Ch 2 Inflation Exports
The Products side of consumption offers one of the most interesting areas of deflation. China had been subsidizing their currency by an average of 50% for over a half decade. This was on top of other manufacturing subsidies to raw materials, labor and transport, etc. Put another way, the price of Made In China goods should have started at 100% more then what we paid for them as Americans. The US dollar was buying double its ‘natural’ worth from China.
China: Divine Intervention
It is hard for most to recognize the sense of Divine intervention this represented for the US consumer. We should have been hit with a price tag that was double the costs we paid for most of our products. The China subsidy gave us trillions in free buying power for a half decade. Technically speaking, the USA has been exporting much of its inflation to China.
This happened again with a host of other countries from Japan and S Korea, to Brazil and Russian oil. They were also subsidizing their currencies and industries for export advantage. This depreciation happened with European goods as well. Europe was offset by the Euros’ continuous slide because of the Unions on going economic turmoil. Each Euro fall instantly translated into a new jump for the US dollar. The same was true for England. The Sterling Pound has lost about 50% of its original value against the dollar. The net result is that products coming from all these countries have absorbed a great deal of America’s own inflation cost. The dollar has been buying significantly more than the inherent laws of inflation would have normally allowed a currency. We covered this in several articles. Here’s our lead one:
‘America’s New Cold War: China’
Currency of Trade - Ending
These advantages are largely due to the US dollar’s role as the international currency of exchange (oil) and the developing worlds hunger to gain a foot hold in American markets. In other words, this Inflation Export is fairly exclusive to America. Most of the old rules of Inflation have not applied to the US during this particular run of high deficits. At the same time, these other currencies are worth less then their natural rate because of these rare economic anomalies.
Fed Critics Miss It
Most of today’s economic models fail to include these deflationary factors. This is especially true of Fed critics. They only see the money coming out from the Fed, but fail to consider where, how and why its being absorbed internationally (China) or even domestically (Write-offs & refinancing). These manufacturing and currency subsidies have played a very large role in that deflation.
This issue covers a cross section of policy considerations. Democrats and Republicans have swapped roles and backed both sides of the issue so they have a track record of being both wrong and right. Pres. Clinton backed exports much like many Democrats, but the official credit would have to go to Republicans in their drive for allowing businesses to ‘ship jobs abroad.’ Our inflation went with those jobs, but Democrats hold that we lost those jobs because of it. Raghu-nomics suggest that ‘those jobs’ represented the ‘old’ world manufacturing industries. Sending those abroad was not the problem, but rather, the failure in building the next generation of technology for jobs here in the US. This is one of 10 steps as discussed in our ‘10 Steps to Jump Start American Manufacturing Jobs.’
Understanding these factors such as Inflation Exports is critical. Here’s why. To begin, we will know these buffers are ending once we see these trends reverse. Inflation Export has offset trillions in US inflation. This is changing as China and others remove these subsidies. They are also switching to domestic consumption over American exports. These deflationary factors are coming to an end for the first time in a decade. The time left to reverse our capital outflows is shrinking as countries continue to retrench around domestic consumption. We could be bumping up against a tipping point. It will be the dooms day Republicans predicted. Deficits will than ‘matter’ and have all the destructive force Republicans warned about.
Many ‘experts’ suggest that these foreign subsidies are to blame for shipping American jobs abroad. We have discovered a much larger reason. It has little to do with regulation, low wage countries, tax policies, foreign subsidies or even technology. That will be covered in our ‘10 Steps to Jump Start American Manufacturing Jobs.’ It will offer some surprise solutions. Coming soon.