Thursday, January 26, 2017

Trump the mercantilist, part 1

Trump is currently working on making America a manufacturing based economy again, focused on oil drilling. Manufacturing based economies are called secondary economies and petroleum drilling is an example of a resource extraction economy,  or primary economy. These terms are useful because they are now precise. The problem is that America has become a service based economy with much higher productivity than secondary economies like India. A programmer producing a program is more productive (as in the product creates more value pet hour worked) than someone sitting at a spinning wheel. This is reflected in the persons wages. Countries with secondary economies want to be tertiary with a better quality of life for themselves. Moving backwards doesn't make any sense and will hurt everyone in America.

We have seen politicians move backwards before, particularly in Canada when Stephen Harper moved Canada to become one of the biggest oil producers in the world. As a result the Canadian dollar has depressed in value. This meant Canadian oil is now cheaper abroad, but also that imports to Canada cost more, making Canadian workers have to spend more on imported goods. A few oil executives benefited substantially while everyone else has been harmed.

We are now looking at the same policy in the United States. Reducing free trade and imposing tariffs on other countries in an attempt to increase our exports will force our currency to be devalued in the market. Interest rates on borrowing will increase until the market clears. This means the dollar will crash and he will make our economy go back 100 years as he promised to where we are once again a manufacturing hub, this time with tens of millions of highly trained professionals struggling to make ends meet with the rampant inflation which is necessary for us to become a secondary economy again.

This scenario if everything goes through as he campaigned is also called a recession.

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