On Free Trade and Policy Reform

A recent article on Seeking Alpha pointed to the US commitment to free trade as a source of the economic trouble for a the unskilled and semi-skilled segments of the US working class. It was a thought provoking piece, even though the primary point is well known to everyone – as far back as the NAFTA treaty debates and Ross Perot’s first presidential campaign this was a topic of discussion.

My comments were as follows:

The US government – whether Republicans or Demcorats are in power – has developed an addiction to the current trade deficit system. This is due to the foreign exchange mechanism recycling trade surplus nations’ excess US Dollar reserves back into the US Treasury securities market. That in turn makes the US government as large and as powerful a part of the US economy as it has become, and governments are typically loath to cede power.

Michael Pettis of Peking University, among others, has done a good job of reminding us how this mechanism operates and why China is so constrained in terms of what it can and cannot do with its surplus currency reserves. The same analysis extends to Japan, Middle Eastern oil producers, etc. I would urge anyone who wishes to truly understand this to avail themselves of the excellent resources available.

If you map the transaction flows (as an accountant I like to use T accounts) you will see that one of the results of the global trade system is that wealth goes from US businesses and consumers to the Treasury via the conduit of foreign central banks and governments. It is then disbursed through the policy making process. This is a sort of “hidden tax” inasmuch as it is a transfer from the private to the public sector – all taking place under the guise of that most capitalistic of principles: free trade.

Rather perverse, n’est ce pas?

This is something I think may not be as well appreciated as it should. Those who would like to see the size of the US government and its role in the US economy scaled back  – myself included – have some serious issues to sort out. It’s going to take a good deal more than Tea Party rallies and fiery speeches on the Mall to fix this.

A major concern, which makes me less optimistic than I would like to be, is that the folks who are getting all the attention seem to be so hopelessly under-informed in terms of economic and financial issues. If we want to move in a  positive direction, we need people who understand what the situation is, what the constraints are, and – most importantly – aren’t already captive to the interests of the current system.

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