Quote of the Day: How Devaluations Make Difficult Economic Calculation

Governments in countries like the United Kingdom have destroyed much of their manufacturing industry through currency depreciation, while Germany contrasts with a history of engineering excellence and a firm currency. The German business owner in the post-war years had relative certainty of economic calculation, allowing him to build up his productive wealth; while the British business lobby resorted to encouraging successive governments to keep costs down by devaluing the pound, rather than investing their own resources in more efficient production.

Reducing costs by managing the currency is, to put it less politely, all about robbing the workforce of the purchasing power of its wages. But the workforce is, in economic terms, made up of individual entrepreneurs selling their skills and labour to employers. They are the unconscious victims of devaluation as indeed are small businesses, but at least in the short-term the central planners manipulating fiat money congratulate themselves that jobs have been saved.

The cost comes later, as consumers – who in turn are also entrepreneurs and savers – pay the bill through higher prices and lose on their savings through lower interest rates and monetary value. So where’s the benefit?

None. The history of nations whose governments respect sound money, such as Germany and Japan in the post-war years, has been one of persistent economic progress, despite otherwise economically incompetent governments. This is in contrast with the UK and some European countries, whose continual devaluations were always accompanied by economic underperformance. Since then all governments have increased their currency debasement efforts. Nevertheless, it is striking that businesses do better with a stable currency in the long run than with the supposed benefits of these continual devaluations.

This is from GoldMoney’s Alasdair Macleod on the Impossibility of Economic Calculation in a fiat world

Quote of the Day: The Combination of Bad Economics and Bad History is Pernicious.

Few intellectual activities are more mischievous when done poorly than economics or history.  The power of fallacious economic reasoning or fallacious historical example to damage society is obvious: the pseudo-economics of mercantilism has been reducing trade and protecting vested interests for many centuries; the pseudo-history of the Aryan “race” lent dignity to German fascism.  The combination of bad economics and bad history in bad economic history is pernicious.

The above quote is from page 453 of Deirdre McCloskey’s June 1976 article in the Journal of Economic Literature, “Does the Past Have Useful Economics? sourced from Café Hayek’s Professor Don Boudreaux

The above quote reflects on much of how the mainstream thinks and what they practice today, e.g. inflationism.  

Reasons for US Insourcing

Mercantilists previously argued that in order for the US to regain competitiveness expressed via investments outsourced to China, the US needs to devalue. How misguided this perspective had been.  

While the US has indeed by inflating (devaluing) everyone else has been doing the same including China’s PBoC.

From Mao Money, Mao Problems

The net effect has been to negate each other inflationist policies and instead such seemingly collaborative actions has spawned a global asset boom.

Recently, reports suggest that the US has now been experiencing greater degree of reverse outsourcing, or insourcing. In a verbose report, the Atlantic suggests the following reasons:

-Oil prices are three times what they were in 2000, making cargo-ship fuel much more expensive now than it was then.

-The natural-gas boom in the U.S. has dramatically lowered the cost for running something as energy-intensive as a factory here at home. (Natural gas now costs four times as much in Asia as it does in the U.S.)

-In dollars, wages in China are some five times what they were in 2000—and they are expected to keep rising 18 percent a year.

-American unions are changing their priorities. Appliance Park’s union was so fractious in the ’70s and ’80s that the place was known as “Strike City.” That same union agreed to a two-tier wage scale in 2005—and today, 70 percent of the jobs there are on the lower tier, which starts at just over $13.50 an hour, almost $8 less than what the starting wage used to be.

-U.S. labor productivity has continued its long march upward, meaning that labor costs have become a smaller and smaller proportion of the total cost of finished goods. You simply can’t save much money chasing wages anymore.

While the above may be true, this seems insufficient.

I may add that numerous wealthy Chinese have likewise been seemingly anxious about China’s political economic conditions, such that they have been looking elsewhere to shelter their capital.

From Reuters

In short, US insourcing relative to China may not have been entirely about economic issues but also about politics. 

The risk of an economic bust from China’s assimilation of Western Keynesian policies, that has ballooned a huge shadow banking industry and skyhigh debts, which have intensely increased the risks of a financial and economic bust. This implies that concerns over political instability may have been prompting China’s wealthy and capitalist class (along with cronies) to consider safehaven alternatives abroad. The increasing political risks may serve as a major reason for the US insourcing.

And political risks has also been manifested in China’s gunboat  diplomacy with Japan and Southeast Asia over territorial issues, which has been most likely a diversion from her brewing economic woes.

I might add advances in technology may be a factor too. For instance, advances in 3-D printing may eventually bring manufacturing to the household, which may reduce cross border FDIs relative to manufacturing.

The bottom line is looking at US insourcing relative to China may not signify as an accurate picture of global investment flows. That’s because there is a whole world of other options via many other capable emerging markets than China alone.

Video: Murray Rothbard on Trade Balance and Government Budget

Many mistake the effects of balance of trade with that of government budget. Some do this deliberately, through the use of statistical ruse, to promote the mercantilist or protectionist agenda.

In the following video, the great dean of the Austrian school of economics Murray Rothdard tersely clarifies on such distinction and or dispels the mercantilist myth.

Quote of the Day: Manufacturing Fetishism

The rear cover of the iPhone tells you it is designed in California and assembled in China. The phone sells, in the absence of carrier subsidy, for about $700. Purchased components – clever pieces of design such as the tiny flash drive and the small but high-performing camera – may account for as much as $200 of this. The largest supplier of parts is Samsung, Apple’s principal rival in the smartphone market. “Assembled in China” costs about $20. The balance represents the return to “designed in California”, which is why Apple is such a profitable company.

Manufacturing fetishism – the idea that manufacturing is the central economic activity and everything else is somehow subordinate – is deeply ingrained in human thinking. The perception that only tangible objects represent real wealth and only physical labour real work was probably formed in the days when economic activity was the constant search for food, fuel and shelter…

When you look at the value chain of manufactured goods we consume today, you quickly appreciate how small a proportion of the value of output is represented by the processes of manufacturing and assembly. Most of what you pay reflects the style of the suit, the design of the iPhone, the precision of the assembly of the aircraft engine, the painstaking pharmaceutical research, the quality assurance that tells you products really are what they claim to be.

Physical labour incorporated in manufactured goods is a cheap commodity in a globalised world. But the skills and capabilities that turn that labour into products of extraordinary complexity and sophistication are not. The iPhone is a manufactured product, but its value to the user is as a crystallisation of services

This is from British author and journalist John Kay debunking the mainstream predilection to use manufacturing as a measure or excuse to promote mercantilist policies (hat tip Professor David Henderson)

Bastiat on the Twin Doctrines of Luddism and Mercantilism

The great French proto-Austro libertarian Frédéric Bastiat exposes the fallacies of the twin doctrines of Luddism (opposed to modern technology) and mercantilism, which the great Dean of the Austrian school of economics, Murray Rothbard, defines as a system of statism which employed economic fallacy to build up a structure of imperial state power, as well as special subsidy and monopolistic privilege to individuals or groups favored by the state

The following incisive excerpt, published by the Mises Institute, has been culled from an essay entitled “Human Labor and National Labor” which appeared in Economic Sophisms and in the Bastiat Collection (bold mine)

What misleads the adversaries of machinery and foreign importations is that they judge of them by their immediate and transitory effects, instead of following them out to their general and definite consequences.

The immediate effect of the invention and employment of an ingenious machine is to render superfluous, for the attainment of a given result, a certain amount of manual labor. But its action does not stop there. For the very reason that the desired result is obtained with fewer efforts, the product is handed over to the public at a lower price; and the aggregate of savings thus realized by all purchasers enables them to procure other satisfactions; that is to say, to encourage manual labor in general to exactly the extent of the manual labor which has been saved in the special branch of industry which has been recently improved. So that the level of labor has not fallen, while that of enjoyments has risen.

Let us render this evident by an example.

Suppose there are used annually in this country 10 million hats at 15 shillings each; this makes the sum which goes to the support of this branch of industry £7,500,000 sterling. A machine is invented that allows these hats to be manufactured and sold at 10 shillings. The sum now wanted for the support of this industry is reduced to £5,000,000, provided the demand is not augmented by the change. But the remaining sum of £2,500,000 is not by this change withdrawn from the support of human labor. That sum, economized by the purchasers of hats, will enable them to satisfy other wants, and consequently, to that extent will go to remunerate the aggregate industry of the country. With the five shillings saved, John will purchase a pair of shoes, James a book, Jerome a piece of furniture, etc. Human labor, taken in the aggregate, will continue, then, to be supported and encouraged to the extent of £7,500,000; but this sum will yield the same number of hats, plus all the satisfactions and enjoyments corresponding to £2,500,000 that the employment of the machine has enabled the consumers of hats to save. These additional enjoyments constitute the clear profit that the country will have derived from the invention. This is a free gift, a tribute that human genius will have derived from nature. We do not at all dispute that in the course of the transformation a certain amount of labor will have been displaced; but we cannot allow that it has been destroyed or diminished.

The same thing holds of the importation of foreign commodities. Let us revert to our former hypothesis.

The country manufactures 10 million hats, of which the cost price was 15 shillings. The foreigner sends similar hats to our market, and furnishes them at 10 shillings each. I maintain that the national labor will not be thereby diminished.

For it must produce to the extent of £5,000,000 to enable it to pay for 10 million hats at 10 shillings.

And then there remains to each purchaser five shillings saved on each hat, or in all, £2,500,000, which will be spent on other enjoyments — that is to say, which will go to support labor in other departments of industry.

Then the aggregate labor of the country will remain what it was, and the additional enjoyments represented by £2,500,000 saved upon hats will form the clear profit accruing from imports under the system of free trade.

It is of no use to try to frighten us by a picture of the sufferings that, on this hypothesis, the displacement of labor will entail.

For, if the prohibition had never been imposed, the labor would have found its natural place under the ordinary law of exchange, and no displacement would have taken place.

If, on the other hand, prohibition has led to an artificial and unproductive employment of labor, it is prohibition, and not liberty, that is to blame for a displacement that is inevitable in the transition from what is detrimental to what is beneficial.

Bastiat on the Pretentious Moralism of Mercantilism

Mercantilists operate on the dulcet sound bites that hardly stands on economic laws.

The great French classical liberal Frédéric Bastiat does another splendid demolition job on the supposed moral high grounds supposedly assumed by the mercantilists.

In reality free trade, and not protectionism, advances general social cooperation in society or what we may call as civilization.

Quoting Bastiat: [Mises Institute] (bold mine)

Among the arguments we hear adduced in favor of the restrictive regime we must not forget that which is founded on national independence.

"What should we do in case of war," it is said, "if we are placed at the mercy of England for iron and coal?"

English monopolists do not fail to cry out in their turn:

"What would become of Great Britain in case of war if she is dependent on France for provisions?"

One thing is overlooked, which is this: That the kind of dependence that results from exchange, from commercial transactions, is a reciprocal dependence. We cannot be dependent on the foreigner without the foreigner being dependent on us. Now, this is the very essence of society. To break up natural relations is not to place ourselves in a state of independence, but in a state of isolation.

Note this: A nation isolates itself looking forward to the possibility of war; but is not this very act of isolating itself the beginning of war? It renders war more easy, less burdensome, and, it may be, less unpopular. Let countries be permanent markets for each other's produce; let their reciprocal relations be such that they cannot be broken without inflicting on each other the double suffering of privation and a glut of commodities; and they will no longer stand in need of naval armaments, which ruin them, and overgrown armies, which crush them; the peace of the world will not then be compromised by the caprice of a Thiers or of a Palmerston; and war will disappear for want of what supports it, for want of resources, inducements, pretexts, and popular sympathy.

The short of this is that “when goods don’t cross borders armies will”. Promoting economic isolation is equivalent to promoting poverty and war.

So how can the advocacy of war be considered as moral?

Next mercantilists appeal to the emotion of the public, particularly to morality of material abstinence so as to justify political control over people’s economic activities.

Again Bastiat:

I am quite aware that I shall be reproached (it is the fashion of the day) with basing the fraternity of nations on men's personal interest — vile, prosaic self-interest. Better far, it may be thought, that it should have had its basis in charity, in love, even in a little self-abnegation, and that, interfering somewhat with men's material comforts, it should have had the merit of a generous sacrifice.

When shall we be done with these puerile declamations? When will hypocrisy be finally banished from science? When shall we cease to exhibit this nauseous contradiction between our professions and our practice? We hoot at and execrate personal interest; in other words, we denounce what is useful and good (for to say that all men are interested in anything is to say that the thing is good in itself), as if personal interest were not the necessary, eternal, and indestructible mainspring to which Providence has confided human perfectibility. Are we not represented as being all angels of disinterestedness? And does the thought never occur to those who say so that the public begins to see with disgust that this affected language disfigures the pages of those very writers who are most successful in filling their own pockets at the public expense? Oh! Affectation! Affectation! Thou are verily the besetting sin of our times!

What! Because material prosperity and peace are things correlative, because it has pleased God to establish this beautiful harmony in the moral world, am I not to admire, am I not to adore His ordinances, am I not to accept with gratitude laws that make justice the condition of happiness? You desire peace only in so far as it runs counter to material prosperity; and liberty is rejected because it does not impose sacrifices. If abnegation has indeed so many charms for you, why do you fail to practice it in private life? Society will be grateful to you, for someone, at least, will reap the fruit; but to desire to impose it upon mankind as a principle is the very height of absurdity, for the abnegation of all is the sacrifice of all, which is evil erected into a theory.

But, thank heaven, one can write or read many of these declamations without the world ceasing on that account to obey the social motive force, which leads us to shun evil and seek after good, and which, whether they like it or not, we must denominate personal interest.

After all, it is ironic enough to see sentiments of the most sublime self-denial invoked in support of spoliation itself. See to what this boasted disinterestedness tends! These men who are so fantastically delicate as not to desire peace itself, if it is founded on the vile interest of mankind, put their hand into the pockets of others, and especially of the poor.

For what article of the tariff protects the poor? Be pleased, gentlemen, to dispose of what belongs to yourselves as you think proper, but leave us the disposal of the fruit of our own toil, to use it or exchange it as we see best. Declaim on self-sacrifice as much as you choose, it is all very fine and very beautiful, but be at least consistent.

In reality, advocates of mercantilism hardly practice on what they preach. Since mercantilists believes that they have superior knowledge and the moral ascendancy over the rest, they feel that they are exempt from the rules they prefer or opt to impose on their constituency. They believe that if others ought to sacrifice or embrace abstemiousness, they are exempt.

Of course, alternatively, mercantilism is about political inequality and about special economic privileges accorded by the political class to a favored few (the network of friends and relatives and political allies).

In short, the obverse side of mercantilism is crony-state capitalism.

How then can the protection of the few, through political edicts, at the expense of society (where the populace are subjected to coercive restrictions on economic activities) be considered moral? 

Bastiat on Why Protectionism is a Philosophy of War

Protectionism is a philosophy of war, partly through conquest.

The great classical liberal Frédéric Bastiat destroys the supposed moral high ground of mercantilism which are based on blatant self contradictions. (source Mises Institute, all bold mine)

There is one thing that confounds me, and it is this. Sincere publicists, studying the economy of society from the producer's point of view, have laid down this double formula:

1. "Governments should order the interests of consumers who are subject to their laws, in such a way as to be favorable to national industry."
2. "They should bring distant consumers under subjection to their laws, for the purpose of ordering their interests in a way favorable to national industry."

The first of these formulas gets the name of protection; the second we call outlets, or the creating of markets, or vents, for our produce.

Both are founded on what we call the balance of trade: "A nation is impoverished when it imports; enriched when it exports."

For if every purchase from a foreign country is a tribute paid and a national loss, it follows, of course, that it is right to restrain, and even prohibit, importations.

And if every sale to a foreign country is a tribute received, and a national profit, it is quite right and natural to create markets for our products even by force.

The system of protection and the colonial system are, then, only two aspects of one and the same theory. To hinder our fellow citizens from buying from foreigners, and to force foreigners to buy from our fellow citizens, are only two consequences of one and the same principle.

Now, it is impossible not to admit that this doctrine, if true, makes general utility to repose on monopoly or internal spoliation, and on conquest or external spoliation.

I enter a cottage on the French side of the Pyrenees.

The father of the family has received but slender wages. His half-naked children shiver in the icy north wind; the fire is extinguished, and there is nothing on the table. There are wool, firewood, and corn on the other side of the mountain; but these good things are forbidden to the poor day-laborer, for the other side of the mountain is not in France. Foreign firewood is not allowed to warm the cottage hearth; and the shepherd's children can never know the taste of Biscayan wheat, and the wool of Navarre can never warm their benumbed limbs. General utility has so ordered it. Be it so; but let us agree that all this is in direct opposition to the first principles of justice. To dispose legislatively of the interests of consumers, and postpone them to the supposed interests of national industry, is to encroach upon their liberty — it is to prohibit an act; namely, the act of exchange, that has in it nothing contrary to good morals; in a word, it is to do them an act of injustice.

And yet this is necessary, we are told, unless we wish to see national labor at a standstill, and public prosperity sustain a fatal shock.

Writers of the protectionist school, then, have arrived at the melancholy conclusion that there is a radical incompatibility between justice and utility. 

On the other hand, if it be the interest of each nation to sell, and not to buy, the natural state of their relations must consist in a violent action and reaction, for each will seek to impose its products on all, and all will endeavor to repel the products of each.

A sale, in fact, implies a purchase, and since, according to this doctrine, to sell is beneficial, and to buy is the reverse, every international transaction would imply the amelioration of one people and the deterioration of another.

But if men are, on the one hand, irresistibly impelled toward what is for their profit, and if, on the other, they resist instinctively what is hurtful, we are forced to conclude that each nation carries in its bosom a natural force of expansion, and a not less natural force of resistance, which forces are equally injurious to all other nations; or, in other words, that antagonism and war are the natural state of human society.

Thus the theory we are discussing may be summed up in these two axioms: 

Utility is incompatible with justice at home.

Utility is incompatible with peace abroad.

Now, what astonishes and confounds me is that a publicist, a statesman, who sincerely holds an economical doctrine that runs so violently counter to other principles that are incontestable, should be able to enjoy one moment of calm or peace of mind.

For my own part, it seems to me that if I had entered the precincts of the science by the same gate, if I had failed to perceive clearly that liberty, utility, justice, peace, are things not only compatible, but strictly allied with each other, and, so to speak, identical, I should have endeavored to forget what I had learned, and I should have asked,

"How God could have willed that men should attain prosperity only through injustice and war? How He could have willed that they should be unable to avoid Injustice and War except by renouncing the possibility of attaining prosperity?

"Dare I adopt, as the basis of the legislation of a great nation, a science that thus misleads me by false lights, that has conducted me to this horrible blasphemy, and landed me in so dreadful an alternative? And when a long train of illustrious philosophers have been conducted by this science, to which they have devoted their lives, to more consoling results — when they affirm that liberty and utility are perfectly reconcilable with justice and peace — that all these great principles run in infinitely extended parallels, and will do so to all eternity, without running counter to each other — I would ask, Have they not in their favor that presumption which results from all that we know of the goodness and wisdom of God, as manifested in the sublime harmony of the material creation? In the face of such a presumption, and of so many reliable authorities, ought I to believe lightly that God has been pleased to implant antagonism and dissonance in the laws of the moral world? No; before I should venture to conclude that the principles of social order run counter to and neutralize each other, and are in eternal and irreconcilable opposition — before I should venture to impose on my fellow citizens a system so impious as that to which my reasonings would appear to lead — I should set myself to re-examine the whole chain of these reasonings, and assure myself that at this stage of the journey I had not missed my way."

But if, after a candid and searching examination, 20 times repeated, I arrived always at this frightful conclusion, that we must choose between the right and the good, discouraged, I should reject the science, and bury myself in voluntary ignorance; above all, I should decline all participation in public affairs, leaving to men of another temper and constitution the burden and responsibility of a choice so painful.

Beware of their hypocrisies

The US Dollar Renminbi Standard Myth

Another bizarre mercantilist claim today is that the world monetary system operates on a supposed “USD-Renminbi” standard.

(From Tradingeconomics.com)

Such claim has been anchored on supposed “trade imbalances”, particularly US trade deficits, from where the world evolves only around only two nations, the United States and China. From such premise it is easy to dismiss this as false choice.

A further assumption is that central bankers of both nations have only been fixated on each other’s economy while ignoring the rest of world.

Nevertheless here a few charts to dispel such myths

Based on merchandise trade, it would be a mistake to assume that both these countries equally been trade oriented.

The fact is that the US despite the deficits, external trade in goods account for only a little over 20% of the economy. This makes the US essentially relatively a closed economy.

Meanwhile China’s merchandise trade is about half their economy. In contrast Germany’s external trade accounts for more than 70%. 

Germany largest share among the three squares with the EU’s position as the largest trading bloc. (Wikipedia)

To further add, China accounts as the second largest trading partner to the United States. (US Bureau of Commerce)

Also in terms of trade deficit with the US, while it is true that China has the largest surplus, there are many other countries that maintains where the US has a deficit. (US Bureau of Commerce) Add all to the 9 largest trading partners with surpluses these will easily overshadow China. A further implication is that should protectionist measures be imposed on China, US deficits will only shift to these countries.

Yet for those blinded by deficits, they fail to also account that China’s exports have been (51%) owned by foreign owned companies based on China.

In reality, the obsession towards trade deficits are misleading for the simple reason that trade deficits are balanced out by capital account (Mark Perry)

To quote Professor Mark Perry (bold original)

As a direct consequence of our current account deficits, the U.S. economy has been the beneficiary of more than $8 trillion worth of capital inflows from foreigners since 1980. Because the Balance of Payment accounts are based on double-entry bookkeeping, the annual current account and capital account have to net to zero, so that any current account (trade) deficit (surplus) is offset one-to-one by a capital account surplus (deficit) and the balance of payments therefore always nets out to (equals) zero. And that's why it's called the "balance" of payments, because once we account for trade flows and capital flows, everything balances, and there are no deficits or surpluses on a net basis.

The other side of the coin is that China’s ownership of US debts has been overstated.

In reality, foreign ownership as a total of US treasuries account for only 25% (Wikipedia)…

…where China owns about 8% share of total foreign ownership as shown by the breakdown above. 

In terms of international currency reserves…

The Euro-USD constitutes 90% of global foreign exchange reserves. Add the pound sterling, yen and the swiss franc such would account for 95% of foreign reserves. (Wikipedia) In other words, global trade and banking reserves have hardly been about the Chinese yuan yet. Although China has been making inroads with other emerging markets (e.g. ASEAN, Brazil India Russia, Chile and even Africa) to use her currency as an international reserve.

China’s fixed currency has partly been accused for such relationship. But China’s currency has been fixed since 1994. If fixing currency to the US dollar has been about stealing jobs…

…then all these countries have been guilty

But then again, currency fixing or pegging has been adapted by these countries mostly to promote stability.

According to Investopedia.com

The reasons to peg a currency are linked to stability. Especially in today's developing nations, a country may decide to peg its currency to create a stable atmosphere for foreign investment. With a peg, the investor will always know what his or her investment's value is, and therefore will not have to worry about daily fluctuations. A pegged currency can also help to lower inflation rates and generate demand, which results from greater confidence in the stability of the currency.

Other reasons have been for expanding trade network externalities and importing policy credibility, (University of California) aside from lack of depth in their respective domestic and sophistication in domestic financial markets. 

Bottom line: As I have been pointing out, US trade balance, aside from the conditions of the US dollar has mostly been a function of domestic boom bust cycles, the Triffin dilemma (frictions arising from the collision of international and domestic interests based on short and long term objectives) and many other domestic interventionists policies. 

There has not been a single factor. (Fallacy of a single cause)

Financialization of the US has been an outgrowth of these from which trade deficits have been funded through the growth of financial industry. Wikipedia points to the “greater role arising from the issuance of fiat currency untethered to gold or other commodities, as well as the “end of the post-World War Two Bretton Woods system of fixed international exchange rates and the dollar peg to gold in August 1971”. 

Neither has supposed trade imbalances been deliberately caused by China.

Boom bust cycles, for instance, draw in lots of resources and labor to malinvested areas where during a booming phase distorts the price mechanism and distribution and production process via overvaluing wages, the domestic currency, asset prices, welfare (pensions), fake profits and etc....

Once a bust arrives these policies induced boom becomes key sources of retrenchment.

Mercantilists have been flagrantly blind to this.

Finally as I pointed out, Ben Bernanke has not been targeting the exchange rate for his latest QE. This means, if you believe his uprightness, then he acknowledges that the issue has been local, particularly putting a floor on asset prices and hardly about foreign (devaluation).

Seeing things from reality (than from political biases) gives us a better chance at being right in our investment positions.

World Economic Trend: Mercantilism or Globalization?

To paraphrase a recent comment I received from a mercantilist: Because of the US dollar standard, mercantilism have been more prevalent today.

It is easy to dismiss such an argument as post hoc fallacy since two distinctive variables have been made to function as causally related. Nevertheless let us see from a few charts and graphs whether this claim has validity, even if we exclude the role of the US dollar.

To rephrase the issue: Has the world economic trend been more about mercantilism or globalization?

According to Google’s Public Data World merchandise trade as % of GDP has ballooned from a little less than 20% in 1960s to about nearly half of the world's economy today.

Even trade balance of services, again from Google Public Data, based on OECD economies volume has leapt sixfold since 1996.

Above is the breakdown of global trade per sector in 2010 (World Trade Organization)

Add to the current dynamic the dominance of intra-region trade

One major reason for the surge in global trading activities has been due to major moves to LIBERALIZE trade via substantial reductions tariffs which came from Regional Trade Agreement (RTA), Multilateral Trade Negotiations (MTN) and or even unilateralism (WTO)

Bilateral investment treaties peaked in 1995 but the effects of these are still being felt today through massive growth in cross border investments

While there have been some protectionist pressures as consequence to the financial crisis of 2008, generally speaking trade liberalization has been minimally affected.

From IMF Finance 

The number of new protectionist actions peaked in the first quarter of 2009 and bottomed in the third quarter of 2010. However, recent GTA data suggest that protectionist measures are increasing again; protectionist actions in the third quarter of 2011 alone were as high as in the worst periods of 2009 (Evenett, 2011).

The Group of 20 (G20) advanced and emerging economies account for most of the trade measures, most of which did not involve tariffs, imposed since 2008. There has been no significant increase in the overall use of tariffs or temporary trade barriers, such as antidumping measures, aimed at assisting local firms injured by import competition (Bown, 2011). Such measures affected only about 2 percent of world trade (Kee, Neagu, and Nicita, 2010; WTO, 2011). The trend of gradual tariff liberalization observed since the mid-1990s has not been affected

The World Trade Organization (WTO) notes of the recent increases in Non-Tariff Measures (NTM). But these have been based on technical barriers to trade (TBT) regarding standards for manufactured goods and sanitary and phytosanitary (SPS) or measures concerning food safety and animal/plant health, and partly domestic regulation in services which have hardly been about restricting competition.

From the WTO,

“I think it is a good time for the WTO to have a closer look at non-tariff measures (NTMs)”, said WTO Director-General Pascal Lamy, at the launch of the Report. “A clear trend has emerged in which NTMs are less about shielding producers from import competition and more about the attainment of a broad range of public policy objectives. The new NTMs, typically SPS and TBT measures but also domestic regulation in services, address concerns over health, safety, environmental quality and other social imperatives. The challenge is to manage a wider set of policy preferences without undermining those preferences or allowing them to become competitiveness concerns that unnecessarily frustrate trade.”

The above trends seems quite clear. Globalization has been the dominant theme of the world economy over the past decades, regardless or in spite of the role of the US dollar.

Now of course, events of the past may not extrapolate to the future. 

Bottom line: The religion of politics makes many people see fantasies as self constructed reality.

Bastiat on the Political Religion of Mercantilism

What I call as political religion is a deeply held or entrenched belief in theory which is in reality signifies as massive self-contradiction, impractical, unrealistic or virtually utopian.

Yet such ideas have been popularly embraced by the vulnerable public primarily because of its “feel good” effects from what seems as “noble sounding” but spurious rhetoric.

Alternatively, what seems plausible—which are principally based on economic ignorance or self-interest from political redistribution or the interests of tax consumers (e.g. beneficiaries from welfare-warfare state,  political agents, captured interest such as private sector funded directly or indirectly by the state and etc…) or personal biases shaped by political ideology—does not square with  economic reality.

The great French classical liberal Frédéric Bastiat explodes on supposed moral high grounds of mercantilism (from Mises Institute) [bold emphasis mine]

The advocates of monopoly maintain that the facts are on their side, and that we have on our side only theory.

They flatter themselves that this long series of public acts, this old experience of Europe, which they invoke, has presented itself as something very formidable to the mind of Mr. Say; and I grant that he has not refuted it with his characteristic sagacity. For my own part, I am not disposed to concede to the monopolists the domain of facts, for they have only in their favor facts that are forced and exceptional; and we oppose to these, facts that are universal, the free and voluntary acts of mankind at large.

What do we say; and what do they say?

We say, "You should buy from others what you cannot make for yourself but at a greater expense."

And they say, "It is better to make things for yourself, although they cost you more than the price at which you could buy them from others."

Now, gentlemen, throwing aside theory, argument, demonstration — all which seem to affect you with nausea — which of these two assertions has on its side the sanction of universal practice? 

Visit your fields, your workshops, your forges, your warehouses; look above, below, and around you; look at what takes place in your own houses; note your own everyday acts; and say what is the principle that guides these laborers, artisans, and merchants; say what is your own personal practice.

Does the farmer make his own clothes? Does the tailor produce the corn he consumes? Does your housekeeper continue to have your bread made at home, after she finds she can buy it cheaper from the baker? Do you resign the pen for the brush to save your paying tribute to the shoeblack? Does the entire economy of society not rest upon the separation of employments, the division of labor — in a word, upon exchange? And what is exchange but a calculation which we make with a view to discontinuing direct production in every case in which we find that possible, and in which indirect acquisition enables us to effect a saving in time and in effort?

It is not you, therefore, who are the men of practice, since you cannot point to a single human being who acts upon your principle.

But you will say, we never intended to make our principle a rule for individual relations. We perfectly understand that this would be to break up the bond of society, and would force men to live like snails, each in his own shell. All that we contend is that our principle regulates de facto the relations that obtain between the different agglomerations of the human family.

Well, I affirm that this principle is still erroneous. The family, the commune, the canton, the department, the province, are so many agglomerations, which all, without any exception, reject practically your principle, and have never dreamt of acting on it. All procure themselves, by means of exchange, those things that it would cost them dearer to procure by means of production. And nations would do the same, did you not hinder them by force.

We, then, are the men of practice and of experience; for we oppose to the restriction you have placed exceptionally on certain international exchanges the practice and experience of all individuals and of all agglomerations of individuals, whose acts are voluntary and can consequently be adduced as evidence. But you begin by constraining, by hindering, and then you lay hold of acts that are forced or prohibited, as warranting you to exclaim, "We have practice and experience on our side!"

You inveigh against our theory, and even against theories in general. But when you lay down a principle in opposition to ours you perhaps imagine you are not proceeding on theory. Clear your heads of that idea. You, in fact, form a theory as we do; but between your theory and ours there is this difference:

Our theory consists merely in observing universal facts, universal opinions, calculations, and ways of proceeding that universally prevail; and in classifying these and rendering them coordinate, with a view to their being more easily understood.

Our theory is so little opposed to practice that it is nothing else but practice explained. We observe men acting as they are moved by the instinct of self-preservation and a desire for progress, and what they thus do freely and voluntarily we denominate political or social economy. We can never help repeating that each individual man is practically an excellent economist, producing or exchanging according as he finds it more to his interest to produce or to exchange. Each, by experience, educates himself in this science; or, rather, the science itself is only this same experience accurately observed and methodically explained.

But on your side you construct a theory in the worst sense of the word. You imagine, you invent, a course of proceeding that is not sanctioned by the practice of any living man under the canopy of heaven; and then you invoke the aid of constraint and prohibition. It is quite necessary that you should have recourse to force, for you desire that men should be made to produce those things that they find it more advantageous to buy; you desire that they should renounce this advantage, and act upon a doctrine that implies a contradiction in terms.

I defy you to take the doctrine, which you acknowledge would be absurd in the relations of individuals, and extend it, even in speculation, to transactions between families, communities, or provinces. By your own admission it is only applicable to international relations.

This is the reason why you are forced to keep repeating, "There are no absolute principles, no inflexible rules. What is good for an individual, a family, a province, is bad for a nation. What is good in detail — namely, to purchase rather than produce, when purchasing is more advantageous than producing — that same is bad in the gross. The political economy of individuals is not that of nations" — and other nonsense of the same kind.

And to what does all this tend? Look at it a little closer. The intention is to prove that we, the consumers, are your property! — that we are yours body and soul! — that you have an exclusive right over our stomachs and our limbs! — that it belongs to you to feed and clothe us on your own terms, whatever be your ignorance, incapacity or rapacity!

No, you are not men of practice; you are men of abstraction — and of extortion.

The path to hell is paved with good intentions. This so applies to the nirvana fallacy based doctrine called mercantilism, which in reality represents an instrument for political and economic repression.

Currency Manipulation and the Politics of Neo-Mercantilism

At the local stock market forum, the Stock Market Pilipinas I had been asked to comment about the currency manipulation charges hurled against China.

For starters, as per Wikipedia’s definition of currency intervention, otherwise known as exchange rate intervention or foreign exchange market intervention, is the purchase or the sale of the currency on the exchange market by the fiscal authority or the monetary authority, in order to influence the value of the domestic currency. (bold emphasis mine)

In brief, the employment of currency/foreign exchange/exchange rate interventions implies that both monetary and fiscal authorities of ALL nations are currency manipulators.

(chart from Bloomberg)

As evidence, considering that international reserves assets (excluding gold) are at record highs mainly through the expansion of central bank balance sheets (via unsterilized interventions) these means that all central banks have been manipulating their respective currencies.

The growth of central bank balance sheets includes Asia and the Philippines. (Bank of International Settlements)

Such concerted balance sheet expansions has also been reflected on the state of money supply growth. (chart from Mao Money, Mao Problems)

Fund manager David R. Kotok of Cumberland Advisors has a good narrative of why the growing concerns over dollar debasement are valid.

Mr. Kotok writes, (bold emphasis mine)

The dollar maintains its reserve currency status because it is the least worst of the major four currencies – the US dollar, the British pound, the Japanese yen, and the euro.  All four of these currencies are now suffering the effects of a stimulative, expansive, and QE-oriented monetary policy.

We must now add the Swiss franc as a major currency, since Switzerland and its central bank are embarked on a policy course of fixing the exchange rate between the franc and the euro at 1.2 to 1.  Hence the Swiss National Bank becomes an extension of the European Central Bank, and therefore its monetary policy is necessarily linked to that of the eurozone… 

When you add up these currencies and the others that are linked to them, you conclude that about 80% of the world’s capital markets are tied to one of them.  All of the major four are in QE of one sort or another.  All four are maintaining a shorter-term interest rate near zero, which explains the reduction of volatility in the shorter-term rate structure.  If all currencies yield about the same and are likely to continue doing so for a while, it becomes hard to distinguish a relative value among them; hence, volatility falls.

The other currencies of the world may have value-adding characteristics.  We see that in places like Canada, Sweden, and New Zealand.  But the capital-market size of those currencies, or even of a basket of them, is not sufficient to replace the dollar as the major reserve currency.  Thus the dollar wins as the least worst of the big guys.

Fear of dollar debasement is, however, well-founded.  The United States continues to run federal budget deficits at high percentages of GDP.  The US central bank has a policy of QE and has committed itself to an extension of the period during which it will preserve this expansive policy.  That timeframe is now estimated to be at least three years.  The central bank has specifically said it wants more inflation.  The real interest rates in US-dollar-denominated Treasury debt are negative.  This is a recipe for a weaker dollar.  The only reason that the dollar is not much weaker is that the other major central banks are engaged in similar policies.

Given the high concentration of exposure by the world’s banking system on these four major international reserves currencies (US dollar, British pound, Japanese Yen, and the euro), this means that policies of ancillary central banks has to adjust in accordance to the policies of these major international reserve currencies.

In short, policies by the US mostly dominate on the policies of global central banks. Alternatively this suggest that the US has been the world’s biggest 'currency manipulator'.

While it is also true that some peripheral currencies has differentiating factors as pointed above, the point is that these currencies don’t have enough market depth to replace the incumbent international reserve currencies.

As caveat, such premises remain conditional on the absence of a currency crisis. Abrupt changes to the current setting should be expected if or once a currency crisis should occur.

Yet the fundamental issue is to understand the role of role of central banks. As Mises Institute founder Llewellyn Rockwell Jr. recently wrote, (lewRockwell.com):

First, they serve as lenders of last resort, which in practice means bailouts for the big financial firms. Second, they coordinate the inflation of the money supply by establishing a uniform rate at which the banks inflate, thereby making the fractional-reserve banking system less unstable and more consistently profitable than it would be without a central bank (which, by the way, is why the banks themselves always clamor for a central bank). Finally, they allow governments, via inflation, to finance their operations far more cheaply and surreptitiously than they otherwise could.

The bottom line is that currency manipulation, through inflationism, is the essence of the paper money legal tender based central banking.

So what’s the hullabaloo over China as "currency manipulator"?

Well, “currency manipulation” has been no less than a popular sloganeering of “us against them” politics meant to attain political goals.

Such political goal has been subtly designed for the protection of the privileged business interests allied with the political class through trade restrictions or through the transformation “of the economy from roughly laissez-faire to centralized, coordinated statism” as the great dean of Austrian school of economics Murray N. Rothbard pointed out.

This is called neo-mercantilism.

In the 80s, rising Japan had been painted as a threat to American economic standings, such that hate and envy based politics echoed the call for neo-mercantilist protectionism, again from Professor Rothbard,

Protectionism, often refuted and seemingly abandoned, has returned, and with a vengeance. The Japanese, who bounced back from grievous losses in World War II to astound the world by producing innovative, high-quality products at low prices, are serving as the convenient butt of protectionist propaganda. Memories of wartime myths prove a heady brew, as protectionists warn about this new "Japanese imperialism," even "worse than Pearl Harbor." This "imperialism" turns out to consist of selling Americans wonderful TV sets, autos, microchips, etc., at prices more than competitive with American firms.

Is this "flood" of Japanese products really a menace, to be combated by the U.S. government? Or is the new Japan a godsend to American consumers? In taking our stand on this issue, we should recognize that all government action means coercion, so that calling upon the U.S. government to intervene means urging it to use force and violence to restrain peaceful trade. One trusts that the protectionists are not willing to pursue their logic of force to the ultimate in the form of another Hiroshima and Nagasaki.

With Japan suffering from a humongous bubble bust that has led to a lost decade, today such political bogeyman has shifted to China.

The mainstream (mostly representing captured interests) has used all sorts of highly flawed and deceptive technically based assumptions and theories as cheap labor theory, cheap currencies, global savings glut, global imbalances and others to divert or camouflage the public’s attention from the unintended consequences from serial interventionist domestic policies and bubble monetary policies by riling up or conjuring emotive nationalist or xenophobic sentiment.

Gullible public opinion are easily swayed due to either the dearth of economic understanding or because they are blinded from the obsession to politics.

As the great Ludwig von Mises pointed out (OMNIPOTENT GOVERNMENT p.183)

People favor discrimination and privileges because they do not realize that they themselves are consumers and as such must foot the bill. In the case of protectionism, for example, they believe that only the foreigners against whom the import duties discriminate are hurt. It is true the foreigners are hurt, but not they alone: the consumers who must pay higher prices suffer with them.

And part of that reality has not entirely been about achieving some dubious trading objectives but to expand credit, again for political goals.

Again the Professor von Mises, (Human Action)

While the size of the credit expansion that private banks and bankers are able to engineer on an unhampered market is strictly limited, the governments aim at the greatest possible amount of credit expansion. Credit expansion is the governments' foremost tool in their struggle against the market economy. In their hands it is the magic wand designed to conjure away the scarcity of capital goods, to lower the rate of interest or to abolish it altogether, to finance lavish government spending, to expropriate the capitalists, to contrive everlasting booms, and to make everybody prosperous.

The politics of neomercantilism exploits economic patsies and the politically blind in the name of nationalism for the benefit of political class, vested interest groups and or their cronies at the expense of society.