Back to Basics: A “Real” Economy Makes Real Things
“Our country wasn’t built to be shut down,” said President Trump the other day. “This is not a country that was built for this.”
Indeed, within two weeks of a national directive to practice “social distancing” to slow coronavirus, 3.28 million Americans filed for unemployment compensation.
A recent edition of the Wall Street Journal used half of its front page to depict the calamity within the U.S. labor force.
Wall Street Journal, March 27, 2020.
That long red line running up the page isn’t a printing error. The red up-spike represents people who’ve been laid off.
Obviously, mass unemployment can be more logarithmic than virus infections.
Trump is right. “This is not a country that was built for this.”
But that begs the question, what is (or what was) it built for?
Clearly, the current labor structure is crystallized and brittle. Along came the virus. In a matter of days, the economy shattered like a delicate wine glass dropped on a granite floor. Economists and pundits predict a looming, shocking 10% to 25% reduction in gross domestic product (GDP).
Meanwhile, millions are left on the sidelines of the mighty U.S. economic machine. They’re collateral damage, if not tragically expendable in our throwaway culture.
It’s fair to ask… What the hell kind of economy is this? Because a “real” economy doesn’t simply fold up like a cheap suit… unless deep down it really is a cheap suit.
No, a real economy makes real things. It has productive roots. It’s resilient. It doesn’t freak out and collapse when crisis arrives.
Let’s dig deeper, beginning with a side trip to the mighty Andes of Argentina…
“Early light hits the top of the mountain on the other side of the river,” wrote Agora Financial founder Bill Bonner last week from his ranch nestled high in the Andes. “It lights up in a bright red, then marches down the mountainside.”
Argentine sunrise… How green is Bill’s valley.
Bill and his wife were traveling in Latin America when the global quarantines began. As the world locked down, borders sealed up and airlines grounded flights, Bill and spouse scrambled. They made it to Salta Province, Argentina, one step ahead of national health inspectors, not to mention state police.
They’re currently toughing it out in a remote valley, isolated by some of the world’s most rugged mountains on either side.
“The sun has to brighten up the entire world every 24 hours,” noted Bill. “With a circumference of 25,000 miles, that doesn’t leave it much time for us. In about 20 minutes, the whole valley is lit.”
Damn… That’s good! I wish I had written it. And Bill went on…
“We’re quarantined on thousands of acres. We have sun all day. Warm temperatures, cool nights. Our water comes freely, out of a spring in the desert. We heat and cook with wood. We raise our own beef. Grow vegetables. We are well stocked in wine from our own vineyard. What more could we ask for? We make do.”
Damn, again… I’d buy that ticket!
High in his rocky, craggy Argentine fortress, Bill and bride have what they need.
He also illustrates a “real” economy at work, at least on a micro-scale. Or as he quips, “No Starbucks fraps. No newspapers. No TV. No microwave. No presidential debates.”
Then again, if Bill’s ranch were structured like the U.S. economy, he’d rely on a long power line to a far-off electric plant; maybe one in Venezuela. He’d sit at his computer all day, concocting things called “Bonner dollars.”
And Bill would spend those Bonner dollars importing all his energy, beef, vegetables, wine and everything else from other ranches. Or worse, he’d import it all from China, across the vast Pacific Ocean.
Eventually, Bill’s neighbors — if not his Chinese creditors — would show up to demand the deed to the ranch.
Which brings us back to the U.S., and how “real” economies make real things.
A “real” economy makes toilet paper, for example. And on that front, there’s good news.
You may think there’s a toilet paper shortage, but that’s just media spin, causing needless panic. That is, we actually make toilet paper in the U.S. After all, the country has plenty of trees and paper mills.
From news accounts, the Charmin division of Procter & Gamble is working 24/7 to crank out precious rolls. On rail lines from coast to coast, cars are stuffed with toilet paper, bound for empty shelves of supermarkets across the land. Fear not, my compatriots…
But when it comes to facemasks, protective gowns, medical equipment and even many –—or most — standard pharmaceuticals… Well, the word is China.
I’ve discussed before how the U.S. relies on China for the bulk of medications and much of the medical and hospital equipment we use. .
Medicine-wise, we’re behind the proverbial 8-ball. The last U.S. aspirin plant closed in 2002. The last U.S. penicillin plant closed in 2004. Today 97% of the antibiotics used in the United States originate in China or are made from Chinese ingredients.
One might think that a “real” economy has its own pharmaceutical plants and factories to make warehouses full of medical supplies. After all, a “real” economy makes real things.
One might think that U.S. regulators — like the salaried bureaucrats at the Food & Drug Administration — would move Heaven and Earth to keep pharma production viable in the country. But no… That’s not how they roll.
Instead, the U.S. has an economy designed by monetarists and macroeconomic accountants. It’s all about the so-called “velocity” of money. Every recordable transaction is part of GDP.
Buy a house? It’s part of the GDP. Sell it… GDP. The next guy sells it again. GDP. Flip the place three times in a year, without even applying a new coat of paint? It’s all GDP. Same old house, but the economy looks stronger. Real estate sales are “up.” Yeah, right…
Or on a larger scale, unload tens of millions of 40-foot containers at U.S. ports every year. Place them on rail cars and trucks. Haul to distribution centers. Sell the contents at “big box” stores… There’s more of that GDP thing.
Yet aside from locomotive engineers, truck drivers, shelf-stockers and sales clerks, the entire production chain is offshore. And this too – selling other people’s stuff – is considered GDP. Some people actually believe this false gospel.
But, but, but… “Globalism,” goes the cry. Yes, and the devil speaks many tongues.
For years, we’ve been told that globalism is inherently good. It’s self-evident, right?
The argument traces back to British economists John Stuart Mill and David Ricardo in the early 1800s. They developed a theory called “comparative advantage.” For example, some nations are more suited to growing wheat. Others are better at wine. But people want both wine and wheat. So each nation focuses on its inherent strengths. Eventually, there’s a balance of resources, where one nation imports wheat and the other imports wine.
Fast-forward to the present era. Allegedly, global sourcing — a riff on comparative advantage — supposedly brings cheaper prices for things we buy from Walmart and the Dollar Store.
There’s an entire cottage industry of economists and K-Street lobbyists who push for so-called “free trade.” The U.S. Chamber of Commerce comes to mind…
The problem is that free trade only works until it doesn’t. Look at hospitals across the nation scrambling to secure supplies of facemasks and ventilators while the U.S. government uses wartime powers to “encourage” companies to set up emergency production lines.
That offshore trade dynamic doesn’t seem very “free” anymore.
And now, with the Congress passing a $2.2 trillion stimulus bill to salvage the economy — and more spending coming down the line — that “free trade” idea is definitely not bringing everyday low prices to America. It’s more like everyday endless, bottomless, unpayable debt that will crash the value of the dollar.
Meanwhile, what’s so “global” about offshoring U.S. factories and workshops to just one country?
Indeed, what’s “global” about offshoring entire industrial sectors to a single swath of one particular country; the California-sized industrial zone of China that runs from the south, near Hong Kong, up through Wuhan (yep, that Wuhan) towards Shanghai.
Global? Hardly. In fact, it’s an accumulation of risk factors, awaiting a tipping point which… well, which we are seeing now.
How in the hell did all of this happen?
Intellectually and strategically, it’s because of a 200-year-old article of academic dogma that goes counter to fundamental national interests for any large, powerful nation. And over several decades our politicians, policymakers and university “thought leaders” (ahem…) all bought into this truly self-destructive idea.
Meanwhile, out in the heartland, the U.S. lost its industrial base one factory at a time, sad to say. Day by day. Month by month. Drip, drip, drip.
Every closed American business has its own tale. The essence, though, is that U.S. factories could not compete against allegedly “lower cost” imports; often subsidized by the home government and protected by all manner of subtle barriers.
When an American industrial sector went away – pharmaceuticals come to mind just now – the salaried talking heads of media, academia and politics collectively went “Tsk, tsk…” Those uncompetitive U.S. businesses deserve to close, was the thinking.
Now we have idle, abandoned plants scattered across the land, town after town, county after county, state after state. Their old smokestacks resemble pillars of ancient Roman ruins, or Egyptian-style obelisks that you see in old cemeteries, metaphors for industrial graveyards.
Where do we go from here? Back to Trump’s comment the other day: “This is not a country that was built for this.”
He’s right. The country seems way too “built” – over built – to import and sell other people’s stuff.
Now, as a nation we’re under the gun. We’re hostage to circumstances.
Congress just passed super-costly legislation to bail out the unemployed, lest people literally starve. And to bail out businesses too, in the hope of staving off bankruptcy. All this in a desperate effort to preserve life and some semblance of an economy. The immediate focus is to tide the country over until something else kicks in.
At this point, it’s a safe bet that we’ll never return to “normal.” There is no normal anymore. It all shattered in the past few weeks, like that above-noted wine glass hitting a granite floor.
But it’s time — way past time — to rebuild the country. If ever you need an existential national crisis to force action, then this is it. It’s time to clean out the rot. Time to restructure taxes, regulations, government controls, education, overall attitudes…
Time to rethink everything about the past 30, 40 and 50 years. Because large parts of the economy were “built” wrong.
It’s time to get back to basics. And the most basic point is that “real” economies make real things. It’s now or never.
On that note, I rest my case.
That’s all for now… Thank you for subscribing and reading.
Managing Editor, Whiskey & Gunpowder
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