Ed Martin talks about the St. Louis Aerotropolis

After asking Ed Martin about his decision to run for Congress in Missouri's 2nd Congressional District, I asked him about aerotropolis. That's the proposal to expand Lambert airport to be an international air trade hub with China as our main trading partner. Funding for this project would come mainly in the form of tax credits and Federal grants.

Our "Allies" the French

The French are questioning the role of the US dollar in international monetary policy. Reuters reports that France's Sarkozy thinks the international community should consider SDRs:

France, which took over the presidency of the G20 group of industrial and developing nations last month, is sounding out governments on ways to reform a monetary system dominated for decades by the U.S. dollar with the aim of creating greater global stability.

"We need to start thinking about the relevance of a system based on accumulation of dollar reserves," Sarkozy said, adding that France would float proposals during the next year.

"Does not this system make part of the world dependent on American monetary policy? Should we not reflect on the role of the SDR (Special Drawing Rights) and on the internationalisation of other currencies?" asked Sarkozy, in a speech to mark the 50th anniversary of the Organisation for Economic Co-operation and Development (OECD).

French officials have said they hope to encourage greater use of the Chinese yuan as a reserve currency during their G20 presidency, including talks on a possible timetable for its inclusion in the basket of currencies which underpin the International Monetary Fund's Special Drawing Rights.

Related articles

• Thanks Barack... CHINA & RUSSIA QUIT DOLLAR! (gatewaypundit.rightnetwork.com)
• Sarkozy: G-20 Should Set Capital Flow Rules (online.wsj.com)
• Sarkozy sets stage for open season on the dollar (theglobeandmail.com)

What QE2 Hath Wrought

Chicago Boyz explains economics 101 in a post titled Bleeding and Purging to Balance the Humors of the Economy:

Peter Suderman at Reason [h/t Instapundit] observes in his article on “Quantitative Easing” that:

There’s a similar sentiment behind arguments for the Fed’s new policy, a simplified version of which goes something like this: Quantitative easing is probably a good idea. Why? Because we need to do something to increase economic activity. Fiscal stimulus is off the table for political reasons (at least). Inflation has been running a little low, which makes it an obvious policy lever. Expanding the monetary supply—and thus spurring on inflation— may not do much, but it’s what can be done. And that means that, well, quantitative easing is a good idea. QE2, motherfucker!

The old saying, “when the only tool you have is a hammer, all problems look like nails,” doesn’t really give the entire picture. More comprehensively, we should say that when the only tool policy makers have is a hammer, they developed incredible baroque theories to rationalize why hammering is the solution to every problem.

This has led to the bizarre world in which Fed Chairman, Ben Bernanke, is "unusually critical of China for its currency manipulation", while pounding the table for manipulating our own currency via another round of quantitative easing. So is it any wonder that Russia And China Drop Dollar For All Bilateral Trade?

St. Petersburg, Russia (AP) – China and Russia have decided to renounce the US dollar and resort to using their own currencies for bilateral trade, Premier Wen Jiabao and his Russian counterpart Vladimir Putin announced late on Tuesday.

Related articles

• Thanks Barack... CHINA & RUSSIA QUIT DOLLAR! (gatewaypundit.rightnetwork.com)
• "Much Ado About Nothing: China, Russia Drop Dollar In Bilateral Trade" and related posts (zerohedge.com)

Greenspan Warns of Weaker Dollar

The Financial Times is reporting that Alan Greenspan has warned about a weaker dollar:

Mr Greenspan argues that with China also holding down the renminbi, the upward pressure on currencies elsewhere risks a return to widespread trade protectionism. Mr Greenspan criticises China for continuing to prevent the renminbi strengthening, saying it reflects a misguided view that a weak currency is necessary for export growth and political stability. “China has become a major global economic force in recent years,” he writes. “But it has not yet chosen to take on the shared global obligations that its economic status requires.” More unexpectedly, Mr Greenspan adds: “America is also pursuing a policy of currency weakening.

Mr Greenspan does not specify which agency in the US system is implementing policies to weaken the dollar"

Ah, our old friend, quantitative easing again...

Russ Carnahan Representative Wants Smoot-Hawley

Congressman Russ Carnahan (D-MO) backed out of an appearance at the Lemay Chamber of Commerce luncheon and candidate forum. Michael Vogt (D-MO) spoke in his stead at the event. He had one major slip-up during the question phase of the event.

The question put to Carnahan's representative, Mike Vogt, was: "how would you stop the export of American jobs?" Vogt went with tariffs. Specifically, he said that there was a time in our history where we had government control of the import/export business in the United States.

You certainly can't fault Vogt's history lesson. We did have a sort-of tariff on tea at the country's outset; however, I think Vogt was alluding to other historical incidents like the disastrous Smoot-Hawley Tariff Act of 1930. Few would see that as an episode to be emulated particularly with our economy still struggling. Perhaps Vogt is unaware that most economists of the time blamed Smoot-Hawley for precipitating the Great Depression. Or maybe Vogt has not heard of the economic concept of gains from trade—positive externalities and side-effects resulting from exchange. Curtailing those effects by reducing trade through tariffs ensures that the economic pie shrinks as those gains are lost to what Bastiat called the "not seen". It's ironic that Russ Carnahan's chosen representative would make such a commerce-killing suggestion at a Chamber of Commerce event.

We must remember the lessons of history so that we can avoid repeating them. For an overview of how the Smoot-Hawley Tariff Act led to the Great Depression, I highly recommend Russ Robert's EconTalk interview with Thomas Rustici (listen to the mp3). It's about 85 minutes long and very informative. Rustici has looked at the newspaper reporting from the day:

On October 21, 1929, the 16 free trade Senators log-rolled; said they'd join in if you give tariffs for the industries in our states. The Senate then supported the Smoot Hawley bill. Tariff increases from 38%-60%--almost a doubling. Immediate ramifications. The day the 16 Senators switched, on October 21, is when the market began its slide; lost 1/3 of its value before the Crash on October 29, 1929. When you read the financial papers--Wall Street Journal, New York Times--they have front page stories on one side with markets decline and other side Smoot-Hawley passes; nobody connecting the dots.

There's much more. For instance, our tariffs set off trade wars around the world that killed our export market. Since much of the grain that America grows is exported, farmers were hit hard. Farm states, like Missouri, saw the first to see bank runs during the Great Depression.

As I drove home from the Chamber of Commerce luncheon I heard Mark Reardon of KMOX interviewing Claire McCaskill. They talked about the process of opening up a cargo hub to facilitate trade between China and St. Louis. One of the sticking points in the negotiations with the Chinese is that they are embargoing our beef and we are embargoing their chicken. The more things change...

Currency Collapse?

World at Risk of Folding in on Itself:

'If we slide into deflation - the likely fate of the developed market - a Japan-style outcome will become inevitable,' he said.

'In Japan, the BoJ has lost the ability to create inflation and is condemned to deflation. Central banks may now need to talk about the necessity of inflation...before it is too late.'

Tyler Cowen on FairTrade

Over at Marginal Revolution, Tyler Cowen distills FairTrade: "...it's mostly a marketing gimmick."

Hu's in Trouble?

The last capitalist we hang shall be the one who sold us the rope. — Karl Marx

Economists assure us that international trade is a good thing. I agree, and I think the advantages of trade are well described by the Ricardian model and comparative advantage. Yet, I worry that every dollar of debt we incur with China is a little more rope for them to use against us.

Here's an imagined conversation between Hu Jintao and George W. Bush to illustrate a repugnant possibility of China's vast holdings of US currency and debt instruments:

[Phone rings in Oval Office. Bush answers.]
W: This is W.
Hu: Howdy cowboy! Hu here.
W: The 2008 games... Great show, great show...
Hu: Let's cut to the chase. We've got some of your spare change we could loan you.
W: Right.
Hu: Furthermore, we've got a lot people to keep occupied. We can keep them occupied by either working in factories making McDonald's Happy Meal toys or we can muster them into armies. We like the Happy Meal gig and I think you do to.
W: Yup.
Hu: So how about you recognize our territorial claims to the island of Formosa?
W: Hmmm... You know I can't do that.
Hu: We'll burn $700B worth of US Government bonds and you'll recognize us as the rightful sovereign of that little island.

The above dialog reaches a spectacular low in (imagined and implied) moral turpitude. Unfortunately, this sort of option is going to remain on the table as long as China has significant holdings denominated in US dollars.

I don't know if we should do anything. Inaction is sometimes the best course of action. Nonetheless, the reality of the Templeton curve looms large before us. Politicians are oddly promising more spending during one of the greatest financial crises in American history. As a result, debt forgiveness will become more politically appealing.

I'd like to know how economists see this playing out. Are there similar examples from history that we can learn from? What policy changes should we consider?