Cheap Chinese Goods, the Fallacy

 Intuitively we think that cheaper imports from China benefits the American people. In reality, the purchase of imported goods, removes the production, the employment and the economic velocity from our economy with far more negative consequences. 

Follow the money. A macroeconomic equation by Godley and Cripps best shows the liquidity flow, not so obvious on the surface.

S + (m-x) = I + (g-t)

S = middle class savings, m= imports, x= exports, I= investments, g= government spending and t= treasury revenue. Investments may be in China, in multinationals or international banking. Some of it amounts to retirement funds underwriting the Chinese companies and military.

As you can see, a trade deficit (m-x) must result in some combination of: decreased savings, increased investments, decreased treasury revenue or increased government spending, all of which comes out of the private sector of productivity market turnover (velocity) middle class wealth and consumer spending.

If you ask why? —- GDP = velocity x money supply, where in money turns over some times between 1 and 15 (velocity) while money supply amounts to trillions  only a small decrease in velocity reduces the GDP by a large percentage. Furthermore, that effect falls on the consumer far more than on the wealthy.

One can further see from that liquidity flow, a greater and greater concentration of wealth in the hands, the banks and the investments of the wealthy, a phenomena economists call capital divergence.  

Capital divergence correlates with: the long term cycle of depression, with war, famine and the collapse of civilizations.

So, cheap Chinese goods may not be so cheap after all