Skip to comments.Whipping China Won't Stop the Bleeding
Posted on 09/30/2011 10:21:32 AM PDT by Kaslin
It was just a matter of time before history once again repeats itself. I am referring to the joint press conference held by Senator Jeff Sessions, R. Atlanta, and Senator Charles Schumer, D. New York.
Since the President's jobs program is a non-starter for both Republicans and Democrats it was only logical that both parties needed something to not only show the electorate that jobs were paramount but also to show that both parties could and would be bi-partisan.
Who to make the whipping boy for both parties? None other than China. Then, with the blessing of Senator Harry Reed, D. Nevada, the Senate will propose a bill that will penalize our bankers for not playing ball and allowing their currency to float.
The theory goes that if the Chinese would only let their yuen trade like all other world currencies, as our dollar becomes cheaper through devaluation, their dollar (yuen) would be more expensive.
Therefore our manufactured products would be cheaper and theirs would be more expensive. Their people would buy our goods and not theirs. Our companies would be overwhelmed with buy orders and finally would have to hire 3,000,000 new workers to keep up with the demand.
In theory it sounds terrific. However, when you're clutching at straws everything in theory seems to make sense. The problem is we've seen this movie before. It was called the Smoot Hawley Tariff Act of 1930.
Twelve months after the crash of 1929, unemployment reached a peak of 9% (sound familiar?). Congress wanted to protect farmers and jobs from foreign competition.
President Hoover knew a tariff act, like that which had been proposed, was not in anyone's best interest (sounds like today's White House). However, he yielded to party pressure (also today's White House) and signed the bill.
Seventeen countries responded with their own tariff plans and the trade war was on. The result: from 1929 to 1934 overall world trade decreased by 66%. That which was supposed to be a job creator was a job destroyer as unemployment rose to 16.3% in 1931, 24.9% in 1932 and 25.1% in 1933.
The Chinese were very smart in pegging their currency to ours. Our devaluation, while hurting the rest of the worlds trade, had little effect on China. The trade came down to which country could produce at the least cost, and not the cheapest currency.
Im surprised the rest of the world didnt follow Chinas lead. But that would be a fixed standard like ummmmm Gold?
This bill coming up is pure politics but unfortunately may have the same effect as happened over 80 years ago.
Edmund Burke once said Those who dont know history are destined to repeat it.
Never more true than now. Repeat after me.
What we need is to lower corporate taxes to 10% do away with a lot of the government regulations and sign honest true fair trade agreements and this will solve most of our trade deficits!!!
Chinese banks have a lot of bad government (their government) loans on their books. The number of internal violent protests are increasing because of government corruption facilitating developer land grabs and general inflation. China will probably implode on its own. This legislation is a waste of time. Amazing that China has kept the lid on this long. China is a big consumer of luxury goods, yet the great unwashed masses scrape to live. At some point the average Chinese has to wonder what happened to “from each according to his ability, to each according to his needs”.
Pure nonsense to relate the rise in depression era unemployment to Smoot-Hawley. During that same period, the four years following the stock market crash in 1929, Fed actions or inaction shrunk the money supply by 30%. And trade was a small part of the economy in those years.
Anyone with the slightest understanding of economics should be able to imagine what a 30% reduction of the money supply would cause.
The great depression and its offspring, the New Deal, could both have been avoided if the Federal Reserve had performed the task assigned to it. All the Federal Reserve had to do to avoid the Depression and the subversion of the American constitutional order was to purchase $1 billion in government securities during the 10-month period from December 1929 to October 1930. The result would have been an increase, instead of decrease, in high-powered money, and the banking crisis that began in the autumn of 1930 would not have occurred.
That link provides an analysis of the Great Depression based on the work on Milton Friedman and others. Smoot-Hawley is not even mentioned because it was of so little consequence in that era that it wasn't worth mentioning.
All economic activity of that era, including trade, plummeted due to the 30% reduction in the money supply and the great depression that resulted, not due any spooky trade war.
No matter the industry, so long as you can get free access to your export markets and keep your own markets closed you will have enormous economy of scale advantages.
Trade advantages for Asia = lost jobs here.
That's also been called the Asian model for growth, proven to work by Japan, South Korea and now China, and probably a few lesser known trading 'partners' of the US.
Gain maximum possible access to the US market, and allow minimum possible access to the home market in Asia, and economic growth results.
Here is a discussion of Smoot-Hawley from a different point of view:
I have particular ire for the Japanese. They fully "used" the protection of the United States and the access we granted them.
It's unclear whether that information is accurate.
So, a fixed currency is better than a currency that is valued by the free market. What planet is this conservative financial planner from?
Thanks for the subscription offer.
Gross Domestic Product (ref. 1929 dollars in millions) Year GDP 1929 101,444 1930 91,513 1931 84,300 1932 70,682 1933 68,337 1934 74,609 1935 85,806 1936 95,798 1937 103,917 1938 96,670 1939 103,736 1940 112,961 1941 126,237 Source: National Bureau of Economic Research, NBER Series 08166.