Where is the US economy headed?

If "comparative advantage" is a common sense concept, why are there so many protectionists, left and right? If "supply and demand" is a common sense concept, why do 75% of Americans believe in raising the minimum wage? Why have 2000 years of Judeo-Christian tradition consistently supported laws against usury? Why is rent control so popular? I think the contrary of what you say is true: Most findings of economics that economists agree about are counter-intuitive and unpopular, but correct. And herein lies the value of economics as a science.

Karl Marx said the same thing. I invite you to compare his Kapital with John Stuart Mill's Principles of Political Economy, which was written around the same time. You can then decide which book has withstood the test of time better. Of course, for all we know, the present critics of economics may do better. But I am not holding my breath, given the critics' record so far, and given that most 'criticism of economics' consists of fallacies debunked centuries ago.

I agree that neither a human body nor an economy is a closed system energywise. The former runs on energy from food and air. The latter runs on the work, thrift, and risk-taking of the people, plus natural resources. I don't think that blood and money have anything to do with it. They are both media of exchange, but buth make up only a minor part of what bodies and economies produce.

The world economy as a whole is a closed system. There is no "outside."

You are. The USA is the second most productive nation in the world. (The most productive is Luxemburg. Luxemburg is tiny, and I'm sure one can cut a Luxemburg-sized chunk out of the US that is even more productive than Luxemburg. Long Island and the Bay Area seem like good candidates.)

Investors regard America's secure property rights as a major reason to invest in your country. They regard Zimbabwe's insecure property rights as a major reason not to invest there. Secure property rights are an important factor in creating wealth, and they are supplied by governments. As to your point about competing nations, economists have been debunking your argument since David Hume (1752). The debunking of your argument has been completed in Ricardo (1817). More evidence, I believe, that economics is not just a simple application of common sense, as you thought it is.

Where does the money come from that es it so prosperous?

As to competition of nations, I am not sure whats been debunked there, you will need to explain further. Perhaps I don't understand your argument, but it seems your USA / Zimbabwe comparison proves that competition does exist and it does matter, and as the world gets smaller through enhanced communication and transportation, I think it is only going to grow in importance.

China Set To Reduce Exposure To Dollar
Move Would Probably Push Currency Down

By Peter S. Goodman
Washington Post Foreign Service
Tuesday, January 10, 2006; D01

SHANGHAI, Jan. 9 -- China has resolved to shift some of its foreign exchange reserves -- now in excess of $800 billion -- away from the U.S. dollar and into other world currencies in a move likely to push down the value of the greenback, a high-level state economist who advises the nation's economic policymakers said in an interview Monday.

As China's manufacturing industries flood the world with cheap goods, the Chinese central bank has invested roughly three-fourths of its growing foreign currency reserves in U.S. Treasury bills and other dollar-denominated assets. The new policy reflects China's fears that too much of its savings is tied up in the dollar, a currency widely expected to drop in value as the U.S. trade and fiscal deficits climb.

China now boasts the world's second-largest cache of foreign exchange -- behind only Japan -- and is on pace to see its reserves climb past $1 trillion later this year. Even a slight diminishing of the dollar as a percentage of those holdings could exert significant pressure on the U.S. currency, many economists assert.

In recent years, the value of the dollar has been buoyed by major purchases of U.S. Treasury bills by Japan, China and oil-exporting countries -- a flow of capital that has kept interests rates relatively low in the United States and allowed Americans to keep spending even as debts mount. Some economists have long warned that if foreigners lose their appetite for American debt, the dollar would fall, interest rates would rise and the housing boom could burst, sending real estate prices lower.

The comments of the Chinese senior economist, made on the condition of anonymity because the government disciplines those who speak to the press without express authorization, confirmed an analysis in Monday's Shanghai Securities News stating that China is inclined to shift some its savings into other currencies such as the euro and the yen, or into major purchases of commodities such as oil for a long-discussed strategic energy reserve.

In a report circulated this week, Stephen Green, senior economist with the bank Standard Chartered PLC in Shanghai, identified several signals that China is intent on limiting its exposure to the dollar -- not least, a recent pledge from the State Administration of Foreign Exchange to "actively explore more efficient use of our foreign exchange reserves."

"We believe this adds to the downside pressure the USD [U.S. dollar] is currently facing," Green wrote. "It is the first official expression from SAFE that they are looking at switching away" from the dollar.

The comments on SAFE's Web site reinforced earlier public warnings from Yu Yongding, an economist on the monetary policy committee of China's central bank, that the country's reserves are now vulnerable to a drop in the value of the dollar.

"The general trend for the U.S. dollar is continuously weakening," Yu said, speaking to reporters at a conference in Beijing last month. "Countries with huge foreign-exchange reserves will have their assets shrunken."

Last week, Hu Xiaolian, director of the foreign exchange administration, said China plans to "optimize the structure" of its reserves. Analysts took that to mean China would pursue a higher return than it can get from holding dollars by diversifying its reserves.

Not all economists anticipate negative repercussions for the U.S. economy. Were China and Japan to engineer a significant fall in the dollar, those nations also would suffer the consequences -- sharply diminished exports as Americans lose spending power, plus a drop in the value of their dollar assets.

"It is thus extremely unlikely that China would do anything to harm its own balance sheet," wrote Stephen Jen, an economist with Morgan Stanley, in a research note distributed Monday.

In 2005, the dollar rebounded against major foreign currencies as the Federal Reserve raised short-term interest rates -- making dollar assets relatively more attractive than others -- but has slid a bit early this year. Meanwhile, China continues to amass foreign-exchange reserves at a pace of roughly $15 billion per month.

Warnings about an impending Chinese sell-off in dollars emerged in July, as China slightly altered the way it sets the value of its currency, the yuan, bumping it up against the dollar by about 2 percent. At the time, China announced that it would gradually allow greater movement in the exchange rate -- something that has yet to materialize -- while also shifting from a system in which the yuan moves with changes in the dollar to one where it tracks a basket of currencies including the yen, the euro, the Hong Kong dollar and the South Korean won.

The move temporarily muted criticism on Capitol Hill from those who accuse China of currency manipulation, asserting that an artificially low yuan has made China's goods unfairly cheap on world markets. But as the implications of the new currency policy rippled out, some analysts suggested that China would thereafter have less need for dollars and greater need for the other currencies in the new basket, sending the greenback down and risking higher U.S. interest rates that would dampen economic growth.

China sought to quash such talk. In September, a senior central bank official told a ballroom full of international executives gathered in Beijing that China would not sell significant quantities of U.S. bonds, cognizant that such a move would "cause the price to plunge."

Even if a Chinese shift away from the dollar weakened the currency, that would probably not soothe tensions with those in Washington calling for an increase in the value of the yuan to help U.S. manufacturers. Unless China severs the link between the value of its currency and the dollar -- a move Beijing says could destabilize its economy -- then a weaker dollar would simply mean a weaker yuan as well, leaving in place the current debate over whether China's export earnings are being netted unfairly.

Special correspondent Eva Woo contributed to this report.

America's technological and economic strength is the result of its tremendous ingenuity. The USPTO has taken and will continue to take aggressive steps that will enhance quality and improve productivity to ensure that U.S. intellectual property protection remains the best in the world, protecting American innovation and sustaining economic growth.

okie

The plutocracy of CEOs who sit on each other's boards don't quite invite confidence. I have bought shares and found CEOs write golden parachutes forthemselves while running the corporation to the ground. There need to be a reform in forbidding CEOs from being members in other corporate boards.

Bush's terrible economy is breaking records on Wall Street.

http://www.foxnews.com/story/0,2933,217766,00.html

Bush's terrible economy is breaking records on Wall Street.

Talk about economic ignorance. As the chart below illustrates, until Bush Jr got in office, the Dow Jones did nothing BUT break records every few weeks, since it was in a continuous process of going up almost all the time.

The fact that it took Bush's economy six years to go up from where it started is a disgrace.

okie wrote:

Bush's terrible economy is breaking records on Wall Street.

http://www.foxnews.com/story/0,2933,217766,00.html

Just for context: How long into the presidencies of Clinton, Bush I, and Reagan did it take until the Dow first broke its previous record? Without having looked at the data, I'd bet it took much less than six years for each of them.