The Nature of the Global Free Market

The significance of the global free market has been vastly underestimated in our efforts to influence our economic outlook. So much of the rest of the world is tied in with the United States in such a way that if we fail, they fail. Everyone has been forced by the extremely competitive nature of trade economics to run their country right at the edges of feasibility. This is great for progress, but it also comes with a risk of more complete failure. It is something of a synonym for our own individual or national credit-investment lifestyles.

As the economic video on a previous post humorously pointed out, in our fiat based monetary system, nations measure their currency not by any fungible commodity, but by relation to other currency. Lets take this to its logical conclusion:

• We incur a large deficit.
• We print a lot of dollars in the hope of decreasing the relative cost of our goods and value of our debts
• This causes the same sort of economic instability in other nations that caused our problems.
• Those nations print money in order to decrease the relative cost of their goods and debts.
• We end up right where we started.

What this proves is that even in a fiat, regulated, socialist heavy world, the free market is still running the show. You can push the numbers around, but in the end, what really matters is whether you produce a desirable product and sell it at a reasonable value.

I found another example of this thought in an odd cooking website, of all places. The Big Mac Index  is a method of measuring the purchasing power parity of various currencies by comparing the price of a Big Mac in each country. My immediate thought was Japan; land of the hundred dollar melon. Strangely enough, Japan wasn’t near the top of the list for cost of a Big Mac (about 280 yen or $2.62). This is because things like the purchasing power of your currency, and the number of zeroes attached aren’t the only important factors. In the U.S. it takes abut 13 minutes for the average citizen to earn enough money for a Big Mac, in Japan, only 10.

As I once learned from a business administration lecture, a man by the name of Deming revolutionized the industrial strategy of Japan after WWII. He put their focus on quality at a time when other nations were putting theirs on quantity. This is how they manage to live on a small island and be one of the best producers of high tech goods in the world, with a thriving economy. People buy their goods, not because they are cheap, but because they are too high tech to be produced in most other nations.

Rather than trying to compete with the cheap labor of China, Mexico, India, and Brazil, we should be competing with Japan for the products of tomorrow. This is the path to progress and prosperity. Adjusting interest rates and printing money is nothing but smoke and mirrors.

Update: I found a great post on the subject here: The U.S. Can’t Unilaterally Inflate

What is the Ideal Value of the Dollar in Today’s world?

With all this talk lately of which way the economy is going to break (is it going to be depressionary deflation, or hyperinflation?), the question we really need to be asking ourselves is: what is the ideal value of the dollar in today’s world? Barack Obama doesn’t strike me as a gold standard kind of guy, so for the foreseeable future we are stuck with printable money.

If the value of the dollar is high, foreign goods are cheap to us, and our goods are expensive to them. this leads to trade imbalance in their favor. This can lead to a reduction in demand of our goods, reduction of manufacturing, GDP, wages, an increase in debt, etc.

If the value of the dollar is low, foreign goods are expensive to us, and our goods are cheap to them, leading to a boost to our manufacturing and exports.

Complicating this is supply and demand. If every nation in the world pumps up their inflation in order to boost manufacturing, pretty soon you have people working all day to build items that no one really needs any more. Once you have tires for your truck, getting eight more doesn’t do you any good. With the rise of China, we may be approaching that level where the market gets a bit saturated around the edges. When this occurs, it is time to move towards quality, tech, and automation. We can’t compete with cheap foreign labor in kind, nor should we desire to. What do you sell someone who already has all the basics covered? Better versions of what they have. Japan has survived with a currency as highly valued as it is because they sell things that are too complex for others to make.

Printing money doesn’t create wealth, but it does move it around. When they print new dollars, those new dollars are worth just as much as the dollars in your bank; those dollars just aren’t worth what they were the day before.

Back to the question at hand. What is the ideal value of the dollar, in today’s global market? I’d like to see it about 25% lower. Not all at once of course, but maybe over the course of two years.

Compromise

“The fellow who says he’ll meet you halfway usually thinks he’s standing on the dividing line.” -Orlando Battista

When you hear the top political candidates speak, one of the more common qualifications you hear them push is their ability to get compromise between democrats and republicans. What does a bipartisan compromise mean in America?  There are a few ways we break the deadlock.

• One is when individual representatives decide to sacrifice their convictions on the current issue in exchange for pushing through their own pet project they know would never fly otherwise. We call this pork.
• Another is to remove all the parts of the bill that are offensive to anyone, usually removing the taxes that will pay for the project, or the regulations on how it will be used.
• Or they can just spread panic and try to push it through under public pressure before realization and regret set in.
• Or they can just reallocate the money from something vital and force the other side to re-fund that (as seen with the Iraq surge, and California budget under Schwarzenegger)

None of these are helpful. The second example, splitting the difference, is what most often appeals to the public. This is like having each party with a hand on the steering wheel. The Democrats wanting to turn left, the republicans right; meanwhile the media is in the back seat rooting for the underdog.  We will hit the center divider every time.

 

There are ways to affect compromise that aren’t dirty. An example would be this plan put forth by Bob Ingles. He proposes starting up a carbon tax (democrats want), but offsetting the tax by reducing taxes elsewhere, such as income taxes (republican opposition evaporates). I’m a fan of taxing problems to fund solutions. Pollution is a much bigger problem than income.  If we give the free market incentive to clean up, they will do so. Since this is as much a behavioral issue as a technological one, I would consider it progress. Imperfect progress (for much the same reason as traffic cameras), but still far better than the business as usual methods of compromise.

Speed Camera Pimping

It looks like people are now taking advantage of this new, guilty until proven innocent folly in order to hurt their rivals. ‘Speed Camera Pimping“, as it is being called (Plate Cloning in Europe) is the act of putting a printout of someone else’s licence plate on your car and then intentionally zipping through red lights in order to rack up tickets. The city has a conflict of interest in this case since it is far easier for them to continue to accept these vast revenues than to solve the problem.

How Does Inflation Work?

This motion picture from the depression era explains nearly everything. Well, this is a cow…

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