The Ghost of Smoot-Hawley Stalks Congress
Just when you thought Congress couldn't possibly do more damage to the battered economy the House of Representatives, in a bipartisan act of impotent fury, voted 348-79 to light the fuse of a global trade war.
Not since Herbert Hoover and Franklin Roosevelt tag teamed to turn a cyclic recession into the Great Depression have Democrats and Republicans jointly indulged in such destructive economic legislation.
Congress is upset that China has pegged its currency to the dollar, as do many countries seeking monetary stability, not allowing it to appreciate as Uncle Sam prints up trillions. So the House passed the Currency Reform for Fair Trade Act, amending the Tariff Act of 1930 to empower the administration to selectively slap harsh punitive duties on goods imported from any country whose currency can't buy enough bushel baskets of greenbacks.
Designed to show voters they are tough on China, many of our elected leaders apparently believe that doubling the price of every item at Wal-Mart is somehow going to help the poor and unemployed. While we're at it, let's take the only country where General Motors is generating serious profits and provoke them into kicking the company out because Congress refuses to let Americans buy cheap underwear. And then, let's encourage our European allies to start a beggar-thy-neighbor depreciation spiral to see who can make their fiat currency lose value the fastest.
Yes, Congress is demanding a return to Carter inflation - the most effective way to increase taxes on everyone without getting blamed. Is it any wonder why gold spiked to over $1,300 an ounce?
When the original Smoot-Hawley Tariff Act passed in 1930 international trade plunged by 60% as retaliatory tariffs sprang up everywhere. US unemployment doubled from 7.8% to 16%, climbing to 25% by the time Congress got through implementing all the economic machinations of the New Deal. After the global economy collapsed hungry masses ceded power to mad tyrants promising change. It took a horrific world war followed by decades of painstaking trade reform to tear down those tariff barriers and restore international trade to the levels reached in the 1920s.
So what is the last and just about the only thing Congress decides to do before blowing out of town to campaign for re-election? Start down that protectionist road all over again!
The reasoning behind this legislation is that the wicked Chinese Communists are artificially keeping the value of their currency low by taking all the dollars American consumers are happy to spend buying Chinese stuff and instead of encouraging Chinese consumers to spend those dollars buying American stuff they are enticing their own citizens to trade their dollars for too many Yuan (you heard that right) then lending those dollars back to the US Government to get them out of the country.
Got that? Congress is angry that the Chinese government is screwing itself delivering great bargains to American consumers while financing the Obama administration's spending orgy. The solution is to tax American consumers every time they try to buy something made in China. If the tax is high enough, so the theory goes, underwear manufacturing will somehow return to America, creating all those low skill, low wage jobs Americans are clamoring for. Yes, investors are just waiting for Congress to kick off double digit inflation and instigate a global trade war so they can rush out and build new factories. Plus making the Chinese stop buying T-Bills, forcing us to drown in our own government debt, is going to help the bond market make it easier for businesses to get loans.
You can't make this stuff up.
One might understand why the Democratic Party is attracted to this kind of economic suicide pact, after all it's in their blood, but what are the many Republicans that backed this bill thinking?
The politics behind the legislation is that although plenty of Congressmen know better they are so terrified of facing angry voters that they are willing to put their names on abominations like this first because they are sure the Senate will never let it become law and second because they believe that their Buy American rhetoric will be accepted at face value. You see, incumbent politicians can count on the fact that voters are too stupid to figure out what is really going on.
Are we? We'll find out soon enough.