Category Archives: Free Trade
Everyone knows the Fed is pushing Quantitative Easing. By that, it means that when America is having trouble selling T-bills at advantageous interest rates, the Fed prints up some money to keep demand. It buys the bonds with newly-printed money. The recent run was $600B or so, and the Fed’s current balance sheet holds about $2.7T in assets (that they can choose to hold as long as they find prudent — since they print the money to keep them and/or roll them over).
But what if I told you that there was another $11T of outstanding US dollars* out there in the world, and that everyone except the US has a say in whether they are circulated. In fact, that those dollars are sitting on foreign soil is a very good thing for the US and has been for decades, but it’s not assured it will last forever. As I said WAAAY back in 2007:
As I’ve pointed out in the past, the dollar’s status as a reserve currency has largely allowed America to inflate with very little visible burden on our own citizens. We create worthless money, use it to buy durable goods from other countries, and watch as they hold that money or reinvest it in the sinkhole that are Treasury bonds. It’s a credit card on the world, and we can print whatever we need to pay it off…
…as long as they don’t wise up. If they do, suddenly that money might come back to us, and we’ll feel the results of the inflation we’ve engaged upon.
Inflation benefits those who see the money first — in this case, Americans who used that money to buy durable goods from overseas. It has the least benefit for those who see the money last. To date, that has been forex reserves, sovereign wealth funds, etc. But should those foreign nations decide they no longer want to hold US dollars, they’ll spend them right back into circulation — and they’ll eventually want us to sell them goods in exchange for those dollars.
If that happens, the inflation comes full circle and we feel it right here at home — without the Fed ever releasing the $2.7T they have on their balance sheet.
We’ve spent the last four decades, ever since Nixon “closed the gold window”, sending dollars abroad to other nations who stick them under their mattresses. This has been the persistent trade deficit we’ve held. Sure, some of those dollars came back to be lent to our own government to finance even MORE spending that didn’t come from the American people, but much of them quite literally got shoved under the mattress.
What happens if they want to spend those dollars? Well, dollar-denominated assets and goods produced in the US will rise in price. Oil, gold, silver, food (produced in the US), etc. Look at gold, for example: In the last year, gold has increased in dollar terms by over 32%, but by less than 8% in Swiss francs. USD vs other currencies show similar (but smaller) gaps. What can explain this? Well, if nothing else, that big buyers like China and India are using their dollar surplus, rather than their reserves in other currencies, to buy gold.
Where’s the endgame if this dollar-spending widens? Well, eventually those dollars are sold to people who don’t want to buy goods from China or US T-Bills: they want to buy US exports or US assets. That sounds good, of course; everyone likes exports! But is it good? Restate it this way: a durable good (i.e. product of American workers’ output) needs to be produced to leave our shores, and it increases the circulating money supply in the USA. The good we produce here is enjoyed elsewhere, while the increased money supply makes our own goods at home more expensive.
We change from trading our paper for other nations’ hard work to trading our hard work for our own paper back.
The endgame is the end of trade deficits, where we work harder as a nation to supply the rest of the world with goods in exchange for a lower standard of living here. That doesn’t sound good to me at all.
America has enjoyed a very privileged position in the world, and that position has only been possible from two things: other nations have trusted us and they’ve had no other options. The first is eroding to the point where they’re looking for the second. If we want to continue enjoying our position in the world, we need to convince the rest of the world that holding the US Dollar as a reserve currency benefits them — and neither trillion Dollar deficits as far as the eye can see or quantitative easing accomplish that.
When the inflation comes, it’s not going to be the Fed printing money — it’s going to be other nations sending us the money printed over four decades and expecting to buy something with it.
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Want to inject liquidity into the market, support American jobs, and do so without raiding the US Treasury or overheating the printing press? The answer is simple: get out of the way.
Now, some may say that’s a libertarian’s answer for everything. And they’d usually be right. But I’m not signing you up for a precipitous decline in federal revenue. I’m not resorting in protectionist and mercantilist policies destined to impoverish American consumers in favor of American exporters. All I’m asking — or relaying the request of Cisco CEO John Chambers and Oracle President Safra Catz, more accurately — is that the US Government make it easier to bring foreign profits back to our shores:
One trillion dollars is roughly the amount of earnings that American companies have in their foreign operations—and that they could repatriate to the United States. That money, in turn, could be invested in U.S. jobs, capital assets, research and development, and more.
But for U.S companies such repatriation of earnings carries a significant penalty: a federal tax of up to 35%. This means that U.S. companies can, without significant consequence, use their foreign earnings to invest in any country in the world—except here.
The U.S. government’s treatment of repatriated foreign earnings stands in marked contrast to the tax practices of almost every major developed economy, including Germany, Japan, the United Kingdom, France, Spain, Italy, Russia, Australia and Canada, to name a few. Companies headquartered in any of these countries can repatriate foreign earnings to their home countries at a tax rate of 0%-2%. That’s because those countries realize that choking off foreign capital from their economies is decidedly against their national interests.
By permitting companies to repatriate foreign earnings at a low tax rate—say, 5%—Congress and the president could create a privately funded stimulus of up to a trillion dollars. They could also raise up to $50 billion in federal tax revenue. That’s money the economy would not otherwise receive.
The tax picture described is very simple, and it makes American companies make some difficult decisions. A company with overseas profits and a need to reinvest can choose to invest them abroad or here in the US. Those overseas profits can be invested overseas with little or no tax penalty, or they can be invested here with significant tax penalty. The decision becomes simple. It is only smart to invest foreign profits in the US if it is investment that simply cannot be effectively done overseas, because the cost of repatriation is enormous. It’s a trade war, but it’s aiming the artillery inward, not outward.
Anyone who has read my work knows that I am not a fan of government subsidies. I personally think that American corporations and American workers can compete quite handsomely on the world market. We don’t need our government to actively help industry here; we have an educated workforce, developed infrastructure, stable institutions and a strong rule of law. We have everything we need to make it profitable for companies to invest here. We could have a country where overseas profits are re-invested in American workers and the US economy. What we have instead are government policies actively hostile to that end. All I ask is that those policies be rescinded.
America is seen worldwide as pro-business. In many cases, that is true, but certainly not in our corporate income tax system, as described by the Cato Institute here. Rather than being a low-tax laissez-faire bastion of capitalism, we have the highest corporate income tax rate in the developed world:
Reducing the taxes on repatriated profits can be done in a revenue-neutral way. All that is necessary is to choose a tax rate that will balance the tax revenue earned on repatriated earnings at the current rate with the expected revenue earned on the much larger base of repatriated earnings at a lower rate. Some foreign cash is undoubtedly repatriated; as I said there is incentive not to do so, but that incentive in not insurmountable. However, at a lower tax rate it makes sense for more companies to repatriate much larger sums, and I think a baseline rate of 5% as suggested by Chambers and Catz is a good starting point for discussion if remaining revenue-neutral is a goal.
There is up to a trillion dollars out there that could be injected into the US economy without raising the deficit, without spinning up the printing press, and which would go immediately to the entities who have the best ability to invest it in stimulative ways — companies who are already profitable. While many in Congress may not like the idea, as they have little control over how the money is spent, I think that’s a feature — not a bug.
While I’m not a protectionist, I think we should stop government policy designed to hurt American employment and help employment overseas. Of all the policies in which our government engages, one that actively stops capital from flowing into America from overseas seems rather idiotic.
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It’s beginning to be really easy to hate Facebook. While Google has stuck to its libertarian principles of free exchange of information by not cooperating with Chinese censorship, Facebook has become more and more creepy:
The people behind the “Just Say Now” marijuana legalization campaign (oft-Boinged Salon contributor Glenn Greenwald is one of many political thinkers on their board) want Facebook to back off its decision to pull their ads from the social networking service.
This is what Facebook’s PR says:
It would be fine to note that you were informed by Facebook that the image in question was no long acceptable for use in Facebook ads. The image of a pot leaf is classified with all smoking products and therefore is not acceptable under our policies. Let me know if you need anything further.
One key indicator that you are dealing with unapologetic authoritarians is when you’re being harshly reprimanded for violating regulations and rules that are unpredictable, undefinable and more than likely not even known by the person touting them. That appears to be the case with Facebook’s policies:
But the group points out that Facebook’s ad policy doesn’t ban “smoking products,” just “tobacco products.” Also, Facebook does permit alcohol ads, even ads featuring images of alcohol products and packaging, though alcohol ads that make alcohol consumption “fashionable,” “promote intoxication” or that “encourage excessive consumption” are banned. Just Say Now calls Facebook’s action censorship.
Perhaps Facebook goes by the old Jack Webb Dragnet school that pot consists of “marijuana cigarettes.”
There’s alot of faux outrage out there, as the Cordoba Crowds in NYC have shown us. Given the extensive cost to normal livelihoods by the continued prison construction and law enforcement funding required by prohibition, Facebook does deserve to be boycotted for trying to silence a group like Just Say Now.
Just Say Now’s Jane Hamsher, founder of Firedoglake.com, is also on the side of liberty in her fight against punitive immigration laws. Check out an appearance she did that I posted at my website Voice of the Migrant. She’s also a cancer survivor and all around political superhero. Give her support and take it away from Facebook.