From a stockmarket trading site I came across the following.
The basic resources of production and gross advantages in same ,labour and materials, remain in the same markets that have the most room for development/growth.How could they not. Hence , for every £ we try to throw at growth in mature developed countries it is almost inevitable that without controls an excess portion of it will find it’s way to those ‘developing’ countries/regions. The feedback loop on this process is reinforcing in that it encourages ever more capital investment to flow away from the very countries who can least afford to suffer that consequence ,but whom paradoxically remain the main source of capital.These countries have large, long standing socially financed commitments to meet and basically left unchecked they will struggle to meet those commitments.
Let’s separate out the factors of production in the aforementioned list to check the truth of the assertions.
*Raw materials [Russia, Saudi Arabia, Brazil, US, Africa, Australia]
*Capital Goods [Japan, Germany, US, China, Taiwan, Korea]
*Labour [China, India, Asia [generally] Africa]
On what basis would an investment of $100 in the US flow to say China? My neighbour postulates growth. This is a quite valid supposition if greater returns to capital are available.
What hasn’t been differentiated are the two different forms of capital flow. Foreign Direct Investment flows [FDI] and liquid, speculative flows into financial markets.
The positive feed-forward loop mentioned, can apply to speculative capital flows. Certainly where a bubble forms, as in the Chinese stock market into late 2007, this is true. However, it can flow out again just as quickly.
Of far more permanence are the FDI flows, which in part are attracted by lower wage rates, and non-mature markets for goods/services.
The conclusion drawn however is erroneous. Capital exists to earn a return. Ownership of that capital is not ceded. Different levels of control over that capital do exist. In hot flows, a very high level of control is maintained. FDI control, in part, resides within the legal enforcement of Property rights etc. Here, obviously lies an area of risk.
In one scenario with FDI, if we assume Property Rights are upheld, then dependent upon the accuracy of analysis with regards to returns on capital, we can state that the FDI investment of capital helps, rather than hinders the social contracts entered into.
What is the harm in that ,surely the free market should be left to run it’s course,this will be the most efficent outcome. Well ,if it was truly a free market then maybe so,but it isn’t free is it. The market interference from currency pegging alone is evidence of that. More is to be found with central control over quotas and capital movement in the form of corporate activity permitted ,or not permitted to protect domestic interests.
Indeed the free market will or would provide the most efficient outcome. It is important to avoid generalisations with regard to degrees of freedom within various markets.
Currency pegging is not exerting control over the currency market. It is expropriation from those using and relying upon the currency as a store of value, but exhibits no control over the free market.
Essentially, financial markets, in their current form, remain free markets. True various institutions try to control them but have not, and cannot succeed if they [financial markets] retain their current form.
Government can and does however control the money supply. This hides and distorts the free market mechanism. Thus governments seek to exert control through their control of the money supply, visible at the injection point of the short-end rates. For this to succeed, they require complicity of the banking system and control of the Central Bank. In addition, they require a non-critical population at-large, who lack the understanding to see through the veil-of-deceit.
When you cut through all of this it comes down to self interest.
The tradeoff is this. To raise the standard of living in say China as quickly as the Chinese want ,the standard of living in the mature countries is going to go down ,not plateau ,but actually go down. It must because in those countries they simply cannot compete for economic activity based upon labour costs and skewed monetary costs that come about through currency manipulation and other similar activies.
Here we encounter the sum-zero fallacy. If China is to win, America must lose. In economics, this is simply incorrect. With the theory of the division of labour, all can win. The division of labour drives [under competition + technology + capital] prices lower. Lower prices equate to a higher standard of living.
Labour costs are an excellent example of the faulty reasoning. Labour costs represent only one variable in production. Capital is another vital variable [amoungst other variables] that increases productivity. Total productivity based on fixed and variable costs determine the profitability of an undertaking.
Thus an American worker, working at higher wages than his Chinese competitor, utilising a higher proportion of capital, can produce more units than can the Chinese worker. The higher unit production spreads the costs over a greater number of units, thus lowering the selling price, while maintainig profit margins to economic viability.
I actually see no way the Chinese are going to say ,ok chaps ,let’s really play with a straight bat ,and try to find that elusive equilibrium that we can all live with. To date they show no signs of that. They will continue to try and reap the outperformance until it is no longer possible to do so. The only question is do the mature countries foolishly allow them to do that through this so called free market farce ,or do they become proactive in moving that point forward.Doing the latter wouldn’t be that difficult to do ,exchange countrols ,that limit the movement of capital and also impose £ for Yuan control over what may move across borders would get the job done.
Assuming the Chinese are actually guilty of what they are accused of, what would be the best way to combat this tendancy?
The advocated Protectionist solutions have historically failed time-after-time. Why repeat the same mistake again. True, unfettered, laissez-faire capitalism has succeeded historically, and would succeed again, if control of the money supply were stripped from government and socialistic controls removed.
This would inarguably cause inflation in mature countries, but actually it would be healthier inflation because labour costs would rise in those countries along with sustainable employment. No more jobless recoveries.
Even people retired ,but with savings would benefit if their savings were locked into inflation linked wrappers.It hardly needs pointing out that some people would suffer in that they could not benefit outright ,but there is no solution that could accomplish this.
When is debasement [inflation] of the money ever healthy? This draws upon the fallacy that higher wages increase employment. Stickyness of wages and their inability to fluidly reset at lower levels is directly responsible for unemployment. The complete opposite of what is claimed. This displays a fundamental lack of understanding of what drives employment and growth.
True, in an inflation, savings in say TIPS securities are a far better opton. However it is incorrect to say there is no solution. The solution is simple. Take the control of the money supply away from government. Eliminate the systemic policy of continuous inflation.
I just don’t see a sustainable standard of living future in some countries if they do not step up the fight to protect their interests.IMO they are being innately silly in allowing themselves to become economic doormats to developing countries,particularly China.There’s a more equitable route to balance all of their needs ,but it won’t happen by simply doing nothing ,or by chasing this nonsensical notion of ‘free trade’. LOL..whenever was it really ‘free’.I wonder what in Chinese is ” Heads I win ,tails you lose”.
Restoring free trade is exactly the way forward. Historically free trade has delivered the greatest creation of wealth. Protectionism, historically has delivered disaster. It is the fundamental misunderstanding of free trade within the electorates, that allows governments to expropriate under their very noses, wealth that should by rights accrue to them.
Indeed ,what other than trade controls is ever going to persuade our wee Japanese friends to stop messing around with their economy in such a way that they are actually forced to develop their economy into a more evenly balanced entity that does not rely so heavily on exports. In nigh on 20 years they have failed to find a solution to that problem left to their own devices.
This alludes to a misunderstanding of trade. To export, you have to import. I exchange a Toyota for X It is because X can take numerous forms, that the confusion arises. The possibilities are:
*Money [an exchange good that has very high exchangeability & fungability]
*Goods
*Service
*Debt [is a provision of capital that exchanges PV for FV]
If money is taken as an exchange good, this money will store value [in a non-governmental controlled money] until it is exchanged for a completing transaction on the original exchange. This may not be with the original entity of exchange.
Japan, being berift of natural raw materials, must import raw materials prior to any export of manufactures.
Debt, or the loaning of capital, is a provision of a service by the contractor of the debt. The debtor undertakes to return principal + interest to the creditor. This is an export service. The creditor feels comfortable that the return of principal + interest is a valuable exchange for PV goods supplied.
Thus, there can be no exports, that do not correspond to an offsetting import. The trade deficit, essentially tracks the willingness of exporters to exchange PV goods for FV services. This is why the Central Bank manipulations of the short-end interest rates [money supply] can seriously distort the production cycle.
Japan’s problems relate not to export/import, rather to BOJ control of the banking system and systemic failure of their supply of money through the 1980’s and beyond.
Global trade imbalances have led to global debt imbalances and we are where we are ,unable to continue in that same manner.
Nothing to do with trade. Everything to do with money supply and the banking system.
