said this regarding trade deficits:

Can somebody clear this up for me? Don't we simply have the comparative advantage in the sectors Schiff named (on an international scale, in the financial and other professional services) -- do we really need to be the ones with industrial capacity?

Well the thing about that is that if we sell the services to other countries we could repay the debt. The problem is probably regulation occurring in international service trades. That and those other countries are often corrupt and people WOULD rather sell services to the populace, but can't due to regulation in those other countries. What we need to do is stand firm and say that we don't owe them squat until they privatize and deregulate their economic actions. After all, how can we be expected to repay when they refuse to buy from us what we have and are willing to offer?

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From what I understand, we need to export *goods* if we want to keep importing *goods*. Now, what those goods *are* is immaterial, but Schiff is right that there is a problem if we're importing goods in exchange for cash but that cash *isn't being spent* on American goods. That means that our economy is, in part, being propped up by foreign investors sitting on our money and *pretending* it represents goods instead of gaining actual goods in exchange for their money.

It's like passing bad checks. You can write hundreds of bad checks and as long as your creditors trade those checks among themselves (believing that they represent actual goods), everything is hunky-dory, but when they all show up at your door and present the checks for collection, you have a problem.

Relying on a service economy would seem, to me, to be a bad idea, because the value of intangibles like financial expertise depends a lot on the state of the economy itself, whereas commodities like tennis shoes remain tennis shoes regardless of the state of the market. You could get away with *tangible* services, maybe, like entertainment, but in the end you have to be producing stuff as well as just knowing stuff.

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Well the thing about that is that if we sell the services to other countries we could repay the debt. The problem is probably regulation occurring in international service trades. That and those other countries are often corrupt and people WOULD rather sell services to the populace, but can't due to regulation in those other countries. What we need to do is stand firm and say that we don't owe them squat until they privatize and deregulate their economic actions. After all, how can we be expected to repay when they refuse to buy from us what we have and are willing to offer?

Okay, this I don't understand. Isn't this analogous to telling someone "here is some money which you can exchange for anything you want later on if you'll let me buy a TV with it now" and then when they show up with the money, saying "sorry, did I say you could have anything you wanted? Well the only thing I have is legal services, so you're going to have to take that whether you want it or not."

I know if someone did that to me, I'd be pretty annoyed. The existence/nonexistence of regulation doesn't factor in, the problem is that you're only offering services that people don't want (for whatever reason) and can't dispose of because no one else wants them, either.

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There was a very good article around on how the international monetary system is built on foreign governments/companies spending their American cash on purchasing American debt. I think that is in large effect how the money spent on imports comes back to the US.

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There was a very good article around on how the international monetary system is built on foreign governments/companies spending their American cash on purchasing American debt. I think that is in large effect how the money spent on imports comes back to the US.

Yeah, and this is why *our* financial problems screw over the economy of the entire world. I recently finished reading Economics in One Lesson by Henry Hazlitt, which I thoroughly recommend, and I've found that it's a lot easier to think about international finance if you treat countries as though they are a single person conducting certain financial affairs. Like I said, everyone else has been passing American checks around as though they represented goods--but they don't, which is a serious problem indeed.

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Hazlitt's book is great -- I wish they'd assign it to high school students.

Jennifer, let me make sure I've got your take clear: If I want a good from Mr. Wen, I have to give Mr. Wen something else in return. Are you saying that what I've been giving Mr. Wen is not exactly as quantifiable as what Mr. Wen has been giving me? And further, that whatever I AM giving Mr. Wen is highly dependent on how I'm doing financially, whereas what Mr. Wen is giving me is valuable regardless of economic disturbances?

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Okay, this I don't understand. Isn't this analogous to telling someone "here is some money which you can exchange for anything you want later on if you'll let me buy a TV with it now" and then when they show up with the money, saying "sorry, did I say you could have anything you wanted? Well the only thing I have is legal services, so you're going to have to take that whether you want it or not."

I know if someone did that to me, I'd be pretty annoyed. The existence/nonexistence of regulation doesn't factor in, the problem is that you're only offering services that people don't want (for whatever reason) and can't dispose of because no one else wants them, either.

Well they're the ones who accepted the money. Furthermore, they can always use the money to produce things by offering it to those who WOULD want the services money could buy. That's how trade works. You choose whether or not to make exchanges and are responsible for your own benefit, which is the only way mutual benefit can happen. That doesn't mean it guarantees mutual benefit, but mutual benefit cannot exist without it.

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From what I understand, yes. Granted, my understanding of economics is pretty basic, but in general it's been functional enough to let me *understand* when people are talking sensible economics and grasp the principle involved. That's one of my methods for recognizing bad economics--when I find it completely incomprehensible, that's because it's B.S. It's even one of the things Henry Hazlitt pointed out: he didn't get what twists of logic led people to believe that one thing could be *bad* fiscal policy when practiced by an individual, yet *good* fiscal policy when practiced by a nation. Time and time again, he said, exploring economic fallacies leads you to come back to what's usually called "common sense".

Furthermore, they can always use the money to produce things by offering it to those who WOULD want the services money could buy. That's how trade works. You choose whether or not to make exchanges and are responsible for your own benefit, which is the only way mutual benefit can happen. That doesn't mean it guarantees mutual benefit, but mutual benefit cannot exist without it.

That's kind of the point--they've been handing the money over to other people on the premise that those other people will, *eventually* be able to get something they want for it, but as it turns out no one can get anything they want for it, so the money isn't good for anything. Yet the goods that they *exchanged* for the money have been consumed or otherwise used up, so they're just stuck with a pile of worthless paper.

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That's kind of the point--they've been handing the money over to other people on the premise that those other people will, *eventually* be able to get something they want for it, but as it turns out no one can get anything they want for it, so the money isn't good for anything. Yet the goods that they *exchanged* for the money have been consumed or otherwise used up, so they're just stuck with a pile of worthless paper.

Wait. I would think this last sentence is true to the extent that these goods are bought with debt. But if they are bought through the exchange of services -- we offer them financial / business services, etc., and we get goods in exchange -- I don't see what the problem is?

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There's nothing wrong with being a "service" economy. It is part of the trend where we moved away from agriculture. Today, one person can produce food that is enough to feed tens (if not hundreds). A few lumbermen can produce lumber for hundreds of homes. So, more people can be employed in areas like healthcare and education. Imagine if one could fully automatize farms and factories -- chances are that such an economy would move toward being even more "service oriented".

While Schiff is right that the U.S. BOP imbalance is a part of the problem, the specific components that flow this way or that are not so relevant. The BOP deficit is more a manifestation of a problem than a problem itself. That is to say: a BOP is not a problem if it is caused by private parties, acting in their private capacity. The primary problem with our BOP is that governments have been interfering in international trade and investment. For instance, the Chinese government does not give the full "real" value-flow from U.S. consumers to its producers. Instead, it takes a bit off the top and uses lends it to the U.S. government, to U.S. agencies (e.g. Fannie/Freddie) and also invests some in U.S. companies. What the U.S. consumers do not see immediately is that they are taking on debt, because it is they --qua tax-payers -- who are either borrowing the money or guaranteeing repayment.

Imagine buying a T-shirt for $15. Of that, let's say $13 in real value reaches the Chinese manufacturer, while $2 is kept by the Chinese government. Of that $2, $1 is lent to the US government who spends it on all sorts of consumption. The other $1 is lent to Fannie/Freddie and results in cheaper home-loans in the U.S. If the U.S. recipients were not the the U.S. government, nor backed by the U.S. government, it would not be an issue. However, under the current scheme, the T-shirt buyers pays $15 qua-consumer, and then borrows back $2 qua-taxpayer, to spend on consumption.

Schiff is right that there has been too much consumption in the U.S. in recent years, and we have to shift toward more productive (wealth-generating) expenditures.

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It doesn't help that current gov't policies encourage consumption and discourage investment.

Or that today's US mfg sector is the least cost competitive globally.

I think comparative advantage is possible. I also think its prudent to ask how much government intervention in teh economy distorts those effects.

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Isn't there a correlation between production and innovation though? I mean you're not going to develop the next best technology for washing machines if you are no longer making washing machines....

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