Why Ben Bernanke is Doing the the Right Thing with QE2

When your competitors start complaining about unfair competition you know that you are doing exactly the right thing. That what happened at the recent G20 Summit.

As the Chairman of a small manufacturing company told ne recently "Economics 101: There are only four ways of creating true wealth: Mining, Agriculture, and Manufacturing." To that I would add Intellectual Property". All the rest are ways of spending money.

My primary concern is Manufacturing and how the 60,000 or so mid-sized manuafcturing plants in the USA become world beaters again.

The answer is easy - keep devaluing the US dollar. Every time Ben Bernanke adds another zero the the money supply, the dollar depreciates and we become much more cost competitive in Manufacturing.

In real terms the dollar has declined in value by 50% over the last 5 years. It will decline again by the same amount over the next few years. Currently our manufacturers are very cost competitive versus Europe. Another 50% decline in the value of the dollar and we will beat the Chinese at their own game.

We currently only spend 15% of our manufacturing costs on labor and, if the dollar declines in value, this will continue to go down.

Manufacturing is coming back to the USA in a big way. And, if you want to see a group of believers, look at the behavior of the Venture Capitalists. They are buying up manufacturing companies in a big way because they see that they will have the ability to flip these companies at a big profit in 5 - 7 years when the dollar has halved again.

So is the decline of the value of the dollar a great prescient move by the US Government? Unfortunately no. We have a bunch of incompetents in Washington (in both parties) who will continue to add to the money supply because the only way they can get re-elected is by bringing more goodies (earmarks) back to their constituents and the only way they can do this is by adding to the debt - which automatically decreases the value of the dollar.

Some point in the not too distant future the Chinese are going to have to decouple their currency from the US dollar, otherwise they will be selling their products at less than the cost of the raw materals they consume to make them. Then we will be able to truly compete with the Chinese manufacturing plants.

But will this bring back jobs to the USA? Unfortunately no. Manufacturing is going the way of Agriculture. Half the corn in the USA was harvested last year by a team of 48 people. The number of people needed to work a manufacturing plant is steadily declining due to the use of technology but the skill level of those people is going way up.

But the good news is that those manufacturing plants will earn more and more money for the USA by turning our natural resources into manufactured goods that can be sold to the rest of the world, eventually reversing our trade imbalance; all due to the incompetence of our Goverment.