Why are manufactured goods cheap in the United States?

I enjoy reading Kevin Graham’s blog, because he often has observations that disagree completely with my own.  Recently, he’s blogged that inflation has increased the standard of living.  Kevin and a certain Joel got into an interesting conversation about it.  But here is the picture that Kevin got from Carpe Diem from the 1964 Sears Catalog:

Kevin’s point is that big screen HDTVs today are hardly more expensive in nominal dollars, and far cheaper in inflation adjusted dollars.  But furthermore, the actual TV product is superior.

Now, I encourage readers to read both Joel and Kevin to see the two sides of the coin.  I interjected myself with a couple of comments that I wish to record here:

@Joel, thanks for your thoughtful responses to Kevin’s stimulating post. I would like to add one point, which is crucial in this whole picture. The 1964 TV is American made in factors in the United States with US workers; back then, TVs were likely exported to other countries. The 2012 TV is made in China. The reason it is cheap is because the Chinese sell their products in exchange for the United States fiat dollars, which the Chinese can then use on world markets either to invest or to buy the raw materials that they need. The United State has a three-decade trade deficit. All that means is that the United States has been able to export its own currency receiving manufactured goods in return, currency which it costs virtually nothing to make–particularly when it is created electronically and not printed. Now the United States by inflating its currency over this period has been a big winner in global trade. And those TVs and such are indeed cheap. But I defy you to go to a country which is not able to export its currency to China. Say a poor African country. There, people still fix, e.g., 30 year old refrigerators, because the cost of labour and parts is still much, much cheaper than replacing the unit. All this means is that it is possible for the United States to overdo it–I think inevitable at this point. Then the rest of the world will reject the US dollar and there will be completely new dynamic, where the cheap money is unable to chase real goods. This is an unprecedented situation in the world today; to my knowledge, no fiat currency has ever enjoyed the ascendency of the dollar, and so no such currency has ever fallen from such a pinnacle. When it does, watch out. It will be the end of the global economy as we know it.

By the way, Kevin, did you take into consideration that that TV you picture is in a fine piece of crafted wood furniture? I know the TV cabinet is out of style, but if you were able to purchase something comparable in quality and materials, say a buffet cabinet without the hutch, it would cost starting  at around $2000, and that is without a the TV. How does that figure into your calculations about the benefits of inflation?

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Be careful, please, of investing in the United States

I wrote to fellow blogger Kevin Graham the following warning after his repeated insistence that Wells Fargo is very safe and cheap:

Kevin: Are you aware of the consequence of the FATCA legislation and how it will affect investments in the United States? As a Canadian you can easily protect yourself from these consequences by pulling your investments out of the United States. I am involved in a group blog, the Isaac Brock Society, which is dealing with the questions of US persons abroad and the attempt of the United States to crack down on alleged tax evaders living abroad, including Canada.

I say this because you promote Wells Fargo, and not a few other US equities as “safe”. I am not sure that anything in the United States can be deemed “safe” and I recommend all investors to get out before the meltdown of the economy there. The other issue of course, is that the United States debt has no surpassed 100% of GDP. This seems to me to be a reason to be extremely cautious.

Kevin and I had a good time going back and forth over Petrobakken last year, when PBN hit its nadir.  I was the bull; he was bear, even when PBN was at $6.50; Petrobakken achieved its year end exit production guidance and thus is on its way to a full recovery (which I think will be above $24).  It didn’t hurt that Sinopec bought Daylight Energy, a company which had a similar debt issues to Petrobakken, but Daylight was arguably less attractive because it was more weighted towards natural gas than Petrobakken, but it did give us an opportunity to see what an outside buyer would pay for a mature intermediate oil and gas company, and it was double the then-current market price of Daylight. I took tender for my shares of Daylight and I am happy to say that I have, as of today,  received into my brokerage accounts.

Unfortunately, Kevin’s recommends US bank after US bank.  But he is apparently unaware of FATCA and the likely damage that it will do as a result of the exodus of foreign investment in the United States.  Furthermore, I consider American banks black boxes.  Who can possibly know what they are worth when they have so many derivative contracts that nobody understands?  I consider the banks bad risk since the time that I learned that many of them (e.g., Scotiabank) have large short positions in gold through their sale of unallocated gold certificates.

One might ask why I bother checking Kevin’s blog.  Well, I like reading some blogs that look at the world in a totally different way than I do.  I also like to challenge them.  Then, if they can muster cogent responses, it makes me think about my position.  I can’t say that Kevin has ever succeed in convincing me of anything though.  Each time that he talks about a company being safe (like Sears), I get the urge to add to my Spam collection.

My Spam collection

Focus on what is real not what is reified

Kevin Graham, who was recently featured at the Globe & Mail, continues to write about DIY investing at his blog.  Recently, he wrote against oil investing, “Five reasons that oil prices will fail“.   While I agree with some of what he says, I am the sort of investor that he would criticize (and he has done so on this blog).  All of my investments are in oil & gas companies or gold and gold mining companies.  But I am not sure what else to do in the current investment environment.

So I wrote a comment (edited below), that I had the hardest time swallowing this one line from Graham:

“Commodity prices do not reflect reality.”

I don’t disagree that commodities could be in a bubble per se–that could be the case, and the recent rise in the oil price might see a pull back. Rather, I am bemused because it assumes that our current financial markets have anything at all to do with reality. You and I are in fundamental disagreement about fiat currency. Considering that fiat currency is a derivative and has no intrinsic value, it is curious that you could determine value of a commodity based on its nominal dollar value. This is what philosophers call reification. You are trying to determine the value of a concrete object (a commodity) on the basis of an abstraction (the value of the dollar).

In this light, Jim Grant told the story of a letter to the editor of the Financial Times, in which the author said that he finally understands what Quantitative easing is, but now he isn’t clear on what money is anymore.

Commodities are real. Money is not. When high/hyperinflation hits, I will be focussing on what is real, as fiat money will no longer represent anything of value. That is to say, my spam collection, my hoard of wine kits, and my unused toilet paper have intrinsic value, but the dollar, not so much. Commodity prices do not reflect reality, because money itself is not real. When money is debased, it is better to have something that is real than a derivative of a symbol of the collective worth of an insolvent nation.