The Investment Thread

Big Daddy

Super User
Protectionism of any kind is bad. If something can be manufactured outside US at a cheaper rate then it must be manufactured there because it keeps the price of products lower for American consumers and inflation low for the USA. If US were to restrict imports then cost of goods and inflation will both increase in the US and that will be economy killer. This is exactly what happens in India (imposition of import taxes). Also, as government start controlling lives of its citizens, it starts becoming corrupt. It may start demanding kickbacks from China for controlling imports.

US has one of the best advanced manufacturing capabilities in the world. Best tanks, 5th generation aircrafts, former shuttles, aircraft carriers, stealth bombers etc. are all manufactured here in the USA.

Automobile, washing machines etc. are old technology. Let China handle that shit at low prices. America should focus on newer and advanced things and get smart Chinese to work here in the US :).

Also, corporate profits actually make Americans richer due to better investments returns in retirement accounts. Obama has made capitalism look bad than what it is.
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Yogesh Sarkar

That is the premise of Globalization, however it brings to the fore the age old, survival of the fittest notion.

Because although you may be looking at advance technology like 5th generation aircrafts, space technology and what not, the fact is, these seldom generate revenue or employment comparable to that of small ticket items like mobile phones, computers, washing machines, cars and what not.

Due to this, trade disparity grows and then you end up in a situation, where you might be officially making a lot of money from trading with other nations, but the reality is, majority of the revenue is coming from overseas investments and not through export of technology or goods, which is what generates employment locally.

When people are unemployed and there aren’t many jobs around, you end up in a situation where the rich get richer by pumping money out of their own countries to more lucrative/promising lands and at home, the lower middle class and poor end up with not enough money to go through a day, let alone utilize it to make investments overseas, which essentially becomes the only major way of making money. This leads to more disparity and eventually, class wars (which is what US seems to be heading to).

Although I haven’t actually studied European History, but I firmly believe these class wars were essentially what lead to Europeans (whether rich or poor), fleeing to places like US and Australia for greener pasture.

But what would you do when all the greener pastures are claimed by others and only the rich can hope to fly to a promise land?

Of course things aren’t all that bad and I do not have much intelligence or for that matter knowledge to even fully comprehend what I have written above.

But I firmly believe that the duty of nation is to be selfish for its own existence and superiority and for the welfare of its own citizens and the nation which fails to be selfish, parishes.

Big Daddy

Super User
You are right in some aspects and somewhat wrong in others. When it comes to economics, there are some things that are well established and some not so much. What is well established is that standard of living goes up with improvements in productivity and improvements in prouctivity results in low inflation. Low inflation results in higher economic growth. With growth in economy, jobs are created (due to increased consumption) and unemployment goes down. Certain types of jobs are outsourced and certain other types (services) are created.

For any nation to be prosperous, it has to increase its productivity. To improve productivity, you have to remove inefficiencies. Inefficiencies are removed by improving infrastructure, investments in information technology and removing corruption & arbitrage opportunities (India's fight on corruption is actually a fight to increase productivity that may lead to higher standard of living). Free markets acheive all that. However, the impediment to free market philosophy is social unrest from people who fall behind (e.g., Naxals in India). No one wants to be a loser and everyone wants to earn a living. Most advanced economies spend money on social programs (food stamps, social welfare etc.). There is some justification for these programs, which is to keep the population well fed and healthy so that workforce is productive (so that a nation is most productive). What is a moot point is the scale of social programs. Large scale social programs require government to tax rich. Higher taxes on rich make rich move their money elsewhere (swiss banks etc.) and result in low tax collection. Higher taxes also result in lower economic growth (tax is inflationary), and when organizations don't make a lot of profit they pay lower taxes. Also, social programs sometimes make poor dependent on government goodies (free money) and these poor never want to work or be productive. So, the problem that government struggle with most is how much to tax the population and how to get people off the social programs. Lowering taxes keep rich happy and poor unhappy (less money in social programs). It is only when poor are unhappy, they relinquish their laziness and get off the social programs to find work. Political parties differ in their estimation of what is appropriate amount of taxation and social program give away. Tax too high and economy suffers. Tax too low and social unrest prevails.

The place where most common people get it wrong is when they say that certain jobs are to be protected. This sounds pretty good, but it introduces inefficiencies in the system that hurt productivity. When productivity gets hurt so does the prosperity of a nation. USSR, China and most other nations cannot have one thing-- prosperity as measured by high per capita income and low inflation. Seeming sound logic of protectionism makes everyone in a nation poor. Poor people start looking up to their governments to rescue them and government, in turn, starts filling its pockets at the expense of its citizens. Protectionism sounds right and helps governments, and most people get easily fooled by this concept. Protectionism is a cancer that slowly kills a nation's prosperity and most governments happily support it.

The day US adopts protectionist philosophy, it goes down hill as well. In a way, this downfall has somewhat begun. The question is, will it accelerate or would the trend be reversed?
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Yogesh Sarkar

You have a valid point and this is how things should work, however you have to keep in mind that when a country opens itself up as a free market and allows its industries to compete with others from different countries, it is the job of the Government to ensure that the industry is on the equal footing.

For instance if today the Government of India has choice to buy wheat either from the Indian farmer or European farmers, then it shouldn’t just blindly go with the cheapest option available (in this example we are assuming European wheat is cheaper). It needs to see whether or not that cheaper wheat from outside is cheaper due to protectionist policies like subsidy or is genuinely cheaper!

Because if it is cheaper only due to subsidy, than the cheaper wheat would only remain cheaper till the Government of that country choses to subsidize it. And thus you are not only making your economy and thereby country dependent upon the policies of a foreign government, you are also wishing away your own capacity to produce wheat, because if you allow the subsidized cheaper wheat from foreign countries to come in and take over the market, majority of the local farmers will eventually go out of business or chose to buy farmland in the European Market and employ workers there, instead of producing in your own country.

This is what is happening globally today, not only in US.

Today we all are happy to buy cheaper Chinese products and see majority of the manufacturing units being shifted to China, because it appeals to our short term interests and as normal naïve human beings that is what we would look at.

However it is the job of our governments to ensure that if the goods coming out from China or for that matter anywhere else in the world is only cheaper due to the fact that the government there is deliberately keeping its currency prices low and is providing industry with subsidized electricity, loans etc. in a bid to essentially take away the manufacturing business from rest of the world, then there is very real chance that once they have a large enough monopoly that they know nothing could break, they can chose to act in a very different manner. This can not only impact prices, but also availability of goods, depending on your relations with them!

Because at the end of the day, Governments aren’t businesses and their primary goal always is power, rather than just short term monetary gains. And if we look at history, we will find examples of this in Indian as well as other country’s history.

Of course I do not in any sense mean to imply that we should blindly impose taxes on foreign goods, but what the government needs to do is find ways to make its own industry competitive enough to compete with foreign companies, whether that is through providing subsidies similar to what the foreign government is providing to its own industry, or is through the imposition of taxes, which take away the benefits of those subsidies and monetary policy control.

Big Daddy

Super User
It needs to see whether or not that cheaper wheat from outside is cheaper due to protectionist policies like subsidy or is genuinely cheaper!
Protectionist policies hurt the country implementing them and not as much for country buying goods from a country implementing protectionist policies. If China keeps on devaluing its currency then Chinese keep on working for low wages and there is no way out of poverty. Chinese government is the main beneficiary. Protectionist policies and corrupt government point was discussed in my previous post.

There is no doubt that the Chinese protectionism hurts the US a little bit. However, this is just one side of the equation. Many Americans are invested in very Chinese companies that abuse China's national policies. When these companies make money, Americans make money. When Americans make money, US government makes money via taxes.

I have a diversified portfolio where I hold stocks in European, Canadian, American, Indian, Chinese and other Asia-Pacific nations. From personal standpoint, I don't care as much as where jobs are or who buys products as long as someone makes money. Interestingly, I also pay foreign taxes and US government gets its share of taxes from my foreign dividends and income.

Protectionist policies can be defended from ethical and social point of view. However, from wealth creation point of view, these policies are indefensible. The only exception is protection of trade secrets and manufacturing technologies that have a national security dimension.

It is in US government's interest that US organizations and investors make as much money as possible. The tax share of US organizations and top 10% (The Top 10 Percent of Income Earners Paid 71 Percent of Federal Income Tax) of earners is over 80%. The numbers favor the rich and organizational profitability. The fact is that 90% of US population can only yell and bitch. Unless they start contributing to the tax revenue, politicians are not going to listen to them. After all who does not want money? US is a super power because of its capitalism. It is not surprising that enemies of US would want to destroy its economic foundation.

Here is a recent study on the effect of China, on US jobs Tallying the Toll of U.S.-China Trade -
Good, nice study. Yes, level playing field is important. America wants to play and compete fairly. No one wants to buy products manufactured by slave labor. However, as long as cheap products are available, America will continue to buy them because it lowers inflation and grows economy. The motto is: Look for lowest cost, spread freedom and respect human rights. Depending on which dimension you weigh as important, you can analyze US-China situation from that dimension. Unfortunately, the analysis from different dimensions will not always converge to a unique result. Hence the dilemma, and different points of views. US and India should continue to buy cheap Chinese goods and constantly push for democratic institutions and leveling of playing field from communist governments.
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Big Daddy

Super User
Here is a recent study on the effect of China, on US jobs Tallying the Toll of U.S.-China Trade -
I suscribe to WSJ and here is complete article. It has its critiques and it is not peer reviewed yet (see at the end of the article). I could not copy pictures from the article, but one picture was important that I am adding below at the top. The figure shows Chinese imports are only 5% of US spending. Restricting trade with China is not going to make a huge difference in US unemployment situation.


Tallying the Toll of U.S.-China Trade
Study Sees Americans Bearing High Economic Cost of Imports as Labor Market Struggles to Adapt


For years, economists have told Americans worried that cheap Chinese imports will kill jobs that the benefits of trade with China far outweigh its costs.

WSJ's Justin Lahart reports that counties throughout the U.S. have seen employment declines thst csn be attributed to the importing of inexpensive goods from China. Reuters photo.

New research suggests the damage to the U.S. has been deeper than these economists have supposed. The study, conducted by a team of three economists, doesn't challenge the traditional view that trade is ultimately good for the economy. Workers who lose jobs do eventually find new work or retire, while the benefits from trade, such as lower prices, remain. The problem is the speed at which China has surged as an exporter, overwhelming the normal process of adaptation.

The study rated every U.S. county for its manufacturers' exposure to competition from China, and found that regions most exposed to China tended not only to lose more manufacturing jobs, but also to see overall employment decline. Areas with higher exposure also had larger increases in workers receiving unemployment insurance, food stamps and disability payments.

Competition from China's imports in sectors such as toys is taking more of an economic toll in the U.S. than thought.

The authors calculate that the cost to the economy from the increased government payments amounts to one- to two-thirds of the gains from trade with China. In other words, a big portion of the ways trade with China has helped the U.S.—such as by providing inexpensive Chinese goods to consumers—has been wiped out. And that estimate doesn't include any economic losses experienced by people who lost their jobs.

"There are really huge adjustment costs to local communities that were far worse than people had appreciated," said David Autor of the Massachusetts Institute of Technology, who conducted the study with Gordon Hanson of the University of California, San Diego, and David Dorn of the Center for Monetary and Financial Studies in Madrid. While Mr. Autor, who specializes in labor markets, receives some funding from the National Science Foundation, this research was conducted independently of any interest group.

The theory of comparative advantage, framed two centuries ago by British economist David Ricardo, says nations prosper by focusing on what they do best and trading with other countries that have different strengths. But amid the surge in inexpensive imports over the past decade, some prominent economists have challenged that view.

In a 2004 article, the late Nobel Laureate Paul Samuelson argued that while trade may benefit some Americans, it does so by "decimating" the wages of blue-collar factory workers. Princeton University economist and former Federal Reserve Board vice chairman Alan Blinder, once a champion of free trade, in recent years has argued that U.S. firms' increased outsourcing to low-wage countries puts millions of American jobs at risk.

Michael Spence, a Nobel Laureate economist at New York University, said the new finding reflected how prevailing theories of trade aren't up to the task of dealing with the breakneck pace of China and other developing economies. Since the world has never seen such large countries grow so quickly, history isn't much of a guide. "It's not like we can look to the past and ask ourselves what happened last time this happened, because there wasn't a last time," he said.

Because the surge in goods from China has swamped import growth from other low-wage countries, the researchers focused on Chinese imports. They studied 722 clusters of interrelated counties covering the entire U.S. Some communities were more exposed to China, because they produced goods such as small appliances where Chinese imports have surged. Other regions were concentrated in industries like heavy machinery where Chinese competition has been slower to build.

A pattern emerged, with areas where factories were most exposed to Chinese import growth faring worse than the less exposed. Between 2000 and 2007, a community at the 75th percentile—one with a greater exposure to Chinese import growth than 75% of all communities—saw a manufacturing employment decline of roughly one-third more than communities at the 25th percentile.

Factory job losses were just the beginning. High-exposure areas tended to see employment outside manufacturing fare worse than in low-exposure areas. With fewer high-paying factory jobs supporting the local economy, and a growing pool of former factory workers entering the labor market, nonmanufacturing wages in the high-exposure areas were depressed.

Asia Today: A new study suggests that the impact of trading with China could be worse for the U.S. economy than previously thought; Australia is seeing a reversal in the rise and rise of its currency, while China continues to guide the yuan higher.

The economists also found that higher exposure to Chinese imports led to larger increases in unemployment insurance, food stamps, disability payments and other government benefits. Those add up to big losses, they said, because the higher taxes the government must collect to pay for benefits, and the way benefits reduce people's incentive to work, makes the economy less efficient.

Dartmouth College economist Douglas Irwin said the new research painted too bleak a picture. There are important benefits of trade that aren't captured, he said, because nobody has figured out how to measure them. For example, commodity-producing countries the U.S. exports to have been boosted by China's growth, creating greater demand in those nations for U.S. goods. "But if we had more exports of (Caterpillar) heavy equipment to Australia, that's not being measured" as a gain from trade with China, he says.

It's also worth noting that many U.S. manufacturing jobs have been lost to factors such as the recession, outsourcing and technology, not Chinese imports.

The economists themselves were surprised by the results. Research Mr. Hanson conducted in the 1990s, based on data from before China became such a global player, suggested trade's effect on the U.S. labor market was small. "With the China study, I did not anticipate that a dozen years could make such a large difference in terms of the greater quantitative impact of trade," Mr. Hanson said.

The research is still awaiting peer review, but the economists have been presenting it at conferences.In earlier versions, they calculated gains from trade with China were completely wiped out by the losses from the increased use of government benefits. Some conference participants objected that the economists didn't weight appropriately how much of the rise in imports from China was due to growing American demand rather than low-cost Chinese goods winning out over higher-priced U.S. ones. The three economists adopted a more conservative approach.
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Yogesh Sarkar

Is it just me or does the world gold council seems to be promoting gold a bit too much to the retail customers these days, which at least in my mind means, that the bubble is about to burst!