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Hillary Clinton wants U.S. investment in Asia

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The Secretary of State, Hillary Clinton, is pushing for more trade and investment in Asia as a counter to Chinese influence.  That’s really a big part of what the Trans Pacific Partnership (TPP) trade agreement is about.  Kind of a modified containment strategy aimed at China, the dominant power in the reason.

The fatal problem with this approach is that we need trade surpluses to engage in net investment abroad.

It is simple math, though most don’t know this.  There is a mirror-image link between net trade balance and net foreign investment.

1.  IF a country exports more than it imports (net export status) on the trade side, THEN on the investment side that country has more outgoing private foreign investment than incoming foreign investment.  In other words with a net export status on the trade side, we take in more foreign cash (and also foreign debt obligations to us).  To balance the excess cash, in rough terms we export dollars in the form of private investment.  In other words, the net inflow of dollars through sales is balanced by a net outflow of dollars through investment or credit.

2.  We are in the reverse situation.  IF a country is a net importer on the trade side, THEN we are also a net importer of private foreign investment.  While we still engage in private investment abroad, there is more foreign money coming into the country.  The net inflow of foreign investment roughly equals our net inflow of goods.

My view, and the view of many, is that trade agreements are more of a foreign policy tool than an economic policy tool.  Presidents and their State Departments want alliances with countries, and use trade agreements as part of the diplomacy, tying us together.  The problem is that we lose so many industries as we “bribe” those countries by way of giving them access to our domestic market without receiving similar volumes of foreign sales.

China’s money is flowing all over the world because they are a trade surplus country.  If they were a trade deficit country, their investment in Africa, South America, the Caribbean, etc. would simply not be an issue.

Thus… Clinton’s and Obama’s strategy is fatally flawed, because (1) the TPP will likely worsen our trade deficit or at least it won’t help and (2) the fact of our trade deficit means we can’t be a substantial foreign investor (because we are a net recipient of foreign investment).

If the U.S. is to reclaim its status as a global hegemonic power, with the economic power to back that up, it needs to run trade surpluses.  Trade surpluses (1) allow our economy to grow; (2) earn the foreign cash to pay for our foreign military exploits as we try to be the world’s policeman; and (3) enable us to be a net foreign investor (as Hillary Clinton).

11 Responses to “Hillary Clinton wants U.S. investment in Asia”

  1. Frank Shannon says:

    The economics of this aren’t complicated as they follow hard and fast mathematical concepts. The diplomacy is what makes these issues so complicated.

    The original “fatal flaw” was mixing the two together in the first place.

  2. Tom T says:

    The U.S. has long been selling jobs for foreign policy aims. With China, this should have been declared a disaster foreign policy long ago. As the cost continually rises (in the form of lost jobs, slowing economy, strategic economic losses, strategic power of China, etc.) this course of action should become apparent to all. It is time to change the basic rules of the game, and not engage China in a game they won long ago. It is simply too late for that.

    The U.S. has to monetize its currency relative to China’s. This is being done somewhat with the bank failures and bail outs but it is a poor use of this strategy and has created perverse capital incentives instead of market correcting consequences. The move from the Glass-Steagal Act was a move towards these incentives and we are still there. Instead of issuing debt, the fed has to print money to devalue the currency relative to China’s. As Mo says, it is much better to print money to support manufacturing than to incentivize the offshore movement of jobs and preventing market correcting consequences to big money.

    It seems Hillary’s strategy is to support increasing investment in Asia other than China to prevent the influence of China’s new found wealth of mining the U.S. currency. This is indeed a turn on Mo’s suggestion. Why in the heck would Hillary suggest the U.S. waste our resources on an economic war of attrition with China in Asia instead of supporting jobs here in the U.S.?

    It is time to move these politicians out of office where they are damaging the nation’s economy and strategic interests. It is time to elect people who are competent enough to assess the situation and quietly change the rules of the game so that the U.S. is not doomed to losing. We need politicians who have the courage to govern instead of politicians who cower at the power of wealth, whether it be Chinese oligarchs or U.S. oligarchs gaming the system for their self interests.

    Tom T.

  3. David C. says:

    I completely agree and cannot believe that our politicians do not understand this as well.

  4. Tom T says:

    When I talk about the oligarchs gaming the system, the below quote is what I am talking about. Much of the loss in bargaining power has come because of offshoring jobs, mainly to China:

    “Essentially, economic policy has not supported good jobs over the last 30 years or so,” said EPI. “Rather, the focus has been on policies that were thought to make consumers better off through lower prices: deregulation of industries, privatization of public services, the weakening of labor standards including the minimum wage, erosion of the social safety net, expanding globalization, and the move toward fewer and weaker unions. These policies have served to erode the bargaining power of most workers, widen wage inequality, and deplete access to good jobs. In the last 10 years even workers with a college degree have failed to see any real wage growth.”

    “Essentially, economic policy has not supported good jobs over the last 30 years or so,” said EPI. “Rather, the focus has been on policies that were thought to make consumers better off through lower prices: deregulation of industries, privatization of public services, the weakening of labor standards including the minimum wage, erosion of the social safety net, expanding globalization, and the move toward fewer and weaker unions. These policies have served to erode the bargaining power of most workers, widen wage inequality, and deplete access to good jobs. In the last 10 years even workers with a college degree have failed to see any real wage growth.”

    Our policies of catering to the wealthy and powerful in this country (and in China) have failed the economy.

    Humpty Dumpty will be hard to put back together again. I don’t see many politicians even getting out the glue.

    Tom T.

  5. Loyd Eskildson says:

    Once again, the American worker gets the shaft while Hillary trades their jobs away to play ‘World Sheriff.’ This has been going on for several decades, under both D and R administrations.

  6. Steve Hudson says:

    Since we have the reserve currency, all the fiat QE money that is handed over to the banks, plus all of the money banks can borrow at 0% tends to go to overseas investment, no? So doesn’t this setup mean we are in effect, and contrary to Ian Fletcher’s analysis in Free Trade Doesn’t Work, getting some of the goods for nothing and stealing foreign assets? The Fed doesn’t go into debt with QE, but just “prints”. This seems like an important part of the equation missing from the above analysis.

    • Tom T says:

      Hi, Steve. For those who don’t know, QE is Quantitative Easing, which means the government just prints this money or electronically creates it. The Fed prints money instead of borrowing it through the Treasury and issuance of government debt.

      QE is a tool of the central bank (the Fed) but has been rarely used in the past. Instead, target interest rates are kept in a range the Fed determines is appropriate for slight inflation (3% or so) through interest rate targets the Fed sets. The Fed has started to use QE (Quantative Easing) with our current recession because of two reasons: One is that they knew the revaluing of assets that form the base of the banking industry would contract the economy so they are reportedly taking these assets off the bank’s hands so they will not all be bankrupt and secondly because interest rates are so low that decreases in the interest rates are not spurring the usual economic rebound. There is also the fact that low interest rates leads to over leveraging by the banks (their over leverage on bad assets is why we had to bail them out).

      QE in the past has spurred the economy. It is not now. It will not be able to as long as businesses in the U.S. can get their supplies cheap from the rest of the world instead of sourcing from our labor/capital pool, which creates what Bob Goldsmith is calling demand destruction. This demand destruction is why labor prices or quantity are not rising here in the U.S.

      Too much QE in the past and at inappropriate times in the economic cycle have lead to inflation. That certainly isn’t our problem now as we are dealing with the deflationary effects of demand destruction with no end in sight unless we change our policies.

      Yes, we are getting goods from overseas for bargain prices but we are losing way too many jobs because it comes at the expense of demand destruction. Bob G. says this will happen as long as we have free trade and orders of magnitude difference in labor costs with these other countries. My point is that this arbitrage between our economy and other countries is not increasing labor’s quantity or wages because that value is being captured by the country’s government in the case of China, or the oligarchs who are allowed to shop world labor rates and world sweatshops and still sell here in the U.S. These kind of companies and countries will out compete U.S. labor, essentially buying our jobs and reducing the demand it creates and as Ian explains, reducing the world’s economy. If labor is not being paid enough, they don’t have the money to create demand. Certainly China’s labor isn’t being paid enough to create demand for U.S. goods or even switch their economy from an export based economy to an economy that is self sustaining without their export economy.

      China has already reportedly threatened the U.S. with their reserves if the game is changed with Qantitative Easing. Our politicians benefit by not having high interest costs of their deficit borrowing.

      Essentially our government is borrowing money from China to take up for the demand destruction their policies are creating here in the U.S. China’s currency manipulation gives all dollars to the central government of China and China is using that money to lend to the U.S. government or buy up U.S. companies. These are the rules of the game our politicians have given us. It is destroying demand and enriching a few who know how to play this game of arbitrage. It is the consequence of our free trade policy.

      Mo’s point is that we need to stop allowing capital to flow out of the U.S. to fund this destruction of demand and that we should keep it here in the U.S. through a special state bank that is not allowed to outsource capital as you suggest.

      I don’t know if I answered your question or not so maybe you could rephrase it if I didn’t. Others chime in if I didn’t explain it well enough.

      QE has not been used to fight mercantilism and the outflow of capital via the oligarchs. We would have to devalue the dollar and that would have other consequences like higher oil prices (bad because we don’t produce enough of it here in the U.S.) and higher consumer goods. Can politicians weather higher oil prices or other goods inflation? This would be good for U.S. businesses because they could then be profitable here in the U.S. instead of out sourcing. It is much easier for politicians to continue to sell the nation to China than to fix demand destruction and so it is. There are many other untold consequences. It is a trap and a check in the current game of the world powers. I hope it is not check mate.

      Tom T.

      • Mo says:

        In an unhampered market with a sound monetary system, even if wages are lower in foreign countries; a country with higher wages and more capital would have lower unit costs which means cheap labor would have trouble competing with machines. To see how distorted exchange rates and policies that promote consumption at the expense of saving and investment effect the economy I would recommend reading the following articles linked below.

        Did Outsourcing Hollow out the US economy?

        Will the Exchange Rate Kill Manufacturing?

        Blame Keynes, not China for America’s economic mess

        • Tom T says:

          Mo, I worked for a professor while getting my economics degree. We input all kinds of information on exchange rates, commodity prices and other factors.

          What surprised me is that the normal things that you think of in economic theory often did not affect purchases (the data is now pretty old). If commodity prices went up, for instance and other things remained constant, you would expect other countries to buy less (downward sloping demand curve).

          The things that mattered when it came to foreign trade in commodities was what national policy was, not prices or comparative advantage. For instance, the U.S. sold (heavily subsidized) grain to Egypt and other goods to Israel. Neither of the sales to these countries had anything to do with relative prices but instead were affected by other factors (if the U.S. wanted to support Israel or Egypt through grain exports, they would happen regardless of price). The policies you have in your country and the policies in your trading partner’s country had more to do with exports than currency valuations and other factors. The goals of the nation affected the trade, not idealistic comparative and competitive advantage or currency valuations. The sales occurred because it was a policy decision.

          I do know that the factors you quote give incentives but incentives of trade are often overridden by a country’s policies, whether they be purposeful currency manipulation as China is exhibiting or non tariff barriers of trade (China is also engaging in these activities).

          All economic justifications for free trade come from the theories of incentives, not a nation’s policy. China easily trumps incentives with policy. Japan did it with non trade barriers. I will agree with you that Wealth of Nations by Ricardo was in a world where gold backed the currency– mostly issued by private banks who had gold. I am also aware of super low commodity prices for farmers at the turn of the last century which culminated in William Jennings Bryant’s speech, “Don’t Crucify Mankind On A Cross Of Gold” where the gold was held tightly by banks and Bryant wanted silver to be added to back the currency simply because there wasn’t enough gold to meet the demand for money. There were many problems with money being backed by gold and many financial panics. Read them here:

          I think Paul Ryan is right about the govt. playing with the money supply but the gold standard is not the solution.

          In today’s world, China can and does buy all the capital intensive assets and technology they need because that is their national policy. It isn’t like a machine in the U.S. competes with hand labor in China. China has the same and often more updated machinery compared to U.S. manufacturers because U.S. manufacturers are setting up the production plants in China with required technology transfers.

          Incentives are being used by China to capture our markets because that is their policy. Policy always trumps any economic theories of incentives and more often than not, the incentives are due to national policies and goals. It is much easier for China to pay their people “orders of magnitude” lower as Dr. Goldschmidt says because of their low standard of living and totalitarian government.

          Tom T.

          • Mo says:

            The problems with past gold standard was that it was a fractional reserve gold system. Fractional reserve banking is the root of booms and busts. All printing money does is just redistribute wealth. If printing money was the way to prosperity then Zimbabwe would be the richest country there ever was. Look at the US economy today, money gets printed to fund outsourcing, infrastructure spending abroad, wars and overseas military bases. That is where wealth has been re-distributed.

            When it comes to gold and silver during the early years of the US; the reason gold and silver only circulated one at a time was because the gov’t fixed the ratio between gold and silver so when one metal was undervalued it started not to circulate. The only reason the classical gold standard where gold coins circulated ended was due to world war 1 where gov’t increasing printed money to fund the war.

            It’s important to note that under a gold standard or a commodity standard the money supply is not fixed. It grows but the production of real goods and services grows faster. Think of what happened to computers. Prices decreased but businesses received more revenues by selling a large quantity.

            What allows countries to fund these distorting trade policies is fiat money. For example, US taxpayers pay to secure trade routes for companies that outsource jobs and technology yet pay no tax to US govt. Also under a real free market tariffs would exist because countries that import goods would need to earn revenue to pay for the security of those imports.

  7. Dr Bob Goldschmidt says:

    The US and Europian economies are suffering from demand destruction due to open trade between countries raving order-of-magnitude differing labor rates. For example, Chinese workers make around $300/month which, once we adjust for 100 hour workweeks, is $0.70 an hour. The next economic shoe to drop will be increased rioting in China due to the slowing of their exports — they have knocked the economic pins out from under their customers.

    When will we finally realize that the 30% tariffs, which existed during our fastest growth periods, are ultimately best for the economies of both rich and poor countries?


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