I've heard Ron Paul mention several times that our monetary policy, as well as having the reserve currency of the world, is the culprit of our shrinking manufacturing sector. Something along the lines of our number one export is paper dollars so the jobs follow our dollars overseas where costs are cheaper. In essence, while free trade is usually blamed, fiat money is the real problem. This kind of makes sense to me, but could anyone explain this process in a little more depth. Thanks.
The part that you’re missing is the technical aspect of how the Federal Reserve creates money. This is understandable because critics often use the metaphor that the Fed is “printing’ money or “creating money out of thin air.”
What actually happens is that the domestic trading desk at the New York Federal Reserve Bank buys securities on behalf of the Federal Reserve System from a group of securities dealers. The Fed pays for these securities by crediting the accounts that the securities dealers’ banks have with the NYFRB, thus creating money. So when the Fed creates money, they simultaneously create a debt security.
This process increases the supply of debt securities and puts downward pressure on interest rates. However, because of the relative stability of the U.S. economy, foreign investors have an interest in buying these securities. The securities are paid for from the proceeds of the goods and services that the foreign investors sell to the U.S. It is these debt securities, and not paper dollars, that are one of our major exports. Thus, in a roundabout way, the increase in the money supply causes an increase in the demand for foreign manufactured goods.
It is important to keep in mind that paper dollars are actually a small part of the total money supply. Most people receive most of their income from checks or direct deposits and make most of their major purchases with checks (or credit cards with final payment in the form of a check). The resulting clearing transactions do not require any paper dollars.
Thanks for the response. I was thinking about this a little more. Since most Keynsians believe consumption drives the economy (I find it ironic that liberal intellectuals rant against consumerism while liberal economists celebrate it, cognitive dissonance I guess) so the economic policy of the US is to push as much money toward consumption as possible (ie welfare, minimum wage, credit expansion, etc.) that this, while increasing consumption simultaneously decreases investment into production. So our productive capacity is reduced while consumption increases. But since someone has to produce for us to consume we inevitably look abroad where they can produce more effiecently than we can.
Why is manufacturing more efficient overseas? How does our monetary policy make their manufacturing more efficient? I guess my main question is my manufacturing has moved overseas? Is it all sweatshop labor? I don't think so.
Not all manufacturing is more efficient overseas. In fact, many foreign automobile manufacturers have built plants in the U.S. southern states. These states have right to work programs, which means that workers cannot be forced to join a union.
Much of the manufacturing that is done overseas is very labor-intensive. For example, garment manufacturing still involves rows of women sitting behind sewing machines. In these cases, labor is a very large part of the total cost of the manufacturing process. Also, some countries, such as Japan, have government programs that strongly encourage saving. Conversely, the U.S. monetary system discourages saving because it causes a devaluation of the dollar. Although both systems are coercive, the additional savings (as a percentage of income) in other countries provides more money for investment in capital projects. This increased saving has a compounding effect on increasing capital investment and, consequently, productivity. Dr. Reisman’s book, Capitalism, provides a very good discussion of how this works.
So when the Fed creates money, they simultaneously create a debt security. This process increases the supply of debt securities and puts downward pressure on interest rates. However, because of the relative stability of the U.S. economy, foreign investors have an interest in buying these securities. The securities are paid for from the proceeds of the goods and services that the foreign investors sell to the U.S. It is these debt securities, and not paper dollars, that are one of our major exports. Thus, in a roundabout way, the increase in the money supply causes an increase in the demand for foreign manufactured goods.
Would you mind going into greater detail how increased demand for debt securities implies higher demand for foreign manufactured goods? I see the point you're trying to make, but I'm not sure how it follows (maybe I am being dense here.)
DougM: So when the Fed creates money, they simultaneously create a debt security.
I have to correct my previous post. In addition to buying and selling treasuries, the Fed also lends and borrows them (through repurchase agreements).
John, I don’t disagree with you. The Fed usually buys existing securities from primary dealers. I was trying to simplify the answer by not getting too much into the technicalities. However, the primary dealers often participate in the Treasury auctions and then sell the treasuries to the Fed. Also, I’m not aware of any rule that would prohibit the Fed from participating in auctions if they chose to.
Inquisitor, the simplest way to describe how increased demand for debt securities implies a higher demand for foreign manufactured goods is Roger Garrison’s description in Time and Money. He says (and I don’t have the book with me, so this is just from memory) that the U.S. is receiving shipments of manufactured goods and paying for them with treasuries. Of course, the relationship is not actually nearly this direct. A German investor might purchase securities from a U.S. dealer through a London dealer. The German investor earned the money to purchase these securities through investments in a German manufacturer. As a result of the transaction, the U.S. dealer now has additional money that he uses to purchase German manufactured goods. The net result is that the U.S dealer has traded U.S. government debt for German manufactured goods.