Note: The author does not have any political agenda. The following study is purely based on the interest to analyze and grasp the true condition of the global economy and where all of us are heading, to heaven or to hell. This study is not burdened by any special interests and does not depend on any non-public information. Only tools used in the study are logic, common sense and a bit of humor.
In recent years some have turned their attention to a real effect of the globalization, that is, the loss of jobs in the trade deficit countries, mainly in USA. The jobs lost can be due to outsourcing by American companies or the replacement of American companies by foreign rivals; the examples of the latter kind are like RCA and Zenith replaced by SONY and Matsushita, and big three American automakers steadily losing market shares to Toyota and Honda. It is easy to see that the workers in USA who have lost their jobs due to the globalization are the victims, but who are the benefactors of globalization? Many will be quick to point their fingers at big American corporations, but are they? The big American corporations mentioned above, like RCA, Zenith, and America's big three automakers are clearly the losers too. Actually many US companies, big and small, are under tremendous pressure of competition from oversea rivals. The true nature and the consequence of the globalization are much more complex than the naive thinking, and require an objective and thorough investigation to reveal.
"Globalization" is in essence a series of international agreements to lower or abolish tariffs or non-tariff trade barriers, and as the consequence the amount of international trades of goods has exploded. To make international trades possible, there must be some mechanism to let one country's currency be converted to other country's currencies. Let us take a Chinese exporter as an example. When this Chinese exporter sells some Chinese made goods to an American buyer, he receives US dollars as the payment. In order to recoup the production cost and the profit of the sale so that he can use them to produce a new batch of goods in China, the Chinese exporter must convert his US dollars back into Chinese yuans. He can directly sell the dollars back to Chinese Government, or more conveniently he can sell the dollars in a currency market where various currencies are sold and bought. However, the current setting of "globalization" is to bestow unlimited power of manipulating the value of a currency into the hands of its government. A government can always push down the value of its own currency by flooding the currency market with printed money, but is hard pressed if it wants to push up the value of its currency. For example, Japanese Government can always destroy the value of Japanese Yen versus US Dollar by printing whatever amount of yens and dump those yens on the currency market for US dollars, but if Japanese Government wants to push up the value of Yen, then it must borrow US dollars from US Government and dump them on the currency market for yens, apparently not a very effective way to operate. On the other hand US Government can always lower the value of Dollar versus Yen by dumping whatever amount of dollars fresh from the printing machine onto the currency market for yens, but will be hard pressed if it wants to boost the value of Dollar. When Japanese Government earnestly manipulates and guides the value of Yen lower whereas US Government gives explicit consent to this action through deliberate ignorence of its duty to counter this manipulation of Japanese Government, then the value of US Dollar will be boosted artificially high versus Japanese Yen. The result is that the Japanese made goods will enjoy a substantial cost advantage over US made goods, and USA will run a large trade deficit against Japan, and Japan a large trade surplus against USA. It is not only Japan, but almost all the Pacific Rim countries are following this tactic of Japan to deliberately destroy the value of their own currencies versus US Dollar to sustain their export engines, and US Government gives consent to each of such manipulation by not countering in the currency market; the result is the tremendous US trade deficit against Pacific Rim countries. Why are those Pacific Rim Governments and US Government acting like what they are doing about their currencies? The motivations of Pacific Rim Governments are obvious. In the textbooks of modern economics it is clearly written that trade surplus boost economy and trade deficit reduces economic prosperity. Since every government in the Pacific Rim countries wants to boost its economy, they are just following the advice of modern economics, that is, destroy the value of their own currency by manipulation, increase their exports to USA, and expand their trade surplus into economic prosperity. Then why US Government gives consent to those Pacific Rim countries to manipulate their currencies and to cause the huge trade deficit of USA? Because US Government has discovered that modern economics is totally erred when it comes to evaluate the effect of trade balance on the economy. Actually for matured economic entities like Japan and USA, contrary to what modern economics is saying, trade surplus country suffers economically and the trade deficit country enjoys prosperity (Ref. 1). Since every US president wants himself or his successor of the same party to be reelected, he must boost US economy, and thus must allow USA to run a larger and larger trade deficit through the currency manipulation of Pacific Rim Governments. That is why the large trade surplus (matured) country, Japan, has assigned herself into the chronic economic recession (Ref. 2) and the tremendous trade deficit country, USA, is doing so fine economically (Ref.3).
Once we understand the logic of this "globalization" and the motives of various governments, it is easy to conclude (Ref. 3) that US prosperity of 1980's was not due to any supply side economics, but was the result of exploding trade deficit. The boom ended in 1987 when US trade deficit started to shrink, thanks to the sharp devaluation of US Dollar against Japanese Yen (from 1985 to 1990). US prosperity of the latter half of 1990's was again due to the exploding trade deficit thanks to the currency manipulation of Japanese Government, which has started in 1995 and is still continuing today. The burst of US bubble in late 2000 to early 2001 was again due to the shrinkage of US trade deficit thanks to the twin collapses of US Dollar versus Japanese Yen, the first one in the summer of 1998 and the second one in the summer of 1999. This series of observations is based on the conclusion that the ups and downs of the value of US Dollar vs. Japanese Yen foretells and leads by two years the ups and downs of US trade deficit which in turn shapes the ebbs and flows of US economic growth (Ref. 3).
The scheme to use trade deficit to create economic booms has the side effect of massive job loss. USA was very lucky in the period of late 1990's when the second explosion of trade deficit occurred. Computer technology has steadily grown for 5 decades and finally flowered as the affordable PCs have invaded average American homes and have ushered in the era of internet. This lucky event has created many new jobs at the time when old fashion manufacturing jobs have been lost with an alarming speed due to the exploding trade deficit and high valued US Dollar. Thus the economy boosting effect of the trade deficit is enhanced and the society of USA as whole did not feel much pain from the loss of manufacturing jobs. However, as the down turn of 2000 came, overseas countries with equally qualified talents in math and science has started to catch up with USA in high technology sector, and the substantial loss of high technology jobs has also started. Currently there is no good candidate-industry that can suddenly create massive amount of new jobs to counter the onslaught of job loss both in the old-fashion manufacturing sector and in the high technology sector. As the job loss accelerates, the effect for trade deficit to boost economy will be diluted substantially, and USA will experience a painful period of transition. At the end of this painful period, all jobs that can be shipped overseas will be shipped away, and USA will enter a phase that is called a "virtual" society in Ref. 3. Ironically in this phase of "virtual" society further expansion of trade deficit will not result in any more loss of jobs, and when trade deficit expands, economy booms and vice versa. It is very interesting to speculate how the daily life looks like in this phase of "virtual" society. The following dramatization will give a glimpse of the life to be in USA:
(Japan in this dramatization is just a collective phrase to mean many Asian countries as a whole).
Mr. A lives in TechValley, USA. He has been unemployed for 5 years and has not paid his mortgage for quite a while. Luckily the holder of his mortgage seems to have forgotten about him so he still lives in his house. One day Mr. A hears a knock on his front door. There is a man wearing a black business suit standing there. His business card says that he is an employee of The Federal Reserve System and is working as the loan officer of Japanese Government.
The man: "Good morning Mr. A. I am here as the representative of Japanese Government to offer you a loan of $100,000 a year. There is no interest on the loan, and you only need to start to pay back after 30 years."
Mr. A (a very honest man, and cannot suppress his astonishment): "Gee. But do you know I am unemployed?"
(The man stares into his virtual reality glasses.)
The man: "Yes, we know. You have a family of four and have been
a computer programmer, a very good one that is. You have not paid your
mortgage since your job, as the chief software engineer sailed across the
ocean along with the CEO job of GeekTech five years ago. You have been
living on credit cards. When you have run up a large debt on one credit
card, always there have been two new credit cards waiting in your mail
box. Thus you use money from new credit cards to pay off the debt on the
old one and still have plenty left to take care of your family. Now you
own 128 credit cards and have a debt of $300,000. This means every year
you spend like $60,000. For a family of four this amount of spending is
quite reasonable and this shows that you are very prudent. That is why
Japanese Government considers you as one of the priority candidate to have
this loan. Just sign here and your checking account will be credited every
month."
Mr. A (asked timidly): "But, are there any conditions attached to this loan?"
The man: "Yes. First of all you must cut up all your credit cards. From now on you are allowed to use only a debit card. Second, you should never use this new loan to repay your mortgage or the credit card debt you own. The loan is strictly for your personal and family spending."
Mr. A (now totally puzzled): "Why? Eventually they are going to foreclose my house and put a lien on my possessions if I do not pay, aren't they?"
The man: "Oh, Mr. A. You seem to be quite out of touch with the real world. Haven't you watched news recently? All credit card companies and mortgage banks have been closed down."
Mr. A: "To be honest with you I have been absorbed in constructing a game for parallel universes in the last five years so I am rather out of touch with the news of this universe. You know that I hope this new game will launch my second career. But please fill me in with the details if you have time."
The man: "Oh, Mr. A. You are a gem of American entrepreneurship. In the time when almost everyone in this country is living on credit cards you are still trying to start up a game business. Many folks are living on credit cards for twenty years or more, and all of our youngsters never know any real jobs after they graduate from colleges or graduate schools. They only know credit cards."
Mr. A: "I wonder why people go to higher education, they know that there is no job for highly educated people."
The man: "It is the old faithful of America, I do not know who started this, which says that the reason of all the job outflow is due to the lack of education. So every administration tries to encourage young people to go to colleges and graduate schools by creating more and more scholarships."
Mr. A: "But even if every American holds a Ph.D degree , jobs probably will not return."
The man: "That is right. You know in D. C. only residents are the president, congresspersons and their highly paid staffs. All the bureaucratic positions are either replaced by machines or are outsourced. I heard Pentagon has become the museum of history of wars. All the generals, captains and foot soldiers are all outsourced; who wants to enlist when everyone can live on credit cards. If our president decides to make an preemptive strike, he just order our oversea military center. Then all the planes and missiles will launch from oversea military bases and bomb the hell out of our enemy."
Mr. A: "At least no American life will be lost in that arrangement."
The man: "By the way the tech advance is also amazing. The other day a friend of mine had an appendectomy. He just fed his ID card into the slot on the front door of a hospital, the door opened, a chair was waiting for him. After the chair carried him to the front of a computer screen and he answered all the questions, a mechanical nurse and a computer doctor appeared to perform all the necessary tests. Then he was put to sleep. When he woke up, he was already in a hospital room. He stayed there for two days but did not see a single living soul. You computer wiz has really done a marvelous job; eliminated all the real doctors and nurses."
Mr. A: "I beg your pardon to be differ at this point. My last job was to perfect the hospital system, so I know all the ins and outs there. Your friend is not operated by machines. He is only operated by remotely controlled machines."
The man: "You mean that there is a back room in the hospital and there are real doctors and nurses hiding there to remotely operate on and take care of patients? But why they do not come out to face patients?"
Mr. A: "Not quite like that. Those machines are remotely controlled from an oversea medical center. Real doctors probably operated on a 3D image of your friend, using virtual knives and so on. All those movements are transmitted through internet to the machines in the real operation room to perform the surgery. Borrowing from your vocabulary, all the doctors and nurses are outsourced. I guess that no one wants to live a hard life of a doctor or a nurse when everyone can easily make a living with credit cards. By the way let us not wander too much into wrong directions. Please fill me in about the reason why they want to shut down all the mortgage banks and credit card companies, and why this sudden appearance of loans from Japanese Government?"
The man: "It is a long story. You must have learned from your history course in college that we have been running ever increasing trade deficits with Japan. Last year the deficit was something like 15 trillion dollars."
Mr. A: "Yes, I recall that I have learned that in the history course. But I do not know it is so huge. We just print that 15 trillion dollars from nothing and pay to Japanese?"
The man: "It is not so. At any moment the money readily can be spent is always capped to like one trillion dollars. But Americans buy things so enthusiastically we turn this 1 trillion dollars over 15 times a year, so Japanese receive 15 trillion dollars a year from us. What happens is that when we buy a batch of products from Japan, it is the Japanese exporters who receive the money, say 1 trillion dollars. However, Japanese exporters do not have any trust left in our Dollar, so they sell the dollars immediately in the currency market. Then Japanese Government must buy up those dollars to keep Yen/Dollar exchange rate at 105 Yen/Dollar, forever, so that Japan can keep exporting to us. When Japanese Government receives the dollars from their Yen sales, it uses the dollars to buy US Treasuries. Thus US Government receives those dollars and inject them into the credit card companies and mortgage bankers. Then folks like you can draw on the credit cards to buy goods made in Japan. The money flows in a circle. The speed for money to flow through this circle is very important. Faster the money flows, larger our trade deficit with Japan becomes, and American consumers have more goods to consume; that means more economic prosperity for us."
Mr. A: "It is rather complicated. Why not US Government just hires every working age American as a government employee instead of using credit cards to distribute money? If done like that, at least all Americans can pretend to have real jobs and can regain some self esteem, aren't we?"
The man: "We tried, that was, before the times of you and me, but failed miserably. You know the complexity of a bureaucracy grows rapidly as the number of bureaucrats increases. You can imagine what kind of nightmare it was when every American became a bureaucrat. In such a chaotic system, the money injected flowed ever so slowly. Thus the speed of the circulation of money plunged, American bought much less Japanese goods, our trade deficit with Japan dropped sharply, Japanese Government had less dollars and bought fewer US Treasuries, US Government received less money from the sale of treasuries to Japan so had less money to inject into the system, less American purchase of Japanese goods and so on and so on. The whole system just collapsed. That era is now called The Great Depression II. The disaster was arrested only when Japanese Government demanded that we fired all bureaucrats and replaced them with machines and outsourcing. That was the time when Pentagon was outsourced too. Now we have the most efficient and cost effective government in the world, it only cost 5 trillion dollars a year to run. On the other hand this credit card system is used to distribute the remaining 10 trillion dollars to 500 million Americans. Scholars now nickname this credit card system as New Deal II."
Mr. A: "If this credit card system works so fine, then why they want to abolish it?"
The man: "It is again due to the insistence of Japanese Government. In recent years our trade deficit with Japan has started to stagnate. They have done a close analysis of the reason of the stagnation. It turns out that it is our credit card system that is the obstacle to the expansion of the trade deficit."
Mr. A: "Why? The credit card system seems to me is capable of handling ever increasing amount of money to be distributed to American public, isn't it?"
The man: "It is not exactly the credit card system itself causing the problem. It is its necessary peripheral, debtor's prison, that is slowing down the speed of circulation of money. Japanese Government fears that eventually the speed of circulation will turn from stagnation to decrease as more and more US citizens are sent to debtor's prison, their trade surplus with us will shrink and another depression will come."
Mr. A: "Debtor's prison! That is the name from Dickens' novels! You mean that we have that ancient monster on this land of democracy, at this modern and civilized time?"
The man: "Yes, it is the best kept secret of US Government. Big Two media companies do not mention them in fear of triggering a panic among the public and sink the whole system. However, if you watch hard core news diligently and research a little bit, you can easily uncover the truth about it. You know the amount of money injected into the credit card system is not unlimited. There are always some irresponsible people who wants to spend all the money in the system for themselves. If they are not reined in, there will not be any money left for prudent folks like you to spend."
Mr. A: "Oh, I have not thought about that. How does the prison system operate?"
The man: "You must have observed that some of your neighbors suddenly move away and their houses put on the market with for sale signs, haven't you? "
Mr. A: "Yes, there are a few from this neighborhood during last year. I suppose that they have moved to places with nicer weathers, like Southern California or Hawaii."
The man: "At this time when almost every mortgage is delinquent, it is impossible to persuade the managing computer of a mortgage bank to let you sell your current house and obtain a new mortgage to buy a new house at a location of your choice. Those neighbors of you who have moved away are all sent to debtor's prisons. The rule is if, for example, a family of four increases credit card debt more than $500,000 in one year, then a moving van will come to take away their belongings along with the family members to a debtor's prison. The for sale sign will be put in front of the house to disguise the removal of the family."
Mr. A: "What do they do in the prison? Are they put into hard labor as the punishment?"
The man: "Of course not. A debtor's prison is an artificially constructed community with clean, nice but modest homes. The family will be assigned into one of such homes, and will be handed over with a weekly allowance in the form of a mock checking account and a debit card. They must learn to manage that modest allowance."
Mr. A: "Is that all? Looks like not a sever punishment to deter future offense!"
The man: "When they buy anything with the debit card, they must write a one hundred word report indicating what virtue the product has and why they must buy it. Thus more they buy, more essays they must write."
Mr. A: "Looks like quite a punishment. What if they do not write the essays? Oh, I guess their prison term will lengthen as punishment?"
The man: "Yes, that is the case. Since those prisons are located in desolate lands, no right minded person wants to live there forever. The minimum period of stay in the prison is three years. If they get out, US Government will give them a new ID, a new credit card, and assign them into a new neighborhood, naturally far away from their old community. They will move into one of those houses with a for sale sign. But that system is now history."
Mr. A: "Now I see the wisdom of Japanese Government. With this new loans from Japanese Government this ridiculous debtor's prison can all be done away. At the beginning of each month Japanese Government will deposit a fixed amount of money, according to the size of my loan, into my checking account. The coming month's utilities will be immediately deducted from my balance. I use my debit card to spend the rest of the money. If I am not prudent and spend all of my monthly allowance before the end of the month, then my family must live on liberty meals for the rest of the month. Yes, by this way no one can over spend his allowance, and there is no need for debtor's prison at all. A really brilliant idea, isn't it?"
The man: "Yes, it is. Liberty meals should be enough to deter any shopaholics."
Mr. A: "Oh, no. Liberty meals are not as awful as you sound. Actually we use them a lot. Anytime when I feel that we are overspending, or my wife is too lazy to cook, or she thinks we are a little overweight, we go to liberty meals. They taste better than quite a few nearby restaurants."
The man: "Really? I have not touched that meal for ages. What conditions is the meal and its distribution system in?"
Mr. A: "You just go to a distribution center around the corner. Standing in front of a computer, you feed in your ID card, say you want breakfast, lunch or dinner, and look into an eyepiece for a second. Then the computer will ask you to step back to a marked position. During that one second of peeking, the computer measures the blood vessel patterns in your eyes to make sure your identity, look into your records to certify that you are not coming for the second round. Then it measures your weight, height and your physical size in order to prepare a healthy meal for you. Of course before the meal is ejected from a slot, it will ask you what flavor you want. The flavors are numbered from 1 to one hundred something. The first is always the land of liberty; I guess that is how the name liberty meal comes from. As a courtesy, I guess, the last is always American standard."
The man: "If it is so good, I should try some too. By the way you are the only person who has asked me those in depth questions. If you have any more questions, I will be more than happy to answer them as best as I can."
Mr. A: "I have only two more questions. During this conversation it really strikes me that this Japanese Government is so brilliant and wise. It has installed a society of even and fair income distribution, free meals, free healthcare, and above all no requirement of works. In essence it has established a utopia of socialism in this land of America, supposed to be the bastion of capitalism and free-wheeling economy! In order to have such a government people of Japan must be angels. They all live in the heaven, aren't they?"
The man: "It depends on how you define the heaven. From the latest information I received out of Japan, an average Japanese worker, that is about 95% of their population, works 12 hours a day, 6 days a week. Average diet there consists of 4 bowls of white rice sprinkled with some colored pickles along with 3 cups of fermented soy soup a day. A family of four lives typically in an apartment of 500 square feet. The favored modes of transportation are still that now famous jam-packed subway, walk or bicycling; there are almost no private cars to speak of."
Mr. A: " I don't understand. Japan is famous for making cars. We are all driving Japanese made cars here!"
The man: "Japan is producing cars as fast as they can. They are exporting almost all of them to us. Otherwise how can they sustain such a huge trade surplus with us?"
Mr. A: "What happens to all the money we pay to import Japanese goods? Are they all ended up in the pockets of those Japanese trade tycoons?"
The man: "No. Japan is also a socialistic society. All the proceeds of their exports, aside from the portion required for the next batches of production, all the profits are evenly distributed among Japanese citizens. When an average Japanese citizen receives those distributed profits, in the form of Yen, he sets aside only a small portion to sustain his meager daily expense, and all the remaining money are immediately deposited into Post Offices."
Mr. A: "You mean banks. Post offices are for mails."
The man: "No. There are no banks, only post offices in Japan. They deposit money into their post office accounts. Japanese Government will get hold of those Yen in the post offices to buy up dollars in the currency market and then uses the dollars to finance Japanese Government loans in order to recycle those dollars back to US society; before that they used the dollars to buy US Treasuries. You see, along side the circle of dollar circulation there is also a huge circle of Yen circulation. Japanese Government is the joint of these two gigantic wheels of money circulation. The difference between these two wheels is that on the dollar side the wheel rotates through a consumption phase and on the Yen side the wheel mostly rotates through the saving phase. The speeds of rotation of these two wheels are necessarily synchronized. Faster the wheels rotate, larger our trade deficit with Japan becomes, more goods we have to consume, and more savings Japanese citizens accumulate."
Mr. A: "Are Japanese people going to revolt against their meager life and stop the whole rocess?"
The main: "Why? Japan is a true democracy. People votes. I heard that they are so enthusiastic about this government, the opposition party was forced to disband not long after the last depression. After all every Japanese is seeing their nest eggs continuously increasing. Why should they revolt, against themselves? Don't worry. This heavenly balance of two wheels can go forever. Two and half billion saving happy people on the other side of the ocean peddles, and 500 million spending happy folks on this shore get a free ride. We have nothing to complaint, haven't we?"
Mr. A: "OK. You beat me. The last question of mine is rather personal. If you feel uneasy, you do not need to explain. At the time everyone in this country can live on credit cards and loans from Japanese Government without any real works, how come you are driving so diligently across the nation and peddling the loans from Japanese Government. Do they pay you an astronomical amount to do this hard work?"
(The man sighed.)
The man: "No. They only pay me a meager amount and gave me this
RV to drive around so I can take my wife with me. You may call this hard
labor as the bane of all former Wall Streeters."
Mr. A: "What? Wall Street? That is the name in the history book. It is said that there was a street called Wall Street somewhere and some strange things called stocks were traded there, wasn't it?"
The man: "Yes, it was. But as US companies either sailed across the western ocean and disappeared into the horizon, or galloped across the rainbow and vanished into the thin air, all the stocks vanished too. Wall Street had stopped trading stocks long time ago. After that all left in Wall Street were bond dealers. Just think how much US Treasuries Japanese Government needed to buy under the old credit card system. Just a small cut of that huge trade. All the Wall Streeters lived like kings. I had a luxury apartment in The City and a gorgeous villa at Long Island Sound. We, Wall Streeters, naturally did not want the rest of America to know about our existence. Both US and Japanese Governments cooperated, since we held both of them hostage, and pressured Big Two media companies not to report about us. That is why you think Wall Street belongs to the history book. However, once Japanese Government has decided to do this loan business, the need to buy US Treasuries was not there any more. We, Wall Streeters, suddenly were out of jobs. Even worse than that Japanese Government, apparently has such bad feelings against us, refused to give us their loans. It has flatly told us to work for their agent, The Federal Reserve System or else. What can I do? I boarded up my apartment in The City, and closed down three quarters of my villa; I can not support the whole villa any more. Thus I become a wanderer in a RV. During the last vacation, that is one month per year, I dared to drive back to Wall Street to inspect my boarded up apartment. There were hundreds of super rats running along the street. It scared hell out of me. I immediately turned back. It was really a life style gone with the wind."
Mr. A: "I am so sorry to hear that. Hopefully when Japanese Government finishes enrolling every American into their loan program, it will release you from your bondage. Now let me sign this document and bother you no more."
After Mr. A signed the loan document, said good-bye to the man, he watched the man walked to his RV parked along the curb, his wife came out, and two of them, hand-in-hand, walked to the liberty meal distribution center around the corner.
THE END
References
3. Yen/Dollar, Trade Deficits, and Recent Boom Bust Cycles of USA by Chih Kwan Chen (Aug. 2003).