Monday, September 13, 2010

Modern Mercantilism: Trade Surpluses and Currency Valuation: China, Japan and the USA

Paul Krugman understands his economics and in his New York Times article China, Japan, America and the Renminbi, he alerts us to the fact that what we would have called mercantilism a couple of centuries ago is still alive and well today as an economic reality.

What Krugman recognizes and what many of his fellow economists apparently do not understand is that modern "economics" has not negated basic economic principles that have existed since mankind began to trade goods and services.

Although Krugman points the finger of blame at China and at Chinese appeasement by shell-shocked American policy makers suffering from the financial crisis, we continue to regard the real culprit as the large-scale transfer of technology to China and elsewhere BY THE WEST over past decades in exchange for cheap labor. Some people think that is a win-win strategy, but only for those who profit by it. It is a lose-lose strategy for the majority of citizens.

For a while ... you could take a shoe that cost $10 to make in the USA and sold for $100 in the USA and move production to China where that shoe cost $1 to make and still sold for $100 in the USA, but you can not do that forever, because middle-class consumers in the USA, having lost their jobs to cheap labor in China, ultimately no longer have the money to buy those $100 shoes, and the shoe now may cost more to make than before, even in China.

At some point, the equation has to rebalance -- that is inevitable -- and that is one grievous aspect of the current economic problem. Currency over- or under-valuation is merely the surface manifestation of a much larger problem involving the entire structure of the US economy.

Hat tip to CaryGEE.

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