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Sunday, May 13, 2012

Recovery : Free Trade

Barry, My Liege :

The structure of these few remarks is to provide some of the evidence supporting each of my specific suggestions for improving the Economic National Security of the United States that were listed in the posting of April 27, 2012 titled : 'Presidential Elections and Economic National Security'.

Each such remark is fronted in the title by the word 'Recovery'.

This posting is 'Recovery : Free Trade'

Free Trade Doesn't Work ; it's a fact and it's also the title of a book by Ian Fletcher [http://www.freetradedoesntwork.com/].

Trade policy in the United States of America has been wedded to the idea of Free Trade since the 1950's.

One of the justifications for Free Trade and low tariffs for the USA was that we could promote industry in other countries by opening our consumer and industrial markets to the world.

Since the USA emerged from World War 2 as the world's major industrial power, we could afford to, we had an obligation to and our security was made stronger by raising living standards in other countries.

Since then many countries have developed strong economies by protecting their domestic companies and exporting products to the USA : China, Korea, Japan, etc., etc.

Due to their success, our relative economic strength has declined significantly to the point where our economy is now the first among equals instead of the acknowledged leader ; further, we are tied together with the other industrialized countries in an electronic embrace that we cannot break.

The time has come to abandon that policy and conduct our trade policy with attention to the real world and not to the theoretical world constructed in the 1700's.

Make no mistake, trade with other countries can promote our Economic National Security if it is managed carefully. Equally it can damage our security if it is left to market forces.

I will be more than happy to debate any economist or politician on the theory of the subject, but this is not the forum for that technical debate. You can read my short discussion of trade theory and the theory of Comparative Advantage here : http://www.mkeever.com/compad.doc

It is sufficient here to offer an estimate of the harm done to our economy by our recent and overwhelmingly negative trade balances.

By the term 'negative trade balances' I refer to the monthly and annual difference in current dollars between the exports of goods and services from the USA to other countries and the imports of goods and services to the USA from other countries as published by the US Census Bureau, Foreign Trade Division. This number is known as the Balance of Payments or BOP.

The BOP for the United States was either a small positive number - meaning the total dollar value of our exports exceeded the dollar value of our imports - or a small negative number until the mid 1980's.

In 1984, the BOP of the United States exceeded a NEGATIVE $100 BILLION for the first time. That means that in 1984 we bought $109.1 BILLION more of stuff from other countries than we sold to them.

In monetary policy terms that means that our money supply was REDUCED by $109.1 BILLION in that year.

BUT, with the deposit money multiplier, it means that our GDP was reduced by about ONE TRILLION DOLLARS in 1984 alone. In that year, the GDP in current dollars was about Four Trillion Dollars.

SO, our GDP could have been reduced by about 20% in 1984 alone.

While there is some debate as to whether all that money was taken permanently from our domestic money supply and GDP or whether some of it was returned to the USA and used to buy T-bills, there is no doubt that the GDP reduction is significant.

Barry, My Liege, that is just 1984.

We have consistently run a negative BOP ever since then.

Between 1984 and 2009, our cumulative NEGATIVE BOP was 7.3 TRILLION DOLLARS.

Using a conservative money multiplier of 10, that means our GDP was REDUCED by about SEVENTY TRILLION DOLLARS during the period.

In simple terms, My Liege : We are not so rich we can afford to lose such substantial GDP every year to foreign trade.

Unless this problem is corrected, it will bankrupt the United States of America.

Your faithful servant,

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