WSJ: We Think, They Sweat

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)

Comments

[grumpY!]

the problem is that the thinking work is going overseas now even faster than the sweat work (the exporting of which was complete some time ago).

your taxes? outsourced to indian accounting firms
your medical records? same
circuit design? china, india
biotech testing? india
architecture, strcutural engineering work? poland, other euro countries
financial analysis? all over asia

lets not even talk about software

in fact, we have to reimport the thinkers now. look at where grad students are from in science and engineering.

look at where new doctors are coming from.

[rpb]

simply the medicine that the usa wants the rest of the world to take, but as with all bullies, when it comes to taking it themselves, surprise surprise ... houston, we have a problem ...

[ric]

The jobs arent disappearing overseas, there are more people making more stuff worldwide. I'm tired of hearing about how a single country is lossing out. Britain used to run the world trade in the 1800's but nobody would argue life was better for the average person then.

[Ko]

Let's see in a decade how the currently "high-profit-margin" jobs will be done outside the US by China and India. Intellectual property laws might not work adequately to feed the US when the rest of the world becomes more self-sufficient and does not need that much of American-specific goods.

What about the poor and the middle class in the US now? Do they own enough stocks to offset their potential and actual loss of jobs? Looking only at macroeconomic numbers and the stock markets is a bit heartless to these real people in my opinion.

[matt]

Why do you own an iPod if you are so opposed to this?

[Chinese Boy]

Well, I don't want to talk about middle class or poor people in this country. Maybe you are rich and you never care about those guys. Today, I just want to talk about the United States.
Ok, as you said, if we could enjoy cheap products from China, why don't we do that? You said I’ll take that trade any day.
But, do you really believe this kind of trade can be lasted forever? If one day, Chinese or American has economic problem, you would see a huge disaster coming. Wake up guy. I know you got lots of benefits from China, but please remember it cannot be forever. Today, US people like sheep, enjoy sun shine and peace, when you get hungry, you just need to put your head down and eat grass. Chinese like a hungry wolf. They have to run run run and fight for a lunch. But who will win? Wolf of cause! A too comfortable life could destroy you and your country.
What's the real problem? The real problem is you need Chinese's sweat but they don't need your thinking. How much you sold in China about your thinking every year? So without Chinese, you will be "hungry". But without US, Chinese maybe live better.
A thinking job is related to education. So now China earns money from US. Yes, maybe just 4 dollars from IPOD. But it means saving. When they got 4 dollars, they never spent it on importing US's thinking. They put it into education and developing. So soon or later, they will be prepared to rob your thinking job. You can check the rising of expense in education and military of China every year. You will see a quick increment. And this is a real threaten.
I'm a Chinese. So I would like you to count how many Chinese students learning in your universities? You may see they are smart enough and working hard enough to defeat most of native students. So believe me, Chinese is not fool and stupid. They just need a chance. And you are giving them the chance in China.
So, please trust me, if you want to enjoy somebody's sweat, please make sure you can sell the same thinking to them. Otherwise, you will lose.
I told you these just because my family and job are in US. I’m sitting on your side. I don’t want US lose the competition and I hope we could found a way to keep our power for long time. My opinion is giving those smart people all of world more chance in US. Let them work for US not for our competitions. Force China buy more and more US “thinking”. Otherwise we have to stop buying anything from China. We need a balance trading. We sell thinking, they sell sweat. Not they sell sweat, we sell nothing.

[jack]

"Trade deficits are just an economic construct"? you must be delusional from all that ipod listening. out of that $16b how much was from americans? you're robbing peter to pay paul, boy? tst, tst...and they let you write in the journal? it shows its journalistic level. have you heard of the $3.5 trilion credit created by the feds in '06 out of thin air? that's your wealth, boy.

"I checked my wallet and realized that I own dollars, including my bank account, house and stocks. Lowering them in value hurts every American"...remember nasdaq 2001? boy? that's your wealth

let'em eat ipods

[digital dissertation]

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