In his latest Washington Post column Robert Samuelson warns about the potential consequences of the trade war between China and the United States:
The name that comes to mind is Charles Kindleberger, an eminent economic historian of the post-World War II era who taught for years at the Massachusetts Institute of Technology and was a prolific author of books and articles. One of his masterpieces was “The World in Depression, 1929-1939.â€
The crux of Kindleberger’s thesis was that the underlying cause of the Depression was a vacuum of leadership. By this, he meant that Britain — which had provided that leadership in the 19th century — had been so weakened by World War I that it could no longer perform that function in the 1920s and early 1930s. Meanwhile, the United States — which would fill that role after World War II — was not ready to do so.
In this context, the dominant country would keep its markets open to imports, so the trading system would not collapse under the weight of mounting protectionism. Another requirement was that the leading country (the “hegemonâ€) had to have the financial strength so it could lend to banks and other needy borrowers during a crisis so that the financial system, the repository of much wealth, would not self-destruct.
In the recent foreword of the latest version of Kindleberger’s book, economists J. Bradford DeLong and Barry Eichengreen of the University of California at Berkeley put it this way:
“The root of Europe’s and the world’s problems was the absence of a benevolent hegemon: a dominant economic power able and willing to take the interests of smaller powers and the operation of the larger international system into account by stabilizing the flow of spending through the global [economy] . . . by acting as a lender and consumer of last resort.â€
I’m unhappy with the present situation, too. It didn’t have to be this way. The United States didn’t have to lose millions of manufacturing jobs in the space of just a few years in the early Aughts. The same number might have been lost over a period of decades rather than a period of years. We didn’t need to see the wealthiest prospering so mightily while the rest of the people struggled along. We didn’t need to have personal consumption expenditures approaching three-quarters of the economy.
We are a country not a benevolent organization. Rather than governing by slogan or sound bite (or tweet) policies must be carefully constructed, monitored, and managed so that they benefit the great bulk of the people rather than just the Walton family or a handful of other billionaires. It’s the results that matter, we have seen the results, and they have not been particularly good.
I’m in favor of free trade but, make no mistake, a free trade agreement can be written on the back of a napkin. When an agreement runs to thousands of pages it is not a free trade agreement. It is managing trade to pick winners and losers and such a process is inevitably political.
Had the situation been managed patiently and prudently from the beginning the necessary correction would have been less painful. But a correction is, indeed, necessary. We can’t survive economically as a country with just retail and health care. We can’t continue to have U. S. companies finance the world’s R&D while the Chinese reap the benefits through theft or illegal forced technology-sharing agreements.
And so……
Is it more important and in the country’s long term interests to engage in trade sanctions in an attempt to rectify these trade problems, or to latch on to an issue to bash Trump. Excuse me, I mean or to advocate ideologically pure free trade policy.
I’m not sure I’m familiar with Kindleberger, but he seems to be writing in the genre of advocate of the “long peace” btw/ the Napoleonic Wars and WWI as the result of Britain acting as an outside balancer. To a large extent this was because Britain disengaged from European affairs, not acted as a European hegemon. It pursued its financial interest and investment opportunities abroad for the enrichment of its own fiscal state, not as a benevolent charity. The gunboats and blockades were always available when default threatened. I can see why an economic historian may find such capital investment as one of great progress, but I doubt very much we are in that world anymore.
or, said another way, pretty much what I advocate as the attitude of the United States towards the rest of the world.
Something that occurred to me in thinking about PD’s comment and mine is that I don’t believe that many Americans realize how great an outlier the United States is and the degree to which our way of life depends on the qualities in which it is an outlier.
My preference would be for the United States to remain an outlier as it has always been but I recognize that many Americans today really want the U. S. just to be a “normal country”, not realizing how great a sacrifice in our way of life that would mean, how great the curtailing of freedoms we take for granted, and that normal countries are ethnic states.
I oppose both the interventionists, left or right, and the isolationists. I just don’t think that engagement with the rest of the world needs to mean that you’re constantly invading some other country.
Also, I’m not sure, having read the rest of the forward that the shoe fits here. Kindleberger advocates a global liberal economic order, which mainly entails open markets and currency conversion. He doesn’t appear to discuss the military aspects of this, such that world trade necessitates that goods and capital can flow btw/ states with their intended purpose. If the pirates steal the goods or states use their power to extract unanticipated benefits from the bargain, voluntary trade halts.
But Kindleberger believes that a liberal economic order can only be maintained by an economic hegemon willing to invest in the order. He doesn’t care whether such investment is intended, or the result of the hegemon pursuing its own self-interests. It seems like he should care because he believes that hegemon is not only essential, but can be expected to invest more into the liberal economic order in the face of free-riders who benefit without contribution. He is sympathetic to smaller states who are unlikely to be able to make a meaningful contribution in any event, though the benefits generally flow disproportionately to them. Larger economic powers can do well relying on internal consumption, just not as well as they would in a global system.
The forward appears to misrepresent some of his views pertaining to international or regional organizations. He appears skeptical of them as a substitute for the economic hegemon. Regional blocs will tend to think about regional interests. Multi-state consortium will find it to too difficult to coordinate policy and will ultimately promote their own national interests. He wants an individual state to have disproportionate economic power, even though this tends to be undermined by its own diffusion of capitol investment and technology to other states.
Contrary to Samuelson, I’m not convinced Kindleberger would oppose U.S. policy as against China. He believed an economic powerhouse was necessary to impose an international liberal economic order, and arguably China is an opponent of that. He does believe that the powerhouse should take one for the world order, but his sympathies aren’t with large economic states like China, they are with states like Vietnam.
My own analysis is that the establishment of the Federal Reserve system was a major contributor to the depth and length of the Depression.
Kindleberger: “a benevolent hegemon: a dominant economic power able and willing to take the interests of smaller powers and the operation of the larger international system into account by stabilizing the flow of spending through the global [economy] . . . by acting as a lender and consumer of last resort.â€
Financial institutions are, by necessity, conservative. The Federal Reserve Act of 1913 changed all the rules. There was little left to conserve. Replacing the crew of a destroyer with the crew of a cruise ship might get the vessel away from the dock but it’s going to be a while before it is anything but a hazard on the high seas. The Glass-Steagall of 1933 was a desperate attempt to repair the damage.
“Must be carefully constructed managed and monitored “
Isn’t that straying into the area of socialism’s “great conceit�
How to reconcile free American enterprise with business done abroad where our rules don’t apply?
Does our government then behave as those governments do, or cut these corporations loose to take their own risks and responsibilities?
I would say leave tariffs on and let Apple lie in the bed they made.
No. I’m just advocating good government rather than slapdash, corrupt, bad government. I’m not claiming that all government is good or that more government is invariably good.
My opinion: reciprocity.
I definitely think that supply lines are risks that belong to the companies not to the public.
In the US, the Great Depression was caused by inter-bank loan failures – ‘liar’s loans’.
The Stock Market bubble was fueled by investment banks borrowing from commercial banks, and with each subsequent crash, fewer investment banks could repay the commercial banks.
Investment banks lent on margin, and as the stocks crashed, the margin calls forced stocks to be sold. This selling drove the stock prices lower and kicked-off another round of margin calls.
As the margin based accounts defaulted, the investment banks were unable to payback the commercial banks, and the commercial banks stopped lending. At this point, it did not matter. The entire financial system was connected by fractional reserve loans that would never be repaid.
During the 1930’s, the Dust Bowl was an additional downward pressure. As the crops failed, farmers defaulted on their loans, and this caused banks to stop lending and call-in loans.
During the 1920’s, international finance (inter-country lending) was an additional accelerant, and the price of the British pound was a factor. Again, the result was additional fractional reserve loans waiting to default.
The post-WW2 prosperity was due to the financial stabilization provided by Glass-Steagall and Bretton Woods. Both of these began to fail the day after they were signed, but due to the structure, they would work for some time. Bretton Woods was doomed the day LBJ removed the gold cover.
(Dollars were required to be covered by a specific percentage of gold. It was like the federal debt limit. It slowed the ‘printing press’, but it did not stop it. Removing this gold cover was like removing the federal debt limit.)
Under Bretton Woods, the signatories could exchange dollars for a specified amount of gold, and as more uncovered dollars were produced, the dollar value decreased. Since dollars could be exchanged for gold, countries began doing just that, and by 1971, there was a run on the US gold supply. Nixon defaulted on the dollar.
The default on the dollar ended Bretton Woods and the reserve currency. Since the 1950’s, the eurodollar system had been in place, and it replaced the Bretton Woods system. (I believe that the Marshall Plan was the basis for the eurodollar system.)
The global system can also work to the degree that there are few credit-backed monetary systems, but with the increasing amount of credit-backed currencies, the gold cover problem returns. Probably the late 80’s and early 90’s, the amount of global credit-backed currency caused the commodity aspect of currency to overtake the transactional aspect of it.
A credit-backed monetary-financial system is built upon trust. It only works as long as there is trust, and this trust is limited by the creation of this currency. A credit-backed monetary system is cumulative. Each year’s currency increase or decrease is added to all the previous years.
Tangible based value must be added to the system to retain this trust. Fiat asset values based upon an increase in those future asset values, based upon an increase in those future asset values, based upon an increase in those future asset values, ad infinitum is not sustainable.
An economy that does not produce tangible goods and services cannot increase the tangible asset value supply, and relying upon an increasingly fiat value based system cannot be sustained. At some point, the fiat value overwhelms the tangible value, and fiat value begins deflating leading to a hyper-deflation.
At some point. China will no longer need to trade with the US. They will no longer need to trade their increasingly tangible value for our increasingly fiat value. It should be noted that the same people who believe that this could never happen are the same people who believed that the housing boom would never end.
The China trade-deficit bubble will eventually burst.
There are other effects of an unregulated credit-backed monetary-financial system. Fiat values that are financially based will accrue wealth to the owners of financial assets. In such a system, the primary way to increase wealth is through financial assets, and as the system becomes more financially based, tangible wealth will decrease in value.
In such a system, there is no way to decrease the wealth gap. Hence, mortgage backed stocks become more valuable than the houses backing the mortgages, and such a system can be sustained as long as everybody trusts that it will continue.
And, MMT cannot save the day. It properly describes a Modern Monetary System, but it incorrectly prescribes increasing fiat value.
“Is it more important and in the country’s long term interests to engage in trade sanctions in an attempt to rectify these trade problems, or to latch on to an issue to bash Trump. ”
Certainly won’t see me bashing anyone for wanting to try to rectify trade issues. However Trump is open to criticism, like anyone else, for how he goes about it. He made sure that the tax cuts hurt blue states as much as possible, and now is trying to make sure that voters in red states are not being affected so much by the tariff war, with subsidies paid by all of us. The inconsistencies and the low level competency of many of the people he has as advisers just isn’t very reassuring. So, here we are almost 3 years into his presidency and we still dont have a trade agreement with China. Or a wall. Or cheaper and better health care for everyone. We are still in Afghanistan. North Korea still has nukes. Or, well I could keep going but I hope the picture is clear. The guy just isn’t very good at carrying out and finishing stuff.
Steve
You addressed what I see as a basic problem in our very highly partisan and polarized political landscape. The only things that get done, even when a single party holds the House, Senate, and White House, are the narrow points of agreement within the majority party.
For Republicans that’s tax cuts. They all agree on that. What is it for Democrats? I’m concerned it’s becoming a laundry list of giveaways plus an unenforced southern border. Government-paid health care, college education, national $15/hour minimum wage.
It has NOT always been that way. There were overlapping points of agreement in the two parties. There was a center ground and that’s where most of the activity was. There is no longer any center ground. That was true for most of 200 years.
And yet, Dave, that go along get along has resulted in a steady increase in the size, intrusion, ability to manipulate and financial burden of government. I’d say the left is winning in a route. Compromise is over rated.
“I’m concerned it’s becoming a laundry list of giveaways plus an unenforced southern border. Government-paid health care, college education, national $15/hour minimum wage.”
Maybe, but they just dont have a history of giving in to the radical fringe of the party. Remember it was the GOP that impeached Clinton over lying about sex and obstruction of justice. The Dems have even more reason to impeach, but they have not done it. What piece of GOP legislation have they now voted to repeal 40 times? The Mueller investigation is over and they haven’t started 7 new ones already. Not saying they cant turn radical, just that there isnt any evidence of it in their behaviors. They voted to increase enforcement of the border by reinforcing the ports of entry, where most of the entry is now along with most of the drugs. They have talked about free health care and education for everyone in the past. Now they are doing it again and what time is it? Primary time. The only one of those I think has any real support is the minimum wage. My assumption is that if they regain power they will kowtow to their corporate donors and that won’t pass or it will be greatly modified.
In short, I dont really think that freshmen Congress people are going to run the place. Great scare tactics by the GOP, but I hope we know better.
Steve
I think that things really are different this time. I do not believe that a dash to the center once the primaries are over will be a successful strategy.
The tone of the post makes me think you are coming around to my long held belief that this is all intentional,l designed to screw most of us for the benefit of a few. But that’s probably just wishful thinking on my part!
Still, as I have maintained, it is hard to see the result of all of this over decades, and to see that the people that did it still maintain this was the best of all possible outcomes, and think other than I do.
And how did your team do on all those issues?