Wednesday, November 27, 2013

Charlie Sheen-O-Nomics

Some light-hearted ramblings to ease your Thanksgiving boredom:

The Federal Government can't run out of money. Any economist, politician, or crazy uncle who says otherwise is an ignoramus. The government can't run out of money any more than I can run out of letters to type into this blog. Saying that the government can run out of money is like saying we will run out of emails to send to each other. Both are just forms of digital data communications, not anything physical or tangible. When I receive an email, the pixels on my computer screen change as directed by the electronic message. When I receive a payment from the government, the pixels on my computer screen change as directed by the electronic message. They are the same damn thing. Emails from my boss instruct me to do something. Checks from the government also reward or instruct us to do a myriad of different things which our legislators have deemed important to the nation. Thus federal spending is just a huge series of digital instructions. It is the QUALITY, NOT THE QUANTITY of these instructions that really matters. Instead, most people in Washington insist on obsessing over meaningless quantities which they don't even understand.


Even worse, people think we are losing the international trade game, when in the timeless words of Charlie Sheen, we are in fact "Winning!". The Chinese, and the Japanese before them, made themselves the world's slaves. They were willing to work extremely hard to send us real goods and services in exchange for....that's right, digital data. For some reason, they prefer to have digital numbers on a spreadsheet at the Federal Reserve (aka the "trade deficit") instead of the real goods and services which they produced. Why they did this is beyond me. And even worse, America thinks that it is are losing, when in fact it is winning! We have gotten all these other countries to send us real stuff, in exchange for digital data which is utterly cost-less to produce- by pressing on a keyboard! The Japanese have run persistent trade deficits with the US. You know all those checks for $2000 that we send them in the 1980's in exchange for those tiny cars? Guess what, those dollars balances are still sitting at the Fed. If they ever decide to spend those checks (ie run a trade surplus with the US), they will get significantly less real stuff than they could have in 1985. US: 1- Foreigners: 0.

I like to joke that if some clutzy intern at the Federal Reserve spilled coffee on the hard drive somewhere in the Fed's basement where all this data is stored, the hard drive would be fried, and the "trade deficit" would be gone! Just like that! Zap! What are they going to do, call the manager? We have the real fruits of their labor, and they have nothing.

This is called real terms of trade (h/t Warren Mosler.) In this crazy, convoluted world, people have come to care more about digital entries on spreadsheets instead of real, tangible things. At any point in time, the US can decide to reduce the value of existing dollars, thereby reducing the purchasing power of the previous Chinese labor. At any point in time, the US can decide to charge export tariffs on products going to China (Chinese Exclusion Laws 2.0?), or impose capital controls on Chinese claims. This too would reduce the real purchasing power of the money that the Chinese have already earned from us. Or, we could do as we are doing now, and bring down the interest rates that the Chinese earn on the dollars they already got from us, IE quantitative easing. The Chinese, and all other countries that chose to run a trade surplus with the US, put themselves in this incredibly vulnerable position voluntarily. US: 2 -Foreigners: 0.

Of course, I am in no way suggesting we do any of these things. I think the Chinese have worked very hard to improve their lives, and they deserve to earn some interest, or otherwise maintain the purchasing power, of the dollars they have earned from us. My point is that we remain in control, and can make their maintenance of spending power contingent on whatever we want. For example, I suggest we threaten to tax Chinese dollars claims until/unless they stop abusing the peaceful Tibetans, stop killing 100's of millions of sharks for their fins, or reduce their CO2 emissions.

Psssst! Here's a dirty little secret: China is also a sovereign currency issuer. There is no reason why the Chinese could not have always afforded to purchase every shoe, sock, and cellphone they were also capable of producing, and send us nothing. They would have been much materially wealthier in that scenario. They could have been real-stuff-rich, and dollars-poor, and nobody would have given a shit. WTF do the Chinese need dollars for? Do they want or even need anything that the US produces? Apparently not. Instead, they have made it their explicit policy to keep their currency weak in order to maintain their status as the world's slaves. Yes, its stupid, and they finally seem to be catching on, as are the Germans. But it works for us, so I'm not complaining, because after all, we're WINNING!

1 comment:

Anonymous said...

The Chinese seem to want to accumulate dollars for a few reasons:
1) it seemed to work out well for the Japanese;
2) the IMF has them convinced that if they don't have a huge stock of dollars on hand there will be a crisis a la 1997 in which the IMF will force the Chinese to borrow US dollars at exorbitant rates. Better stock up instead;
3) general gold standard thinking in which the US dollar is seen as a proxy for gold, arising from its general stability and role in the (extinct) Bretton Woods system;
4) a belief that accumulation of large US currency reserves gives China power over the US, which belief seems to be shared by the US govt and a large percentage of the US population.

I've also heard it argued that the Chinese want to keep their people busy working but don't want their standard of living to rise too much, as this would threaten the party's hold on the country. So they accumulate currency and ship the products of their labor to America. I'm not yet overly persuaded that this should be no. 5 in my list, but it's possible.

I don't consider any of these to be good reasons, but they seem to be good enough for China.