I have been thinking about our imbalance of trade problem with most of the world for some time and now think that I have a simple way of explaining the situation. That is what this blog is about.
Many years ago I watched the movie "The Grapes Of Wrath". The movie was about my family, but that is not my point. In the movie after the family arrived in California, the grandmother prepared a meal that had some kind of "meat" in it. One of the older men commented that it was good tasting meat and asked where grandmother got the meat. She said that she got it at the "company store" on credit. That simple statement has stuck with me for over 60 years and here is why.
It was clear that the family from the "dust bowl" was poor and hungry and could not afford to buy meat, but they did buy the meat on credit and quickly ate it all up. It was not clear how the family ever was able to pay back the company store. Think of the company store as being China and the poor family "us". It is a fundamental principle that people should not buy things on credit that they can not afford and that is what those people in the movie did. After a while, the company store "owns" the people and they have to work for the owner of the store like slaves. That is the end game and it has happened many times over history.
The problem is how to correct the situation. One way is to put a limit on imports or some kind of tarif. That is what President Trump did. China looks at it as some kind of punishment of them, but in reality it is a punishment on us USA citizens for buying things from China that we can not afford. What product did most of us produce that we can sell someplace in the world or to China to earn the money to buy the products from China? The tarif is a tool to try to make us live within our means. China is willing to loan us money, like the company store, to buy their goods and then to use that money to buy the natural resources of the USA. Once they own all or most of our natural resources any wealth that we earn will have to be from our "value added" work and you know that no country in the world ever got wealthy on "value added" work.
In the short term, I hear people saying that steel and all products made from steel like bean cans or beer cans will cost more. That is true. Further, they will not be able to afford to buy as many cans of beans or beer. That is true too. What most people do not seem to understand is that they "now" can not afford to buy those things. We are not as rich as we think we are, pure and simple. We all know of families who seem to have every thing and don't seem to be earning that much. They are examples of families spending more than they can afford.
Any time the government gets involved and tries to stack the deck so that people can buy more than they can afford, eventually the rubber meets the road and everything crashes. A few years ago, it was the housing market. Too many people were able to buy homes on credit that they could not afford. Now look at the student loan program. The government allowed students to borrow and spend more money than they could afford. The result is that we have almost a trillion and a half dollars outstanding that most can not afford to pay back. It is not a question of whether it is going to crash, it is only a question of when.
China has a lot of poor hard working people compared to the USA that has a lot of people who think they are rich and are not hard working. How do you think that is going to end up. I used to live in Argentina and they went thru exactly what we are now going thru. Back in about 1950, Argentina people were the richest in the world and they lived like it. By 1975, Argentina was poor, but they continued to try to live high on the hog like they were able to do back in 1950's. Back in about 1975, the USA was actually richer than to day too, but not any more. We had a trade surplus back then, but not any more. We are living on our savings, net worth and borrowing from the future. The picture is so clear, that I can not see why people do not see what is happening.
Are you starting to see that the purpose of tariffs is not to punish China, but to punish us for our over spending. If we had just lived with in our means, we would not be in this problem. Back to the "Grapes Of Wrath". As bad off as those people were, they still had to live within their means.
PS--What happened to pull those poor "Grapes Of Wrath" people out of their situation? Don't know? It was World War II. That was a one time event and don't expect something like that to come along again. What will pull us out this time? The same thing that pulled Argentina out. Oh! That's right. Argentina has "not" pulled out!!
PS--Remember that there are two components to any economic system and those are (1) value added work and (2) Exploitation of natural resources. China is using their competitive "value added" economic wealth to compete with us. They by our corn, but not our corn oil. That is because they can extract the corn oil cheaper than we can. They buy our coal to smelt iron, and then sell steel to us. China does "not" buy any of our "value added" products. Most of our jobs are based on "value added" that are not competitive in most of the world. That is why we have such an imbalance of trade with most of the world. We don't need any more immigrants either.
PS--Here is a universal principle that has application to trade. If you think that a trade war is bad then consider what would happen if our trade balance were much worse. This little trick often opens one's mind. In the limit, at some point we would be so poor because we don't have any jobs that we would not be able to import anything. Do you want some thing like that to happen?
Many years ago I watched the movie "The Grapes Of Wrath". The movie was about my family, but that is not my point. In the movie after the family arrived in California, the grandmother prepared a meal that had some kind of "meat" in it. One of the older men commented that it was good tasting meat and asked where grandmother got the meat. She said that she got it at the "company store" on credit. That simple statement has stuck with me for over 60 years and here is why.
It was clear that the family from the "dust bowl" was poor and hungry and could not afford to buy meat, but they did buy the meat on credit and quickly ate it all up. It was not clear how the family ever was able to pay back the company store. Think of the company store as being China and the poor family "us". It is a fundamental principle that people should not buy things on credit that they can not afford and that is what those people in the movie did. After a while, the company store "owns" the people and they have to work for the owner of the store like slaves. That is the end game and it has happened many times over history.
The problem is how to correct the situation. One way is to put a limit on imports or some kind of tarif. That is what President Trump did. China looks at it as some kind of punishment of them, but in reality it is a punishment on us USA citizens for buying things from China that we can not afford. What product did most of us produce that we can sell someplace in the world or to China to earn the money to buy the products from China? The tarif is a tool to try to make us live within our means. China is willing to loan us money, like the company store, to buy their goods and then to use that money to buy the natural resources of the USA. Once they own all or most of our natural resources any wealth that we earn will have to be from our "value added" work and you know that no country in the world ever got wealthy on "value added" work.
In the short term, I hear people saying that steel and all products made from steel like bean cans or beer cans will cost more. That is true. Further, they will not be able to afford to buy as many cans of beans or beer. That is true too. What most people do not seem to understand is that they "now" can not afford to buy those things. We are not as rich as we think we are, pure and simple. We all know of families who seem to have every thing and don't seem to be earning that much. They are examples of families spending more than they can afford.
Any time the government gets involved and tries to stack the deck so that people can buy more than they can afford, eventually the rubber meets the road and everything crashes. A few years ago, it was the housing market. Too many people were able to buy homes on credit that they could not afford. Now look at the student loan program. The government allowed students to borrow and spend more money than they could afford. The result is that we have almost a trillion and a half dollars outstanding that most can not afford to pay back. It is not a question of whether it is going to crash, it is only a question of when.
China has a lot of poor hard working people compared to the USA that has a lot of people who think they are rich and are not hard working. How do you think that is going to end up. I used to live in Argentina and they went thru exactly what we are now going thru. Back in about 1950, Argentina people were the richest in the world and they lived like it. By 1975, Argentina was poor, but they continued to try to live high on the hog like they were able to do back in 1950's. Back in about 1975, the USA was actually richer than to day too, but not any more. We had a trade surplus back then, but not any more. We are living on our savings, net worth and borrowing from the future. The picture is so clear, that I can not see why people do not see what is happening.
Are you starting to see that the purpose of tariffs is not to punish China, but to punish us for our over spending. If we had just lived with in our means, we would not be in this problem. Back to the "Grapes Of Wrath". As bad off as those people were, they still had to live within their means.
PS--What happened to pull those poor "Grapes Of Wrath" people out of their situation? Don't know? It was World War II. That was a one time event and don't expect something like that to come along again. What will pull us out this time? The same thing that pulled Argentina out. Oh! That's right. Argentina has "not" pulled out!!
PS--Remember that there are two components to any economic system and those are (1) value added work and (2) Exploitation of natural resources. China is using their competitive "value added" economic wealth to compete with us. They by our corn, but not our corn oil. That is because they can extract the corn oil cheaper than we can. They buy our coal to smelt iron, and then sell steel to us. China does "not" buy any of our "value added" products. Most of our jobs are based on "value added" that are not competitive in most of the world. That is why we have such an imbalance of trade with most of the world. We don't need any more immigrants either.
PS--Here is a universal principle that has application to trade. If you think that a trade war is bad then consider what would happen if our trade balance were much worse. This little trick often opens one's mind. In the limit, at some point we would be so poor because we don't have any jobs that we would not be able to import anything. Do you want some thing like that to happen?
