The Oil Drum

27 comments on Is this the Economic stage of the Peak?

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NC on November 23, 2005 - 10:06am

Sunlight,

Thanks for a very lucid critique of CPI and our account balance. A few additional questions you might like to comment on.

I am old fashioned and still believe that wealth is created by adding value to "things" through addition of work or energy. My examples are extraction of ores (and energy) from the ground, geometrically increasing seeds or food using the sun (farming), making complex items (clothing, toys, tools, machines, buildings, etc.) out of simple starting material (manufacturing).

These actions all convert simple items into more and/or more complex items using ingenuity and often energy of some type. The U.S. used to do this and sell more items (in aggregate) to other countries than it used internally. Currently we import most of these items. Especially oil energy. Our economy appears to me to be based more on transactions of money than creating wealth as I define above. In simplistic terms, we are a nation of middle men handling goods and taking a cut.

At the same time we have had this trend away from making things we are told that a lot of "wealth" has been created in the process. Obviously many people have personally benefited in dollars terms. My questions are; has the economy actually grown in terms of real wealth during this period? Are all the transactions that are occuring providing for the maintenance and building of our societal infrastructure the way it did 50 years ago? Or is there not enough money after all the accounting is done to put to those needs? Are we really creating wealth through the new just in time, off shore economy? What is the difference between wealth and a large bank account?

Any thoughts or comments appreciated as I go back and forth on these concepts in my own head.

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Sunlight on November 23, 2005 - 11:18am

NC, In the end an economy with externally balanced accounts, is able to sell enough goods and services, to pay for the ones it imports. Some third world countries are in a weaker position, and their currency is deemed too weak to be convertible, or freely tradable. We are in unique position of having dollars accepted almost universally. We buy German goods with dollars, but Britain must sell goods abroad, to be paid in Euros, so that they can have Euros to spend in the Eurozone. This process is called, "earning foreign exchange." This all goes back to the Bretton Woods agreement (when the dollar was declared the reserve currency and thus equivalent to gold). International monetary agreements have vastly modified the structure set up at Bretton Woods but so far the dollar is still, albeit shakily the reserve currency.

It would seem intuitive that people would demand a reserve currency to make things simple, over and above obvious needs for one, and so proved late Yale economist James Triffin ("Triffin's paradox"). It is also true that since we can buy what we want, there is a temptation for reckless leadership to print more dollars without regard to fiscal soundness, or to keeping the dollar scarce enough for it to be desirable. Bush is now doing that.

I don't know what we should or shouldn't be producing, but I agree, a healthy manufacturing economy keeps well paid jobs and high skills here. Keeping many of the companies headquartered here keeps high level design and leadership skills here. I note Japan is no longer a low cost economy but they still have a vibrant auto industry, for example, even though they now outsource some of the manufacturing work. They are just more reluctant than we and they do consider the effect on the health of Japan when they do so. We are cavalierly letting go the production and productivity built up over centuries, as long as it appears that a free market is operating, and that American shareholders benefit. The rest of the world would seem to be agape as we do nothing to stop it from slipping through our fingers.

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Fernando on November 23, 2005 - 4:27pm

That's an interesting question.

Does manufacturing matter?

Fernando

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NC on November 23, 2005 - 8:09pm

Sunlight and Fernando,

Thanks for replies and insights.

So it seems we need something tradeable other than dollars. In an ideal world dollars (or any hard sound currency) would substitute for goods or services exchanged. Trade deficits, national debt and inflation are the signs that we are trying to print our way to prosperity.