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You get what you pay for

A recent e-mail from a friend extolling the virtues of Walmart in providing cheap goods to the American masses persuaded me to pen this response: You get what you pay for as I have said elsewhere on the blog. We wanted goods, cheap goods, really cheap goods to fill our homes. Initially Walmart sourced those from Americans who were happy to get the work. But the goods were not cheap enough so Walmart began to source those goods from overseas. Of course, Walmart was not the only one. Dozens of corporations began to outsource their production facilities. One can hardly find a product these days that is not labeled Made in China or, to a lesser extent, some neighboring Asian country.

What did we get in return? Toys for our children laced with lead paint because we were not willing to pay for toys that were painted with a more expensive child-proof paint. Melamine laced pet food that killed pet foods across the country because we were not willing to pay for a more expensive, but safer food for our pets. We got similarly laced baby food because we figured that cheap food was good enough for our children. Children’s bibs were found to be contaminated with poison because to ensure their safety cost a little more. Unsafe tires, toothpaste, cough syrup are just a few of the other items that have come to light. Blame the Chinese? Hardly. If we are unwilling to pay for safe paint, then we must expect lead paint; if we are unwilling to pay for real protein then we must expect fake protein. That is no more than the market at work. You get what you pay for. It is only very recently that we have sent three inspectors to China to supposedly oversee the billions of dollars of goods that flow into Walmart – and many other stores. I have no doubt that there are many more horror stories coming down the pike like the heparin story of March this year.

And what did the Chinese get? On the upside they have got all the manufacturing expertise that used to be ours. We no longer know how to make television sets, or digital watches, or cameras, or computers – or even cars that the public is willing to buy. We have gradually passed all our expertise on to them. On the downside, one has only to look at the horrifying pictures of people at work in many of the factories abroad to see the appalling conditions in which they work so that we might have cheap goods. I am always amazed at how we are willing to accept the pain of others so that we might save a few dollars. One has to go no further than the picture in the story about New York manhole covers, being made in India because they are 60-70% cheaper than those made locally — cheaper because the labor is paid a dollar a day, works without shirts or shoes, or eye protection. We get what we pay for but they too get what we pay for.

But, in good economic, textbook style all of this becomes OK because we are trading with them? What exactly is it that they buy from us? The answer is very little; very little indeed. We pay for all of this by giving them dollars. And what do they do with these dollars? They are invested back here in the States, sometimes by buying our companies as when Lenovo bought IBM’s laptop division, but more often by purchasing treasuries. The net effect is to drive interest rates down because there is a glut of dollars in the world. So, all those cheap goods flood into Walmart and cheap dollars come flooding back in.

With interest rates falling, many have sought higher returns by investing in hedge funds, exotic securities such as collaterized debt obligations (CDO’s) and trying to protect themselves by buying credit default swaps. Madoff Securities is just one of many sad attempts to evade the working of the market by making more than the market could deliver in the face of all these cheap dollars. Eventually we built a mountain of these derivatives in an attempt to escape the low interest rates engendered by the flood of money from China. And, I might add, the flood of dollars from Iran, Russia, Venezuela and other oil-producing countries. The result of all this was the collapse of the financial markets in September 2008 and with it the demise of investment banking in this country and the effective nationalising of the commercial banking industry in America. This was the inevitable result of purchasing mountains of cheap goods from desperately poor people and supplying virtually nothing in return for them. The market does work — but not always in the way that we want.

So, what lies ahead? The flood of dollars is already out there and will become a torrent as the government prints even more dollars in an attempt to stave off another Great Depression. The inevitable result will be inflation once the fear of deflation has passed. That will lead to the collapse of the dollar. A cheap dollar would normally make it easier for us to export but we have outsourced all our manufacturing skills. We no longer have the ability to make computers, for instance. We will continue to sell farm products abroad but that won’t pay for Walmart to fill its stores with cheap goods. We will become poorer as a country and, as a result, less powerful in the world. China and India now have the manufacturing expertise that we used to have along with the many engineers that we have trained for them in our colleges and universities. As we struggle to turn the financial corner, they will have the money that we gave them for the goods that now fill our homes, and they will call the international tune the way that we called the tune in the twentieth century.

Cheap goods in abundance for Americans defined the Century of America. We had our time in the sun but never seemed to learn that old conservative lesson that you get what you pay for — and that it behooves one to pay for what one gets. The future will gradually slip from our hands and, as the magnificently orchestrated Olympic Games demonstrated, into the hands of the Chinese and to a lesser extent the Indians. This will be the Asian Century.

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