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Selling Our Cows to Buy Milk


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#1 SemiBizz

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Posted 19 February 2007 - 11:55 AM

Selling our Cows to Buy Milk



2007-02-16 - Peter Schiff



On Tuesday of this week we learned that in 2006 Americans racked up a record $763.6 Billion trade deficit, and that two Australian mining firms, Rio Tinto and BHP Billiton, were each contemplating $40 billion bids for U.S. aluminum giant Alcoa. Not only did Wall Street and the media fail to grasp the negative significance of each story, but they also failed to see the strong connection between the two.

By running huge trade deficits, Americans are literally selling cows to buy milk. Alcoa is just the latest heifer headed for the auction block. In other words, because we do not trade enough domestically manufactured consumer goods for those we import, we are making up the difference with our assets instead. To the extent that foreigners are tiring of buying more Treasuries and mortgage-backed securities, they are casting their eyes on industrial assets. Last year's trade deficit alone provided foreigners with enough dollars to buy twenty Alcoa's.

Many Americas do not see the downside of such a transfer. In fact, they might even see it as a benefit, as shares of Alcoa would likely rise sharply. However, in exchange for losing one of the world's preeminent mining companies to Australia, Americans would only be compensated by the return of their paper dollars. Future profits that would have been earned by Americans will now be earned by Australians instead.

Founded in Pittsburg in 1886, Alcoa is now the world's leading producer and manager of aluminum, employing more than 120,000 employees in 44 countries. Every day Alcoa mines 86,300 tons of bauxite and 27,300 tons of coal, refines 41,000 tons of alumina, smelts 9,575 tons of aluminum, recycles 2,300 tons of aluminum, manufactures 8,810 tons of aluminum products, produces 166 million closures for beverage and food containers, assembles wire harnesses for 20,400 vehicles, generates 96,000 MWH of electricity, and purchases $27 million in goods and services. The sale of Alcoa would be a great loss to the American industrial landscape.

It is astounding that so many fail to see the sale as further proof of America's economic decline. In his testimony yesterday before the Senate Banking Committee, Fed Chairman Ben Bernanke showed little concern for the trade deficit and its implications for the American economy. If our economy really was as strong as Mr. Bernanke believes, Alcoa would be buying foreign companies, not the reverse. Nations with strong economies use their trade surpluses to acquire choice foreign assets. Nations with weak economies are forced by their trade deficits to surrender those assets.

In the end, when foreign central banks finally allow the dollar to collapse, it's not just Alcoa, but many other Dow Jones companies that will ultimately fall into foreign hands. After all, a sharp decline in the dollar will make those companies dirt cheap for foreign buyers, who will have little else to buy with the trillions of dollars burning holes in their very deep pockets. America will be reduced to the role of a secondary economic power. Our citizens will work primarily for foreign-owned companies while the profits are sent back to their far wealthier foreign bosses.


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#2 pdx5

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Posted 19 February 2007 - 12:58 PM

Why blame the "foreigners" for buying American "cows" when the ball got its start by Americans buying Japanese cars, made in China merchandise and petrol from OPEC for their gas guzzing cars? Where do you thinkthose dollars end up? Right back to buy the assets right here in the USA. That is the price you have to pay to be a consuming society without any meaningful savings programs.
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#3 ...

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Posted 19 February 2007 - 01:00 PM

This guy can't be serious.

It is astounding that so many fail to see the sale as further proof of America's economic decline.


What's actually astounding is that anyone would see a transaction beteen willing buyers and sellers as anything other than a transaction which both parties think will benefit each of them.

What's even more astounding is that anyone would see this transaction as anything more than the ongoing movement away from low-tech stuff like mining and refining to anything and everything that demands higher-tech and higher skills. Which has been what has been going on for the last 100+ years.

We have been moving to an economy which is evermore dominated by services for decades. You can date it from 1800 when 98% of us were farmers. Expect the trend to continue.

Many Americas do not see the downside of such a transfer


Probably true. In fact, many of us see the upside of such a transfer, namely that it turns billions of dollars loose to be put to more productive use.

in exchange for losing one of the world's preeminent mining companies to Australia, Americans would only be compensated by the return of their paper dollars


Exactly. Which is to be desired.

Alcoa would be buying foreign companies


Says who? And why would "we" (or anyone) necessarily want more mining/refining assets (assuming that's what Alcoa would buy, were they so inclined) when more profitable uses of the capital could be made? I note that Alcoa hasn't been running around gobbling up other mining/refining companies.

Nations with strong economies use their trade surpluses to acquire choice foreign assets


Funniest line in the entire laugh-fest. Perhaps he's pining for a centrally controlled economy where the government can dictate who buys what. Other than that chimera, no modern nation, including the many abysmally failed communist states has ever done any such thing. Individual companies do whatever they think is in their best interest. In this case, Alcoa apparently decided to sell itself. More power to them.

when foreign central banks finally allow the dollar to collapse


I've been hearing this unadulterated horsepuckey since about 1965. Still waiting. Unfortunately for the writer, central banks may be stupid, but not that stupid.

This "article" was great entertainment, if you consider pontifcation by the economically illiterate to be funny, but otherwise it's a total joke.

#4 James Quillian

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Posted 19 February 2007 - 01:50 PM

I've been hearing this unadulterated horsepuckey since about 1965. Still waiting. Unfortunately for the writer, central banks may be stupid, but not that stupid.

This "article" was great entertainment, if you consider pontifcation by the economically illiterate to be funny, but otherwise it's a total joke.


The article itself is as you say "horsepuckey" but that doesn't mean there isn't a problem.
A trade deficit is not a problem. What is a problem is a lack of interest and understanding as to how expansionary monitary policies affect incentives.
Regulators have become participants in the market. Pumping the price of assets has become a goal in and of itself. Rather than the trade deficit, the problem lies in the ever increasing need to sell our assets at increasingly inflated values. The reversal of this process will cause problems.

Economists conveniently ignore the subject of changing incentives because it gives them a headache. Thinking is required. It is easier just to do math and point to dead models.

James

#5 PorkLoin

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Posted 19 February 2007 - 02:10 PM

If nothing else I think the article is slanted by viewing the companies as just "American" or foreign. Heck, some of us Americans own lots of Rio Tinto and BHP Billiton. For years now I think it has made sense to do so. Lots of raw materials are going to go to India and China, etc. Can we profit from knowing this?

If they would buy Alcoa, then more of the profits would be going to this American than before, since I have no Alcoa shares.

#6 TradeMark

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Posted 19 February 2007 - 03:52 PM

One would do well, from time to time, by recalling the Golden Rule, namely: "He who has the gold, makes the rules." Obviously the world does not so much value the wonerful outputs of our higher-tech and higher skills economy. Else, we would not have a 3/4 Trillion dollar/year current account deficit. Perhaps, it is not best to entrust the future well being to the kindness of strangers. The dude has a point. TM

#7 ...

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Posted 19 February 2007 - 04:11 PM

What is a problem is a lack of interest and understanding as to how expansionary monitary [sic] policies affect incentives.


Who said, other than you, that there's a lack of interest or understanding? I and many others have been paying attention for decades. And who cares, anyway? People respond to whatever the incentives are and we deal with the results, whatever they are. Not to mention that people who control many more trillions of dollars than you or I do have devoted a great amount of thought to the matter.

Regulators have become participants in the market. Pumping the price of assets has become a goal in and of itself.


Says who, other than you? And, assuming somebody else does, on what proof? Is this like the PPT? Such stuff is the standard fare of conspiracy whackaziods.

Rather than the trade deficit, the problem lies in the ever increasing need to sell our assets at increasingly inflated values. The reversal of this process will cause problems.


Who and what constitutes "our assets?" I haven't noticed any directives from the Central Committee lately. And who, other than you, says "our assets" are being sold? And on what basis do you devine that such sales are being made at "increasingly inflated" values? How would you possibly know if the assets "they" are now buying are at a discount to future fair value or not?

Economists conveniently ignore the subject of changing incentives because it gives them a headache. Thinking is required. It is easier just to do math and point to dead models.


Is it easier to have the computers do the dead-modeling when you don't have a headache? What "dead" model do you claim is being pointed at, and by whom? And which economist has a headache? Is Tylenol discrediting? Do you have any more rubbish to spout?

More importantly, when are you, who admits to being a failed trader going to stop making silly, unsupportable blanket statements that bear no demonstrable relationship to reality?

In case you couldn't tell, I long ago discounted anything you had to say about anything regarding technical analysis, and I now have obvious reason to discount anything regarding "fundamentals" you might opine on.

#8 Rogerdodger

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Posted 19 February 2007 - 05:01 PM

I have a very serious trade deficit with my grocier.
I buy everything from him and he buys nothing from me.
He has the same deficit with his suppliers.

I could grow my own and be self sufficient but it would not be cost effective.
My "free" home-grown tomatoes alone would cost around $64 each.

See the Book:
$64 Tomato': A Quest for the Perfect Garden
"I decided I would try to figure out just what this "free" tomato really cost. I started with the costs of building the garden (orchard excluded):
Garden design $300
Initial construction $8,500
Extra charge for stump pulling $300
Irrigation and drip hoses $1,100
Cedar edging $400
Electric fencing equipment (exclusive of charger) $400
Posthole digger $50
Posts for fencing $50
Two wrought iron gates and posts $400
Additional topsoil $250
Havahart trap $65
Velcro tomato wraps $5
Cedar for tomato posts $10
Steel edging $1,200
Labor for installation of edging $600
Forsythia border (including labor) $700
Gas-powered hedge trimmer for forsythia $75
Wood-chip mulch for forsythia $300
Chipper/shredder for shredding leaves for
compost $400
Dark bark mulch (fifty bags at $3 per bag) $150
Push lawn mower for lawn paths $80
Bag for lawn mower (never used) $40
Gas-powered lawn mower for garden $215
Garden books $100
Garden-magazine subscriptions $150
Peat moss and other miscellaneous soil additives $125
Removal of two trees $600
Not counting thousands of dollars of my labor thrown in for free, or yearly expenditures on seeds and seedlings, I ended up with the shocking figure of $16,565."

Edited by Rogerdodger, 19 February 2007 - 05:02 PM.


#9 mss

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Posted 19 February 2007 - 05:35 PM

:)
Saaaayyyyyy RODGERDODGER,
What ever happened to the following rule, and I quote: :blink:

OEXCHAOS: It would be better to stick to TA.

I'm only allowing occasional OT postings, save from Bob (and only because his are so darned interesting and he keeps them to 1 or 2 that are not political).

http://www.traders-t...?...st&p=193111

:blush:
Me thinks he was right, and as time marches on our "high paying :P jobs" are going to get harder. :lol:

btw: my tomatoes only cost me $36 each. :cry:
Its the cost of my next car that worries me as the countries that have the mines and steel mills decide that they dont wont to sell to a "service" country as they service their own. B)
Best to you and, yes, time to go to the beach :cheer:
[attachment=5311:attachment]
:cat:

Edited by mss, 19 February 2007 - 05:41 PM.

WOMEN & CATS WILL DO AS THEY PLEASE, AND MEN & DOGS SHOULD GET USED TO THE IDEA.
A DOG ALWAYS OFFERS UNCONDITIONAL LOVE. CATS HAVE TO THINK ABOUT IT!!

#10 OEXCHAOS

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Posted 19 February 2007 - 06:46 PM

Not that I don't love a good economic discussion...I do, but I don't want to have to watch this thread possibly spin off into personal affront. Closed, guys. Mark

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