TCS Daily


The World Is Round: How to Think About Foreign Investment in the US

By James V. DeLong - November 21, 2007 12:00 AM

The "world is flat" as an image for globalization is 180o askew. The essence of the contemporary world is its circularity, its roundness, as in "what goes around comes around."

This recognition of rotundity provides the necessary context for assessing issues surrounding foreign investment in the United States, an assessment made timely by a current high-profile example - the pending deal between U.S. tech firm 3COM, private equity investor Bain Capital, and Chinese telecom giant Huawei. Some reactions to the deal raise concerns that a rise in politicization and a hint of chauvinism is threatening this investment, which is an important driver of U.S. economic health.

The essence of the issue is that foreign investment is vital for American workers and the U.S. economy. Obviously, such investment can raise security concerns, particularly in connection with China. As indicated by the recent report of the bipartisan US-China Economic and Security Review Commission, there are "disturbing" as well as "constructive" trends in that nation, and there is particular concern "about the increasing ability of China's military to destroy satellites and to undertake cyber attacks against a broad array of U.S. computer networks, both government and civilian."

But, as the Commission also noted, "free and fair trade depends on a market approach to international commerce, rather than a contest among governments and their closely owned and subsidized industries." To support this ideal of free and fair trade, the U.S. has long had in place a process for addressing national security issues in a professional manner. Any attempt to score political points by playing on the security fears of the post 9/11 era, or by exaggerating the problems of China, injects an inflammatory political virus into a review process that is better conducted in a dispassionate manner, through administrative structures established precisely to avoid sound-bit hyperbole.

If this trend toward politicization is not curbed, other nations will play tit-for-tat, to our national loss. It is in our long-term economic and geopolitical interest to re-emphasize the investment review process that has protected our country and supported economic opportunity for almost 20 years.

The Deal

Bain Capital is a U.S. private equity fund. Its business is to buy public companies, improve them, and either hold them and collect dividends or take them back public at a profit in a few years. 3Com is a respected U.S. provider of telecom equipment, one that prospered during the great tech boom and has struggled somewhat since. Huawei is a Chinese provider of telecom services and gear, and a long-time customer of 3Com's. In fact, 3Com now owns a company called H3C, a joint venture formed by it and Huawei in 2003, and bought out by 3Com in 2006. H3C provides about 60% of 3Com's revenues.

Agreement has been reached for Bain to buy 3Com, with Huawei putting up over $100 million and getting 16% of the equity.

Playing the National Security Card

Because 3Com indirectly supplies commercially-available components to the U.S. government, including network security systems designed to protect networks from intrusion, long-time China critics in Congress saw an opportunity to make a domestic political point by interfering with this deal.

This politicization of foreign investment is exactly what President Ronald Reagan was trying to prevent when he professionalized the investment review process within the Committee on Foreign Investment in the U.S. CFIUS, as it is known, looks at national security implications of foreign investments. To make sure there were no concerns with this deal, Bain Capital voluntarily submitted its, and minority investor Huawei's, purchase of 3Com for CFIUS review.

If CFIUS finds any meaningful threat, everyone involved will be seriously surprised. 3Com sells to the U.S. government only via third party integrators, and sells only general commercial products; it does not have classified projects. Nor will Huawei's decidedly minority stake give the firm any special access to underlying technological secrets, assuming there are any.

The World Is Round

The larger issue is how foreign investors - including those in sensitive technology industries - assess the investment climate in the U.S. If politics disguised as security concerns are allowed to derail potential investment deals like this one, rather than evaluating them through a stable, consistent, professional review process, investment dollars will flow elsewhere and other countries will visit these same tactics on U.S. businesses.

As the Hong Kong based investment advisor GaveKal notes, the U.S. relies on foreign investment to offset the trade deficit. There is nothing wrong with this; there is no reason why trade flows must balance at all times, but:

[T]he changing nature of its trade deficit does pose a problem for the US. In the old days, America's trade deficit was typically against France, Germany, Japan... And if Deutsche Telekom wanted to turn around and use the hard earned US$ that Germany had accumulated to buy SBC communication, . . . then American authorities tended to shrug . . . . However, in the past few years, the deterioration in the US trade deficit has been mostly against China, or oil producing countries. And when Dubai turned around and tried to buy ports in the US, or when China attempted to purchase Unocal, these non- European holders of US$ found that their US$ did not go as far as they thought.

US authorities stepped in and said: "you are Arabs/Chinese! You can't possibly buy this port, or these oil wells...". And, unsurprisingly, when the Chinese and Arabs were told that their "dollars were no good here", the US$ plunged from the low-end of its valuation trading band to new depths.

[Louis-Vincent Gave, The Ever-Falling U.S. Dollar, GaveKal Ad Hoc Comment (Nov. 6, 2007) (subscription).]

And there you have it. We need their capital, and, as U.S. Secretary of State Colin Powell lectured representatives of underdeveloped nations in 2002:

Attracting this money isn't easy; countries have to compete with each other for investment against other countries in the same region, and against the rest of the world. Money, capital, is a coward; it will go nowhere where it is put in fear. Money will fly and go away from corruption and bad policies. It does not want to be around conflicts. It does not want to be around political unpredictability or instability. (Emphasis added.)

The U.S. already has a couple of strikes on it, what with the hysterical rejection of the Dubai ports deal and the earlier uproar over Unocal. A couple more and foreigners will conclude that the U.S. is the home of corrupt politics, bad policies, and unpredictability, and that their capital is safer elsewhere. The consequences would be stark, as the GaveKal essay concluded:

[T]he one truly bearish scenario for continued dollar weakness that we can imagine: the big risk to the dollar is that Americans will refuse to sell more of their assets to foreigners.

Beyond these immediate concerns lies the long-run importance of promoting the trend toward globalization and intertwined economies. Increasing economic connection and cooperation strengthens global political stability and actually enhances U.S. economic and geopolitical interests. By supporting a consistent, professional foreign investment regime in the U.S., American companies can better penetrate foreign markets. The U.S. State Department says that approximately 21 percent of all U.S. exports come from U.S. subsidiaries of foreign companies, based on their ability to tap into multinational parents' distribution networks and knowledge of foreign tastes.

On the geopolitical side of the ledger, the U.S. can use foreign investment to draw countries like China further into the international system, as noted by Edward M. Graham and David M. Marchick in U.S. National Security and Foreign Direct Investment (2006):

Additional investment from China would also produce important ancillary benefits for the U.S. consistent with broader US strategic and political objectives... Interactions between Chinese and western businesspersons would further integrate China into the global economy, creating greater pressure within China for democratic reform, the rule of law and cooperation with the United States and the West.

The authors agree that security is a legitimate issue, but the means are already in place to address it: "If national security concerns do arise in relation to a transaction, CFIUS agencies have a wide-array of tools, including security agreements, to mitigate their concerns."

American economic and national security interests are best served in the long-run by remembering that the world is round. We don't want foreign investors and countries to mimic the introduction of chauvinism-tinted politics into governmental investment reviews, or to use our actions as an excuse. If we want consistent, non-political investment climates for U.S. companies abroad, we must maintain a consistent, non-political investment climate in the U.S.

The CFIUS process was established to protect our security while doing just that. By taking the politics out of investment reviews, it has worked for almost twenty years and it's the process we should rely on and reinforce, whether the issue is Bain Capital's purchase of 3Com, or the next foreign investment to come along.

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130 Comments

Rising Sun
Rememeber how the Japanese were going to take over the USA?

Japanese purchased Rockerfeller Center and Pebble Beach golf course. What were they going to do with them? Move them to Japan?

Investment in your country or state or city, from any source, is a sign that the investor believes he can make money there.

The only caveat I would argue for is the investment from a truly private venture or is it a front company for a government?

There's a bigger problem
which the author misses. The US has become an investment trap for foreign capital. The collapse of the dollar has wiped out with interest any gains made by increase in investments in the US over the past eight years. No investment manager can tolerate a prospect of no return on investment, and yet that's what the US economy and deficit spending has done for foreign investment.

What's that old tune? Oh yeah: "You can check out any time you like, but you can never leave".

Only if you want to covert to Euros or...
Leave the assets in dollars, buy soybeans or corn or another US products and export it.

As I said
the US has become an investment trap through its failure to defend its currency. US policy with respect to other countries in the past, particularly in South America, has been to encourage them to maintain currency values so that they do not remain or become investment traps as a result of the hyperinflation some of these countries experienced. This may be another case of US fiscal policy not practicing what it preaches.

If you are an investor and you invest in say Argentina, do you expect it's acceptable to be told by the government there "oh, because of declining currency value, you'll just have to keep your investment here, no profits, no dividends"?

I thought not.

As I said,
You only loose when you covert USD to something else.

Millions are making money in the USA using USD.

Bargain shopping
The weak dollar is great for new and additional foreign investment. Yes, people who bought stuff in USD when the currency was high are going to lose value. That ALWAYS happens in a "buy high" scenario. But unless someone thinks that the USD is simply never going to recover, now is the best time in a decade or more for foreign investment in the US.

No
It's lousy for investment when the dollar continues to decline, as past history has shown in every other country that has encountered this.

As to recovery, you tell me. It will happen when the US ends its chronic pattern of large budget deficits.

Where will people invest?
"Secure property rights are the key. When producers know that their future products are safe from confiscation, they will take risks and invest. But when they fear they will be deprived of the fruits of their labor, they will do as little as possible."

http://www.realclearpolitics.com/articles/2007/11/the_tragedy_of_the_commons.html

In how many other countries of the world can anyone with the money, buy property or buy businesses and be fairly confident the government won't take it from them?

Now would be a great time for those with Euros or Canadian dollars to begin buying their retirement homes in FL, NV or AZ.

So....
You'd rather buy something when it's EXPENSIVE? Let me know how that works out for you. Here's a hint: look at those people who bought condos in Miami, or houses in California over the last 2 years. They bought when prices were going up and now they're stuck with assets that they cannot unload because the market has declined.

I agree with you that foreign investors who were buying in during the high marks of the dollar are stuck in the same kind of way, but NEW investment, either from new sources or additional capital from those previous investors (to bring down their overall cost-basis) is probably a good idea right now, unless, as I said, you believe the dollar will never recover.

Addendum...
Just read your comment on today's Dollar Policy article, and it appears that you have an honest fear that the dollar really will never recover.

If so, then your position is valid that forgeign investment in the US is foolish.

Agreed
but in the case of retirement homes, that's money coming into the US that will effectively never leave on an investment basis.

As to the question, just about anywhere in Europe and much of SE Asia. Even much of S America has much more reliable civil and contract law than it did even 10 years ago. Lula in Brazil may have gotten a bad rep for being left wing and pro-union, but he's done a lot in improving conditions of investing and doing business. The great ghastly example of what not to do was Argentina a few years ago in their banking fiasco.

So is your money safe from government expropriation/bad faith/corruption in places like Poland, Czech Republic, Slovakia, the Baltic republics, Hungary, Germany, France, Britain? Yes. Ireland? Overwhelmingly yes. China? Probably yes and growing more certain every year as long as you have a clear understanding of what the Chinese will and won't tolerate, but they're pretty consistent about this. The Chinese government's pretty serious about this and one of the few if only countries that executes officials for corruption. Russia? Not a chance.

It's a subject of serious discussion
My thesis is that the devaluing dollar is to some extent the result of fiscal deficits. There has been only one short period in which the US had balanced budgets, mostly during the second Clinton term (no that's not a partisan remark, it's an accident of history). Everything else since nearly the 1950s has been one deficit after another. Only now however do those deficits constitute such a large portion of total GDP. Congress balanced budget acts went nowhere.

A near perfect parallel is the crash of the Spanish economy in the early 17th century. Two centuries of massive government deficit expenditures with, by the end, operating expenses funding by issuance of new debt, resulted in the complete crash of Spanish currency and the nul value of government bonds and securities. It wiped out the world's then largest banking centre in Genoa which was Spain's principal financial centre. Spain never recovered, and remained the sickest economy in Europe until inclusion in the EU in the 1980s.

Other countries have done it, Ret, and the US is on that same path downward. The country must get its fiscal house in order. Is it imminent? Probably not. In relative terms,let alone absolute terms, the US economy is far stronger than that of Spain in the late 16th C. But it will happen if current trends do not change.

So, that's my thesis, and as always, I stand to be corrected on any part of it.

Hitch your wagon to a falling star
Is it your belief that the USD has bottomed out? And that there's no place for it to go but up?

If so, buy dollars. I believe there are a lot of people who will sell them to you.

People who believe the dollar will not be recovering any time soon are the people who blame the erosion of the dollar on bad policies-- and believe those policies will not be changing any time soon.

non-political investment in the US
I agree with this authors point that investment in the US should be non-political, as it is now. Examples of stupid interference was when the chinese wanted to buy that oil company, and the Dubai Ports deal that they stupidly stopped. The US should tear up all it's crappy bilaternal trade pacts like NAFTA, etc. and declare unilateral free trade with the whole world, maintain, a balanced budget, have a stable currency instead of fiat money; if so the US would be like a giant vacuum cleaner sucking up all sorts of investment. This would be especially so if they also had very low business taxes, even less than so many other countries are now instituting.

The Pontif of Doom
I can count on you for a gloomy outlook.

Here is the key. In every economic situation there is opportunity.

American Exceptionalism
We will prevail left to the free market. The one thing that can kill the golden goose is the the left.

Nothing can beat us IF we remain a free market economy and not kill ourselves with social spending.

SSI is the back breaker. Unless we reform it were doomed. Markets like China are not burdened with supporting the non-producers of society and the retired.

A transition to private savings is key. Why people think SSI is such a good thing is beyond my comprehension.

deficit spending has nothing to do with this
because if it did, then the Euro would be in the dumps thanks to the Italians deficit spending.

Colin, you don't know what you are talking about
"As to recovery, you tell me. It will happen when the US ends its chronic pattern of large budget deficits."

Government DEFICITS have nothing to do with this. In fact, it is the mark of some fool who doesn't know what he's talking about on this subject to claim that it does.

And our deficits are not 'massive'. They don't even come close.

A thesis! That explains it now
Go get your degree with that junk, fine. Just stop peddling it here.
What was the figure for Spanish annual GDP growth rates during those two centuries? Given how the rest of pre-industrial Europe's at that time was no where near what we enjoy today your comparison is without merit.

And, as a percentage of GDP, our deficits have SHRUNK. This is be cause the total debt ratio has been shrinking since the end of WWII because our economy has grown by over 400% while our debt increased (via those 'massive' deficits you are so concerned about) by only 84%. And I am only quoting 2005 data. It has shrunk more so since then. (see: http://www.heritage.org/Research/Budget/bg1820.cfm)

Tell me, did Spain's pre-industrial economy grow during that aforementioned two centuries ANYWHERE near 400% while it was accumulating more debt during that time? I don't think so.

If this is the best you have to offer, just be glad you don't have to defend your 'thesis' before me. I'd rip it apart in a New York minute.

Unbelievable.

In every economic situation there is opportunity
I agree with you. In this instance trading dollar denominated for euro denominated investments is probably a smart move.

If you think not, do the reverse. I'll buy your euro paper from you.

Why SSI is good.
It's because of all the brainwashing all these years. The gvernment broke their leg, then gave them a crutch, and said,'see, without your nanny state looking after you, you couldn't even walk'. But it's even more surprising why they think all those millionaires should also collect their SSI.

Wrong
The Euro is a function of all of the EU members, not just affected by the Italians.

There's a few things you're leaving out
which the source you quoted observed.

First, according to the Reidl paper, the debt ratio is rising. It can be argued that it's not yet significant, it's up about 10 per cent over about four years. You will agree I think that this is the wrong direction.

Second, comparisons to WW2 debt levels may not be appropriate because the US did not have the large unfunded liability of medicare and social security waiting, an amount which your source notes as about eight times the total national debt.

Third, the paper claims that the principal effect of deficits is to spend tomorrow's tax dollars today. Agreed. However, do you not think that a dangerous policy in light of the outstanding future obligations your source notes? What is a chronic pattern of deficits likely to do to the debt ratio when those future unfunded obligations start coming home to roost?

As to Spain, its economy exploded in the 16th century after the conquest of Granada and Mexico. Didn't matter. It simply encouraged the government of the day to spend money on a vast scale, most of it wastefully in empire-building with no economic return.

The herding instinct.
Homw much of this is driven by followers of the panic sell? Like a herd of water buffalo, they change direction, not out of real danger, but out of the herding instinct.

House of cards
That, of course, is the real hazard-- a stampede toward the exits. Our entire system of banking and investment is a house of cards, and its continuing existence is a tenuous thread predicated on optimism.

For that reason our creditors have become our protectors. China is certainly going to rock no boats as long as their own savings account is denominated in dollars. But they are certainly having second thoughts. The Americans take their protection for granted, and persist in all our follies.

It's unlikely to go on this way indefinitely. OPEC has decided, for the moment, to stick with the dollar. Again, for the same self serving reasons. But don't think for a moment they're not all thinming the same thought: how to furtively abandon this sinking ship, before the others see what you're up to, and get into some more enduring store of wealth.

cards
You mentioned a more 'eduring store of wealth'. This makes it sounds like you've been reading up on fiat money and the gold standard; maybe you're becoming a fan. And maybe you've found out that these problems could have never happeded if the US had money based on something with such enduring value. If you've gone this far, mabye you'll also graduate from your outdated marxism.

Money has no intrinsic value.
Its value is only based upon what you can get for it.

In engineering terms, money is the grease that lubricates the economic machine.

Basing any money on gold or diamonds or any other relatively useless scarce pretty material is no different than using a predetermined amount of seashells.

Money and its uses
The supply of available money has to be regulated-- that is, expanded, according to the needs it is being put to. In an expanding economy growth is slowed when the supply of money is slowed. That's why we have a Fed-- to regulate the growth in some intelligent manner.

If you hitch the quantity of money to the quantity of precious metals-- gold, silver and platinum-- you've only linked the flow of money to the arbitrary and independently derived increase in these metals. We do not have a finite quantity of gold, for all time. Gold is appearing constantly, in the form of newly mined metal. And it is disappearing as well, in jewelry, teeth and some industrial uses.

It would be needlessly limiting to link the amount of circulating money to the quantity of monetized gold we had available, just as it would be to link it with, say, the average annual temperature.

The supply of money has to be linked to the rate of flow that is optimal for its being used wisely. A good operator at the head of the Fed is our best insurance of sustained value. And at present we have embarked on a difficult course-- to sustain the value of our domestic currency while also using it to float a global game of three card monte, where our providers pay us for our purchases.

useless, scare, pretty gold?
If it is so useless why has it's value gone from, I think I remember it being about $33/ounce, to over $800? What kept it's value better, the crappy dollar, or the gold? Which could be considered more stable?

money uses
You say it has to be regulated, expanded, and "according to the needs it is being put to", which doesn't mean anything. They brought in the FED(be stealth), for sure in order to manipulate it, but manipulate for the interests of the politicians, so they can, for example, make more of those wars you so much disagree with, and make more entitlements, that you seem to agree with, more for pork to buy votes, etc. And all that is exactly why predatory governments should not be entrusted with something so important.
So there so go, back to your default setting; more government regulation instead of more freedom.

It was $800/oz in 1980.
Then what happened?

Gold is a commodity like oil. What's worse about gold is that it has emotional value subject to wild market swings.

When gold was used as money, its price was fixed by governments.

"predatory governments should not be...
"...entrusted with something so important."

Describe a monetary system where national governments do not control their own currencies.

I know. We should be free to create our own. You can print some dietmars, I'll make up some beans. Then we can figure out how to trade them.

Places to start
The last place to start is by expanding the government to include every aspect of life like health care.

Want a fast road to mediocrity as a nation, then socialize everything.

The solution is spending restraint and cuts. I support finishing the war in Iraq 100% but I think it was a bad idea to go in. However, I read some things recently that makes me see why the threat was percieved and in fact, Iraq could have easily averted the war.

SSI needs to be transitioned to a private system, it will take 50 years to do it. Otherwise, were looking at 3 workers or less per retiree. It is unsustainable. Of course, nothing I advocate empowers government or buys votes for politicians so they will never happen.

Odd, my father voted against Roosevelt and SSI for the exact reasons were seeing, he predicted a huge increase in taxes, state meddling, welfare, incentives for non-producers and the eventual overload due to the shift of producers to retirees. He saw all this int he 1930's and 40's. Everything he has told me would happen is coming true.

Chinese Yuan
The dollar policy on China is getting old. If China dropped it's peg to teh dollar then purchasing parity would fall, China would have to compete in the market and imports would dry up in the US as Chinese goods became to expensive.


I am fed up with the political classes selling us out to foreign interests like China. If they refuse to float their currency in the market then screw em.

When are we going to wake the hell up?

Roy, are you really incapable of understanding?
The statement was predatory governments SHOULD NOT be entrusted with something so important" (emphasis mine to get your attention).

And your reply?

"Describe a monetary system where national governments do not control their own currencies".

How does it answer the question?

Dietmar and others want to know WHY YOU think the monetary system should be controlled by the GOVAGs and you simply state the fact that it IS.

Not putting up with that c**p
"I am fed up with the political classes selling us out to foreign interests like China. If they refuse to float their currency in the market then screw em."

How, exactly?

Apparently so
"Dietmar and others want to know WHY YOU think the monetary system should be controlled by the GOVAGs and you simply state the fact that it IS."

Where do we get dollars? From the USG? I think so. In the fifth grade I went to the printing offices on 15th Street, and saw them coming off the presses.

How do we get dollars, other than asking the USG for them?

For example
We could easily develop our own energy here at home. Huge reserves found off Brazil, China and Cuba are drilling off our shores whilst we do nothing but argue over development "risks". ANWR, all these sources will enhance our security and economic freedom as well as the development of nuclear sources.

We are competing in a global market but the political mindset is one of denial. We cannot any longer ignore the competition. As the saying goes, Fat cats don't hunt.

Since China maintains float relative to the dollar purchasing parity is artificially maintained increasing trade deficits by making Chinese products look the same price. Additionally, they do not import.

In the current situation we cannot leverage anything because we, as a people, have become so complacent that any attempt to reform or spending ways meets with violent opposition, just like the French rail workers, spoiled children having their candy taken.

Unless we start positioning ourselves to be fiscally sound, there is nothing we can do. To achieve fiscal stability we must restrain spending at ALL levels, encourage business development and structure taxes to encourage both investment and savings.

What does a family do when they lose a job? They reduce spending. Funny how this apparently is not a option for public systems...

Energy policies should be to reduce imports and increase our refining capacities while exploring COST EFFECTIVE alternatives as a long term strategy. In the mean time we must develop our domestic sources starting now.

The left has opposed any and all development regardless of the economic and political consequences. No refineries have been built in over 25 years, fuels blends are convoluted and mandated by states. This needs to be standardized at the federal level eliminating states like CA from creating virtual shortages due to unique blends for that market alone.

Finally, the bill is coming due Roy and all I hear is more and bigger government. Now it is National Health care.

How exactly do we propose to pay for that one also? Gunna tax the rich some more?

It is really quite absurd toe see the economically suicidal ideas floated by the left such as increasing capital gains to 28-35%, taxing dividends higher and so on. All this static economic theory is pure bunk.

IN a nutshell, it is called getting the house in order.

ONLY way I can think of having a gold standard.
A world wide non-government organization must be created to keep the gold to maintain the value of the gold money in circulation.

Maybe the world can designate the Swiss to keep all the gold and control its value?


One more time, WHY should the GOVAGs control money?
In your fifth grade, the USG was printing the dollars.

When your great garnd father was in fifth grade, the USG was permiting people to hold slaves.

So, do you approve of it now?

Don't feign ignorance of the principle involved here to evade.

You think it is Wrong for GOVAGs to permit slave holding and you think it is Right for GOVAGs to control money.

I know (atleast I think I know) why you think it is wrong for GOVAGs to allow slave holding.

Why do you think it is Right for GOVAGs to control money?

In the ultimate analysis, ALL economic transactions involve barter of tangibles
Paper Money is only a more convenient way to facilitate the barter.

In case of services, the time of the person performing the service (e.g. a surgeon removing a tumor or a fitness instructor advising the trainer etc.,) is the tangible thing that is bartered (exchanged).

And the Cost is always in terms of the things involved (in the barter). Money, as we know it now, is only a tool to measure the Cost more conveniently across (literally) thousands of things. Thus, Cost is something that is Objective (measurable). You can define Cost of anything, using natural constants; if you measure it in terms of so many units of another thing.

For example, when I now pay $3.59 for a gallon of gas everyday, I can say I am bartering a little over a Gallon of milk that I could have bought with that $3.59. And (literally) thousands of other things I could have bought with that $3.59.

On the other hand, the Value of ANYTHING is SUBJECTIVE. Value can not be divorced from the person who is valuing. For example, I wouldn’t value many things that pass as modern art even at $1. But, as we all know, there are people who shell down hundreds (even thousands) for such “art” pieces.

For another example, because I value the extra 20 minutes I now have to get ready to leave for work much more than the $1.80 I could save if I car-pooled with a colleague who lives across the street and leaves to work 20 minutes ahead of me (because his kid’s school start earlier than my kid’s), I am not car-pooling with him.

But, if gas price hits, say, $5.00 (as it did this week in some parts of the State I live in), I may re-evaluate my position and car-pool with him.

This (process of valuing) is a never-ending life-long activity, IF people want to exercise conscious control over their lives.

Now, for your thought experiment and The Joule standard for Money you mentioned in the other thread.

The newly added 1 Million economic participants must first produce tangible goods or services which they can then exchange for Gold (certificates). Unless they (or the original Million) produce double the corn (or other food) for all 2 Million to survive, the Cost of 1 kg of corn (or other food) will actually be 2 grams of Gold (assuming that its Cost was 1 gram of Gold when there were 1 Million economic participants) and the corn (objectively) Costs MORE than earlier, to each consumer who VALUES it, as the per capita availability is suddenly half of what it was earlier.

I am afraid the concept of per capita Value (PCV) is the fly in the ointment.

There is no such thing as PCV. There is only PCC, Per Capita Cost, as conveniently measured in grams of Gold (or US Dollars). Actually, the supply of Gold (or other tangible good used as Money) is irrelevant. Manual double-entry book keeping kept track of the (barter) transactions once and (Super) Computers do now.

If all economic participants simply converted their (Monetary) surpluses into Gold (or whatever the tangible asset that is used as Money), the economy as we know it now comes to a halt and will be re-started only when people start exchanging their Money to (already produced) tangible goods or produce them afresh.

Finally, energy is NOT a tangible good. It can neither be created nor destroyed. It can only be put to use to produce goods. Any money denominated in energy is indistinguishable from fiat currency. How can anybody (even theoretically) convert a currency into energy?

That is the bottom-line. Hope this helps.

1980
Oh, you mean that spike, I also remember it. But look at a chart that shows it for the past 100 years or even from 1971, when they went completely off any gold relationship.
So your example does not show that it was the dollar that kept value, and gold hasn't. So imagine in 1935, say you had an amount of gold, or the dollar equivalents of the time. Would you rather have the gold right now, or the dirty paper money.
Also, gold has always had value in almost every culture since the beginning of time, with no governments to fix prices. In modern times though governments can try to set a value on it, but cannot manipulate it. For example if one ounce of gold is X of a certain currency, the government can't all of a sudden say it's now worth, twice as much. Foreign people people would not pay twice as much for it, and local people wouldn't either, everything would cost more.

I don't want gold.
I don't want to store it and I don't want to buy or sell it. What if everyone said that? What would happen to the price?

If you have foreign currency now, buy US real estate. The price is right and they are not making any more.

Better keep an eye on that gold price so when it falls again, you can sell (for what dirty paper money?) at the top. Or will you hold your $800 gold when it falls back to $400?

Free Market money
I could support this.

"Companies would issue money solely as a means to profit. Produce too much money and it becomes worthless, too little and not enough people will be able to use your money for you to profit."

"These changes are certainly not around the corner, but they should be our goals:
• Repeal all laws giving the Fed monopoly power to issue currency.
• Eliminate all government regulation ofbanks and financial institutions.
• Change the tax laws so there is no preference given to transactions done in dollars (payment could still be required in dollars but there should be no capital gains if you choose to hold your money in yen, for example).
• Completely privatize the Fed through either an auction or fair distribution of shares to taxpayers.
• Exempt banks and financial institutions from ntitrust laws.
Deregulate. Privatize. To improve our standard of living, to increase the level of freedom, and to set a powerful example for the world to follow."

http://www.cato.org/pubs/journal/cj21n2/cj21n2-9.pdf

Gold backed money could compete with all other forms of money.

I like the bit about airline points being used as money. AMEX and a few other companies are doing just that with their point system. All that remains is for people to be able to trade these points with each other and we will be on the path to real, free market money.

How paper money came into being
Paper money was essentially a promise (the giver's word of honor, if I may still use such an expression in discussing anything now a days) to pay the bearer certain quantity of mutually agreed upon tangible goods owned by the issuer of the paper money (historically called Bank Note), whenever the bearer wants to exchange.

What passes off as paper money today is ALSO essentially a promise to exchange it for tangible goods, but not by the issuer of the money but by "society" in general.

In the ultimate analysis, if there aren't enough producers (aka suckers) in the "society" willing and able to produce goods, there will be nothing to exchange the paper money for.

Full faith and credit
Is this based upon perception or reality?

Does perception create reality?

I am afraid I don't get it
Are you talking about paper money being perception or reality?

The paper itself is reality. The value it represents is only a perception or promise.

Faith
Faith is a belief that cannot be proven.

If USD are backed by the full faith and credit of the USA, what does that mean?

One must have faith that the USA will pay based upon...some reality and the perception that the USA can pay.

So far I believe the US economic system is the best the world has ever seen and the "full faith and credit" of the USA has been demonstrated.

But there is an aspect of trust, faith, belief that the USA can and will continue to prosper. I know it can be done, but there are many socialists who want to weaken that trust with high taxes and more government control.

I have given this a lot of thought and I have decided I just do not care anymore
You win Roy, I came to the decision I really do not care anymore. Nothing I do, nobody I vote for will make any difference.

What I was raised to believe in no longer exists. It is sort of depressing. I was raised to believe in a nation where anything was possible, where we could be anything, where innovation and advancement were a given but we have degraded into essentially a anarchy. At every turn there is opposition to growth and freedom and independence. We have politicians looking to grant voting rights to illegal aliens, who in fact, who seek to reclaim the SW for Mexico. Public schools teach hatred of country and re-invent history. The masses clamor for free health care and a social safety net with no emphasis on self reliance.

The result? A declining dollar and politicians, like Carter, who sell a declining lifestyle and socialism and mediocrity.

Rant, no, acceptance. I simply have decided I don't care anymore. There is nothing anyone can do to stop the fall of the US. Better learn Chinese because unlike us, they don't suffer from a identity crisis.

I will have mine and I am actually thinking of moving abroad.

Offshore oil production
I don't think you will find anyone in the oil industry-- and these are some very, very bright people-- who think we can satisfy domestic oil demand with our own offshore production. Nowhere near.

Instead what we are attempting is to satisfy demand with Canadian and Mexican production. And at current prices this looks fairly feasible. So if we consider ourselves to be NAFTA-- the North American economic unit-- we're not doing too badly in terms of energy independence.

Offshore production is fine if you only solve the puzzle for oil. But leaks and spills are inevitable, and we also have to solve the puzzle for fishing, for recreational beaches and for a very large ancillary part of our economy. So in that light, it's not just greenies. A lot of big money people are thinking twice before going along with oil wells offshore.

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