We Don’t Export Enough!
| October 13, 2010 | Posted by Roshawn Watson under Uncategorized |
Today’s post come from Mr Credit Card from Ask Mr. Credit Card where he writes about news in the credit industry, reviews specific cards, and identity theft protection services.
Recently, the United States and western nations have gone through a lot of soul-searching about what went wrong with the economy. All paths point to overleverage as the blame. For example, the sub-prime mortgage debacle would not have been so dire if our economy had not been in so much debt. Consider that one of the primary reasons for the halt in economic growth was that so many companies use debt as their working capital for daily operations! Consumers are leveraged too with mortgages, car loans, balances on their credit cards, and student loans. Unfortunately, we are confronted with a far bigger problem today, which is that the US economy has a negative cash flow. We run a persistent trade deficit. In other words, we import more than we export. It’s like we are spending more than we are making. This has been going on forever. How can this be?
Well, the simple answer answer is that the US Dollar is the currency of international trade. This happened after the World War 2 when the United States became the world’s superpower. The US Dollar is used in international trade. Since international trade is conducted in our currency, countries who have trade surpluses with us (those that export more than they import) have excess savings. These savings are in the US Dollar. They need to reinvest these dollars somewhere, and their preferred investment choice are the US Treasury bills and bonds, which are deemed the safest investments. Consequently, we are able to continually import more than we export thereby allowing us to keep running budget deficits!
However, the recent financial crisis has exposed a flaw to the way the U.S. economy has developed over the last few decades. We are now facing a “jobless slow recovery”. Why?
We Do Not Export Enough
The answer is really simple. We have stopped being an exporting nation. Our economy for the past couple of decades has been based on consumption fueled by our increased indebtedness. Since we run an inflationary policy (2% inflation thereabouts is tolerated), our cost structure continually goes up. It goes up slowly and is not noticeable at first. However, over the years, it results in higher wages. Consequently, we are hit with a double whammy. Our exporters have shifted our jobs overseas because of cheaper labor cost, and the bulk of our economy is based on consumption by consumers. We now consume products made overseas that used to be made by us. Together with cheap leverage, our economy became “service-based.” We became a nation of real estate brokers, attorneys, restaurant owners, financial engineers. Even in our export industries, we hire “Ph.Ds” to invent more swanky Nike shoes (high tech!) and we hire MBAs to market and sell them. These are “phantom” innovations in my opinion.
Now that credit has dried up, we face real difficulties in recovering because we cannot keep consuming anymore without dealing with our economic problems. Becoming a manufacturing nation again doesn’t appear to be a viable option now that jobs have been shifted overseas. One reason is it is hard to be competitive with rock bottom prices available for labor in other markets.
Passive Income Syndrome
Additionally, we have become a nation that simply wants to earn “passive income”. We do not want to get our hands dirty anymore. We try network marketing, making money with blogs and online, and all kinds of other “stuff”. We search for all kinds of “business opportunities” to free ourselves from our “jobs”. We subscribe to franchise magazines or small business magazines and look for opportunities and ideas. However, the problem is that these do not help solve our national problem, which is we do not export enough!
Pick up any small business opportunity magazine and I bet you cannot find a single idea about inventing products and selling overseas. All you see is “franchise opportunities” and other “US based ideas”.
Are you in a “Service-based Job”?
I think a more important implication is that if you are in a “service-based job” that depends on the domestic economy, you are likely (on average) to see slow growth (if any) in your industry for the next few years. That is because the whole economy is deleveraging and demand would be tepid at best.
Beyond Passive Income and Getting Rich
And if you are thinking about going into business yourself, perhaps you should ask yourself if your product or idea will have worldwide demand: In other words, can this product be exported? If you could, you are likely to do better than most domestic businesses that focus exclusively on the U.S. consumer. You will also be helping the nation. If you are thinking about changing careers, perhaps you should consider moving to an industry that sells their products overseas as well.
I do realize that many of you who read personal finance blogs love the concept of passive income, being your own boss, and being a freelancer. However, if you are seriously thinking about switching careers, I suggest returning to the basics and asking if you can start a business that sells a product overseas (potentially). Our economy is in dire need of such businesses and these are businesses that are likely to be more successful rather than service-based industries that just services local or domestic businesses.
So here is a question for you readers:
Does Your Company Export?
If you are an entrepreneur, is their demand for your products abroad?
Related Post
Deleverage Your Life
Copyright 2012, Roshawn Watson, Pharm.D., Ph.D. All Rights Reserved.
Interesting perspective. Why not look globally right from the start! Thanks for the insightful post. I will certainly take this into consideration, Shawn.
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What are you talking about? The US has been exporting plenty of dollars overseas. 😛
Exports are a real cost. Real effort and resources must be expended to ship goods that can no longer be consumed by local consumers. Exporting makes sense if you get something of equal or better value in return (and the trade is a win win), but adopting mercantilist policies to push export at the expense of other priorities is ill-advised. It lowers standards of living, makes imports more expensive, and increases the rate of inflation.
Nonetheless, the US might be heading down a mercantilist path. As much as they are blasting China for keeping the yuan low, it's hard to imagine that quantitative easing is not going to have the same effect on the dollar.
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Kevin,
I can't presume to have the insight of Mr. Credit Card when he wrote this post, but here is my take. I agree with your statement "exporting makes sense if you get something of equal or better value in return (and the trade is a win win), but adopting mercantilist policies to push export at the expense of other priorities is ill-advised." Nonetheless, there is data to support his premise that the U.S. have moved towards a more service-based economy, which I don't think you dispute. For example, look at which industries the new fortunes are being created in! Personally, I also believe that there is a failure to innovate (adapt to consumer preferences). For example, Apple is proof that with a superior product, fierce marketing, and social validation, you can make people spend twice as much for a product and make a ton of profit. However, I will say that there are plenty of U.S. companies that are not hurting, and one common characteristic for many of them is that they have a global presence. Thus, the viability of their brands is not reliant on the U.S. Interestingly enough people are investing in them to get exposure to international markets at a margin of safety beyond say investing in Brazil directly. I think this appears to support Mr. Credit Card's article at least somewhat.
The US is blasting China because they fail to play the currency game in manner that is most beneficial for us. That shouldn't be our focus. Mr. Credit Card does have a very interesting perspective on the matter, which is why I shared this guest post.
My recent post We Dont Export Enough!
Agreed. Apple has really shaken things up, and it's great. it's actually interesting that you bring up the point about capturing international growth by investing in US companies with a large global presence. These companies have a large moat around them, so to speak, and they enjoy strong demand for their products.
I also agree with Mr. Credit Card's point with debt-based expansion and consumption being a dead-end road.
What I really take away from all this is that we gotta be more competitive. but naturally so and not because we burned the dollar or did other things to emphasize exports. We need to have other people want to buy our products naturally, and not because we are engaged in a currency war to make things artificially cheap. I don't believe in protectionism nor mercantilism (exports at the expense of other things).
Exports will be rising slowly as a result of the dollar losing value. This is the easiest and fastest way of fueling economic growth through currency devaluation. Let's wait and see.
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I think cheap energy would be a huge help to the us citizens. Brazil has it act together in this area! Kudos to them!
Until the global wage structure changes, it will alway be difficult to compete with someone over there (China, India, Vietnam) that make $1 an hour or less vs someone over hear making $20 an hour.
Not to mention the barriers to entry into the market place in locaitons like China and India for U.S. businesses…
Tough topic Mr. Credit Card, no easy answers…
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Kevin, I like your take away. Trying to manipulate the economy can only work for so long. It's best to be innovative and aggressive to make consumer's beg for your product, just like Apple.
My recent post We Dont Export Enough!
Interesting thought Mich. I will be watching. I'm forcing myself to pay more attention these topics because it doesn't come naturally 🙂
My recent post We Dont Export Enough!
Absolutely, it is a very tough topic. With the economy we all get to make some fabulous guesses, and some will actually come true, but there are just so many variable that are beyond control many times if we are right it's just luck (or an educated guess at best).
My recent post We Dont Export Enough!
The danger in importing much more than we export and thereby running chronic trade deficits is that we necessarily borrow huge amounts from other countries by issuing Treasury bills,notes and bonds. Thus, today almost half of our national debt is owed to other countries, some of which are not especially friendly to the U.S.
Like the Washington Redskins fighting to get into the playoffs at the end of each season we are slowly losing control of our own destiny.
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Roshawn, nice post. Manufacturing has steadily eroded in this country, but "cheap labor" is not the only reason. I know of factory owners that could expand and invest in new machinery, but are not willing to take on the additional regulatory compliance and taxation burden.
U.S. manufacturing rates of $35 to $75 per hour (fully burdened with fixed cost) can and do compete successfully with low labor cost countries, and that's across a wide range of industries. New Balance athletic shoes is of course the poster child for US competitiveness. I think they still operate 4 or 5 new factories in the US.
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Robert,
Thanks for the additional insight. It is quite disconcerting that we continue to issue more debt in the form of bills, notes, and bonds to other countries like you said. Then, when debt-holding countries don't play by rules that are favorable to us, we blast them instead of fixing our budget so that we're not beholden to them in the first place!
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Interesting. I can see how regulation and taxation add tremendous financial burden, so much so that companies will move. I have seen companies do this domestically (moving from California to Tennessee to avoid state income tax and get cheaper land). Perhaps, Mr. Credit Card was thinking about this too when comparing the costs of cost of national versus international businesses.
Regardless, this is a great point. Thanks for the comment.
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