I’ve always held that it is easier to print money to buy goods than it is to make them yourself, and this is why inflationary booms lead to an outsourcing of consumer goods manufacturing. The Fed’s meddling with interest rates drives American consumer goods manufacturing overseas to China. We saw the same kinds of things take place at a local level when banks issued their own banknotes in the US. As a regional bank inflated the supply of its notes, it would push manufacturing jobs out of the area that its notes predominately circulated in.
Austrian economist Robert Murphy provides us some clarification about why net exports mirror corporate profits. The explanation is so simple and concise I feel it deserves its own post on my site.
Economist Robert Murphy writes:
So if the Fed fuels an artificial boom, such that assets prices in the US are rising, then foreigners want to get a piece of the action. On net they want to buy more US assets, than Americans want to buy of foreign assets. The only way that is possible is if the US runs a current account deficit. Intuitively, as US stocks, real estate, etc. are booming in market value, Americans are willing to sell off more of them (in absolute dollars) and use the proceeds to import more TVs, cars, and other goodies from foreigners as payment.
Not much more needs to be said.
If someone you know is bashing China for undercutting the dollar as the reason why America doesn’t produce any consumer goods, point them to this post and have them chew on this.
Artificially depressing interest rates distorts the structure of production. The artificially low interest rates cause a downsizing in the consumer goods sector of the economy by making long term interest rate sensitive projects look like more attractive investments (such as housing) in comparison to consumer goods manufacturing.
The American economy simply doesn’t have the resources to keep consumer goods manufacturing up while it is busy producing millions of houses. It is easier to simply take the inflows of foreign investment capital to buy our consumer goods from overseas than to make them ourselves.
Once the sugar high has worn off from the Fed’s money printing operations, the American economy is left with more houses than it knows what to do with and a decimated consumer goods manufacturing base.
The Fed is responsible for more evil on this planet than all other entities combined.