WHY THE USA CAN’T EXPORT ITSELF OUT OF ECONOMIC TROUBLE, AND OUGHT NOT TO TRY.

Many US economists have suggested that the US could compensate faltering US demand by increasing exports, forcefully creating a salvational imbalance on the back of foreign lands. This was tried before. It caused the Great Depression.

In the twenties, US industry had gone into an overproduction bubble. The sum of all markets had become too small for US production. The ingenious US Senate found a solution: preventing aliens industrialists from selling products in the USA. Thus, those apprentice sorcerers-economists thought they would increase the size of the market inside the USA, for US products. And it worked! For about two months.

The ressentful aliens spoiled it all. They retaliated in kind, rising their own custom duties sky high. Suddenly the export market for US production disappeared, and what was lost outside was larger than what had been gained inside.

This caused catastrophic damage to the US economy, because the USA was the world’s largest exporter (just as it is now).

US industry had to fire workers massively. Those, in turn, had to stop buying US products, and US production had to be decreased further, leading to ever more firings, and ever more decrease of production. (Then banks started to fail, and the Fed, instead of providing liquidity, did nothing of the sort, etc…)

Lesson?

Production should be in balance with consumption, and this is a world phenomenon, and to achieve this:
1) Let the local market adjust. And, if that is not enough:
2) Provide or restrict liquidity in a timely manner.

In the early thirties, the Fed viewed its role solely as “to take the punch bowl away when the party gets going”. When people are dying of thirst, as they were in the early thirties, that’s a mistake (that the Fed did, then).

Fast forward 70 years.

Greenspan provided liquidity after 1996 in an already overheated US economy. Apparently for Greenspan, the job of the Fed was to fill the punch bowl some more when the partygoers were already drunk. This led to the Internet Bubble. When that imploded on its own, Greenspan provided even more liquidity, creating the housing Bubble, and when that started to falter, gave it further juice with a Credit Bubble.

In a country such as France, the saving rate of families is 15%. In the USA, thanks to the Credit Bubble, it’s negative. In other words, US citizens are lending to each other money they do not have.

The US is a (supposedly) capitalist country which has run out of capital (everywhere one looks in the USA, capital investment is lacking, be it for bridges, trains, airliners, healthcare, the auto industry. Not one refinery has been built in ages, and they are not yet equipped with scrubbers to eliminate sulfur in diesel fuel. Most stuff is built in China. In California, the governor is talking about immediately cutting the education budget by 10%, releasing 22,000 convicts, etc… It’s a house of IOUs built on local property taxes, soon to collapse with housing and credit.

The proposed salvation has been to relaunch exports, because, in aggregate, US citizens do not have money to purchase anything without getting deeper in debt from … foreigners.

To give some more historical perspective: the French government of Louis XVI, having ruinously liberated the British American colonies from Great Britain, spent 45% of the government’s budget servicing its debt. This caused directly the French revolution (which occured within a few weeks of the US Constitution and first presidency, when the French General Assembly, unable to solve the budget crisis, proclaimed it was going to write a Constitution instead, just like in America).

Economists who propose to solve the US socioeconomic crisis by exporting are proposing something very similar to what was proposed by the US Senate in 1930: to EXPORT THE PROBLEM.

They are proposing for US citizens, paid in a debased currency, to work for other countries. Unfortunately those other countries are aware that having an industry is not just a question of having an economy, but more fundamentally, is a strategic necessity. One cannot defend oneself if one does not have the means to make tools and weapons. Europeans and various Asians are fully cognizant that way.

The long view: France got strong relative to Spain in the 17C and 18C, by manufacturing most of what Spain needed. In exchange, the Spanish dictatorship gave gold. All serious European economists have got to remember this, and it’s unlikely they will let the Euro play the role of gold, Europe that of Spain, and the USA masquerade as the new France, maufacturing everything for Europe.

France, indeed, has the most diverse industrial base in the world because she has a very long military memory. Faced with a total US embargo in 1939, whereas the Nazis were totally helped by US industry, France could depend only on herself. So, from drugs, to computer chips, to thermonuclear fusion, rockets, helicopters, planes to electronic skis, to telecommunications, the French do it all, state of the art. This strategic methodology is imitated by all ambitious countries, to the best of their abilities. Those countries are not going to sit and watch their industries die as the USA invade them with products produced with a debased currency. China and Japan have learned their lesson in the 19C. The first to scream will be France, and, backed up by the gigantic Europe Union, and its domesticated bear, and friendly panda, she has the means to stop that latest US non sense.

Thus it’s unlikely that the USA will be anymore successful in an economic war on the world in 2008 than it was in 1928. The result will be the same: retaliation. In 1930, the USA was ruined by the economic backlash. So would it in 2010.

A one way US export “boom” would be an aggression against the world. It would have much in common with the aggression in Iraq, namely ignoring how other people feel, how they think, and how similar their problems are. And trying, once again, to use force onto others, instead of using discomfort onto the USA, to solve problems the US itself created to itself. The US socioeconomic problems cannot be exported, they have to be solved at home.

Patrice Ayme