You want a scapegoat for the dollar’s almost daily decline - the Chinese water torture on the U.S. economy? I blame Steve Jobs. I mean Apple is the worst offender in the decline of U.S. manufacturing. Their well paid engineers sit around in air-conditioned offices on streets with cutesy names like Infinite Loop in Cupertino, California and have others make stuff for them. They imported some 2 million iPods assembled by thousands and thousands of Chinese workers just last quarter - an almost $1.5 billion annualized trade deficit in iPods alone.
Those in Washington that can do something about this – former railroaders and soon breakfast cereal moguls, are so worried about trade deficits that they refuse to defend the once mighty greenback, even begging the Chinese to unpeg the renminbi from the dollar so we can decline against it as well. We’re in a place called Vertigo. Economists weep every news cycle that foreigners will no longer fund our spending and that America surely has peaked. The dollar is destined to the depths of despair until it drops so low that we get those manufacturing jobs back. Gee, thanks Steve Jobs.
A $1.5 billion trade deficit increases wealth in the U.S. by some $16 billion – I’ll take that trade any day.
I checked my wallet and realized that I own dollars, including my bank account, house and stocks. Lowering them in value hurts every American. I was in such a funk thinking about all this that I played my own infinite loop of Muddy Waters and B.B. King on my appropriately blue iPod mini. While needlessly fidgeting, I happened to turn it over and read the fine print. Sure enough – it says “Assembled in China.” But it also says “Designed by Apple in California.” In the middle of the song “Trouble No More,” it all started making sense.
Over the last year, two things have happened. First, Apple has increased their sales by over a third, almost all of it from increased sales of iPods – those 2 million of them at $265 each last quarter and another 100 million songs sold via their iTunes service. An iPod is just the combination some Apple software, cheap disk drives and a $12 chip a Silicon Valley company named PortalPlayer. I calculated that Apple pays $200 each per iPod to Chinese assembler Inventec to slap it all together. Even with cheap labor, Inventec has almost no profits, I’d bet under $10, probably more like $4. PortalPlayer, by the way, emails their design to Taiwan to be fabricated, with profits of some $5 per chip.
The second change since a year ago is that Apple’s stock has gone from $21 to $64. Pretty cool, capitalism at its best. Why? Because Apple keeps $65 per iPod - money chases profits! If you assume the stock increase is all due to the iPod (it is), then that business is worth some $15 billion. Add in PortalPlayer’s market value of almost $1 billion and you start to get a feel for how the world works. A $1.5 billion trade deficit increases wealth in the U.S. by some $16 billion – I’ll take that trade any day. So will all the holders of the retirement accounts at Vanguard and Fidelity and Janus and Lord Abbett who own Apple’s stock. Why am I caring about deficits again?
Trade deficits are just an economic construct, and lowering the dollar won’t solve a thing. We are already moving low margin, low paying jobs overseas, but fortunately, are left with high margin, high paying intellectual property jobs. Would you rather own Apple making a margin of $65 or Invetec with $4, on the same product? Me too. We may have trade deficits of $550 billion this year and, but we enjoy a huge margin surplus.
The very illogical way (so no one believes it) to get this all back in balance is for the dollar to RISE - require more TVs and BMWs to pay for our intellectual property. A lower dollar means foreigners get a needless discount on our productive stuff - Pentiums and iPods and Windows XP and Oracle databases and Cisco routers. They have to buy them anyway to run their economies (well, maybe not iPods) so why the discount? Add non-productive but life enhancing intellectual property to complete the sweep - drugs and Hollywood movies and U2. A weak dollar won’t bring back manufacturing jobs – with $20/hour manufacturing jobs in the U.S. vs. $2 in China, the dollar would have to drop an unlikely 90%. And why should we be encouraging low paying jobs in this country?
Foreigners buy our Treasury bonds they own 43% of them in effect so we don’t have to. Who wants 3% returns? We can and should own stocks of the high margin companies that benefit from this design vs. manufacturing divide. As we move to an intellectual property economy, our wealth will come from exporting our profitable designs and importing more finished goods. Its higher salaries and our stock market that balances this all out as those dollars flow back in. Of course, bean counters can’t find the money that flows into the stock market, it is just bean dip. $4+ trillion in trade deficits since 1976 has been matched by an $11 trillion increase in value of our stock market. That’s about all you have to know.
Plus, as Jack Nicholson might say, they can’t handle our dollars. Too many dollars in foreign central banks leads to over-lending by their banks to wasteful domestic companies. Japan is just emerging 15 years later from a non-performing loan hangover – China is face first in the punch bowl with potentially half their bank loans uncollectible. If their currency spikes, it might go to 100%.
Rather than debase our wallets, Japan and China and even Europeans have to buy dollar assets to keep their currencies from rising too much if they want to continue to sell us their industrial output, while of course, we get rich selling them the tools to do it productively. I’d suggest thanking Bono, er, Steve Jobs for the iPod economy.
Andy Kessler is the author of Running Money (HarperBusiness, 2004)