Saturday, July 23, 2011

Why is U.S. dollar losing value?

Townhall Spotlight, July 22, 2011, states "China to 'Bury' the dollar".

Townhall Spotlight goes on to say:

"U.S. government...appears bent on spending - and printing - our currency into oblivion."

Dear American people: 

Please don't accept the above statements blindly.  The above statements contain some truth but also to an extent take the reader away from the truth.

Please work to understand factually and accurately what is going on.

Hundreds of thousands of college students take Economics 101 each year.  How many students listen to what is taught in Economics 101, understand what is taught, and remember what is taught?

A very clear and basic principle that is presented in Economics 101 is this:  If a nation buys more goods from foreign countries than it sells, the currency of that nation will go down in value. 

In  this situation, an immutable self-correcting force comes into play.  No government or group of people can make this force smaller or larger, anymore than anyone can make the Rocky Mountains smaller or larger.  

If the nation keeps on buying more goods from foreign countries than it sells, its currency goes down in value.  As the process continues there is less and less ability to buy foreign goods.  The nation is saved from itself!  In mirror image there is increasing purchase of goods made domestically.

China is not "burying" the U. S. dollar.  We are burying the U.S. dollar OURSELVES by buying FOUR TIMES more manufactured goods from China than we sell to China. 

50 years ago we did all our own manufacturing and we exported our manufactured goods all over the world.  Then we started sending our manufacturing employment away to foreign countries.  Buying the goods produced by this manufacturing employment became a DRAIN on our economy, rather than ENRICHING our economy. 

We shot ourselves in the foot in a big way.  We "buried" our dollar by voluntarily and on our own initiative sending our manufacturing employment to foreign countries, turning a POSITIVE into a huge NEGATIVE.

Who is "We" in the above sentence?  It is not the ordinary working men and women of America.  The ordinary working men and women of America knew immediately that it was stupid to send our manufacturing employment to foreign countries.  However, our government and business "leaders" didn't listen to the ordinary people of America. 

Our business "leaders" voluntarily and on their own initiative sent our manufacturing employment to foreign countries.  Our government "leaders" passively and obediently allowed this process to begin in the early 1960s and continue on a larger and larger scale.

Today we see the result of this 50-year process of sending our manufacturing employment away.  We see an  impoverished America with 14 million people unemployed.  (Probably the true figure is much higher.)  This result was entirely predictable from day one in the early 1960s when the first jobs were sent overseas.

What is the solution?

The only solution is to increase our domestic manufacturing.  Buy goods made in USA rather than goods made in China and in other foreign countries that don't buy from us in approximately equal quantities. 

In blogging and tweeting I receive all sorts of comments from many different people.  People say it is too late to increase manufacturing in America, it is too expensive to manufacture in America, there is too much red tape, there is too much union involvement, etc.  These comments have some validity.  Nevertheless, manufacturing in America is going to increase.  Practical people are going to increase manufacturing in USA because, according to the immutable forces of economics, the fall of the U.S. dollar makes it attractive.  Also, there are millions of Americans unemployed and ready to work at reasonable wage levels.  Low dollar and high availability of efficient American workers.  An irresistible combination!

According to a recent report, Mercedes plans to invest $2 billion in new manufacturing facilities in Alabama.  Mercedes and many other companies are not sitting around listening to the people who have all the reasons why manufacturing can't happen in USA.  These companies see manufacturing in USA becoming more attractive and they are moving to take advantage of it.

Some people say that there is no manufacturing in the USA.  This view is not correct.  There are many many thousands of manufacturers operating in the USA.  It is easy to demonstrate to the stores that it is win-win to seek out and carry USA-made goods.  When these existing manufacturers start to receive increased orders, they will quickly ramp up production and employment.

Foreign versus Domestic

Dear American people:

Please understand the critical difference between foreign expenditures and domestic expenditures

Foreign expenditures"bury" the U.S. dollar.  Domestic expenditures, even inefficient ones, support the dollar.

Foreign expenditures send our real physical money out of the country, never to be seen again.  If and when we borrow from foreign countries, the interest payments drain the economy and "bury" the dollar.  This process is the cause of the problems in Greece and other European countries.

If we have to borrow, borrow from our own American people.  Then the interest payments go to Americans.  The money stays in America and keeps working in America. 

The politicians trying to solve the debt limit problem are completely missing a huge issue, an issue that should be central to the debate.  This issue is our foreign expenditures.  This is where we should be cutting. 

First of all there is our negative balance of trade in manufactured goods with all foreign countries.  Our negative balance of trade is over 500 billion dollars per year.   This is a huge and totally unnecessary net foreign expenditure, a foreign expenditure front and center in the process of "burying" the U.S. dollar.

Secondly, the government makes foreign expenditures of approximately another 500 billion dollars per year.

So there we have one trillion dollars of foreign expenditures.  These are the expenditures that are truly "burying" the U.S. dollar.  These are the expenditures we should be cutting, rather than cutting medical care, education, maintenance of schools. 

What are the government foreign expenditures?

It is very dangerous for me to say what I have to say at this point.  I don't want to take away from my central message that we have to increase domestic manufacturing employment in order to solve our unemployment and deficit problems.

But the fact is that we have to look at our war expenditures.  We are involved in three wars:  Libya, Iraq, and Afghanistan.  These wars may be increasing our security, or they may be counterproductive, actually harming the U.S.  But the real point is that these wars incur enormous foreign expenditures for fuel and other supplies for our armed forces.   In addition we have armed forces stationed in over 100 other countries.  Again there are foreign expenditures for fuel and other supplies.

America is in deep financial and economic trouble.  We cannot afford the huge foreign expenditures associated with American soldiers in foreign countries.  We have to cut these expenditures by bringing our soldiers home, where they can do really useful things such as guarding the border with Mexico to keep Mexican drugs and drug gangs out of America.

We have embassies in 200 countries.  Embassies incur foreign costs for fuel and supplies, for construction and maintenance by local personnel, and foreign staff.  Unfortunately, America is not able to afford unlimited embassy-related foreign expenditure.  The foreign expenditures related to embassies could be cut in half, with zero adverse effect on American interests or on the American people. 

There are numerous other foreign expenditures by our government that could be cut. 

The important point is that, again, foreign expenditures are much more damaging to the economy than domestic expenditures. Foreign expenditures "bury" the U.S. dollar.  So foreign expenditures are the expenditures that should be cut first.

I wish all politicians could understand the importance of more domestic manufacturing, to cut our negative balance of trade in manufactured goods.  I wish all politicians could understand the critical issue of foreign versus domestic expenditures, and could thereby be motivated to cut needless and wasteful foreign expenditures first!

Some of our politicians do understand these issues.  But many more have to come on board!

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