The Great Depression Online




Great Depression Online Archive Issue:

The Mercantilist's Burden

Great Depression Online
Long Beach, CA
June 13, 2008

Inside This Issue You Will Discover…

*** Spending More Than We Make
*** Mercantilism In Brief
*** The Mercantilist’s Burden
*** And More

Spending More Than We Make

This week we discovered that for April 2008, we Americans collectively spent $2 billion more per day than we made on a global basis.  The difference was made up with debt: corporate debt, government debt, and private debt.

Kelly Evans, for the Wall Street Journal, reports…

“The Commerce Department said the deficit widened 7.8% in April to a seasonally adjusted $60.9 billion from $56.5 billion in March, the largest one-month gain in nearly three years.

“Imports overall rose 4.5% in April to $216.4 billion, while exports rose 3.3% to $155.5 billion.”

In other words, we here in the U.S. spent about 39% more than we made as a country.  On a personal level this would be like having a $5,000 monthly income, yet spending $6,950.  You know that if your income deficit was this wide, it wouldn’t be long before the credit cards were maxed out and your brother in law sat you down for a demoralizing talk about your reckless spending ways.

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~~~~~~~~~~~~~~~~~~~~~~~~~

Why should a country’s deficit be any different?  More thoughts on this below, but first…

What did we spend all this money we don’t have on?

You guessed it…gas. 

“The $4.4 billion increase was almost entirely from imports of crude oil and petroleum products. The value of crude-oil imports rose by $4.2 billion to $29.3 billion in April, a record.”

And it looks like we’ll be resetting that record again very soon, as “…that level accounts for oil prices of only an average $96.81 a barrel -- far from the near-$140 levels reached this month.”

But we’re not here to dwell on the 40-years of negligent energy and monetary policy that got us into this mess.  Nor are we here to reflect on the nobility of our Senators for preventing the malevolent act of drilling for oil in the ANWR.  Or the corn ethanol fraud that was more about alternative farm subsidies than alternative energies.

No, that is not the subject of today’s blatherings.  For hindsight is 20/20.  And who are we to say what should have been done differently.  Besides, we’d rather digress and place the burden of today’s message on the mercantilist.

Mercantilism In Brief

Mercantilism was an early form of economic thought that gained prominence in Europe in the 17th century.  In short, the idea was that for a nation to be wealthy it should accumulate lots of gold.  And to do so, a nation should export goods to other nations in exchange for gold…but it should not import any goods lest doing so would cause gold to leave the country.  Furthermore, mercantilists imposed trade tariffs to discourage imports.

Adam Smith and David Hume later came along and showed that this notion was flawed for a number of reasons.  Mainly that mercantilism confused wealth with money.  Smith, to the contrary, argued that money was just a commodity…but that the wealth of nations is derived by its goods, population, and institutions.     

Hume noted the natural impossibility of continually increasing a nations gold supply.  For as gold in one country increases, its value relative to that country’s goods and services decreases.  Consequently, exports become too expensive to compete abroad and gold no longer flows into the country…but out.

Mercantilists also viewed trade as a zero sum endeavor, where one nation’s gain was at another’s loss.  The notion of comparative advantage later showed that free trade benefits both sides.  And that imposing mercantilist import restrictions and trade tariffs makes nations poorer…not wealthier.

So what’s the point of all this nonsense?

The Mercantilist’s Burden

Yes, the mercantilist’s zealot pursuit of a positive trade balance and gold accumulation has proved to be a misguided economic strategy for increasing a nation’s wealth.  But we still cannot completely ignore their sentiments.

For if encouraging exports while limiting imports doesn’t make a nation wealthier, we suspect, conversely, that having too many imports and too little exports doesn’t either. How many imports are too many and exports too little?  We don’t know, but we’ll guess that a $60.9 billion trade differential over a 30-day period would qualify.

The world, no doubt, is a different place today than the 17th century.  A nation no longer has to be concerned with losing all its gold in trade.  Because in today’s paper money world, more money can always be created out of thin air. 

But at the same time, in this abstract monetary system, a currency derives its value by the trust that is earned by its stewards.  And when the quantity of money, as determined in the U.S. by the Federal Reserve, is rapidly increased, its quality suffers.  In other words, it loses value.  And when the quantity of money being increased supports a massive trade deficit, it loses value in the global economy.

Over the last seven years, the dollar index, which measures the dollar’s value against a basket of currencies, has dropped about 40%.  That means it takes one dollar today to buy in the world market what $0.60 cents could buy just seven years ago.  The mercantilists would consider this a loss of wealth…and so do we.

Sincerely,

M.N. Gordon
Great Depression Online

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