Klein discusses his book Trade Wars are Class Wars
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Hey everybody. It Trevor Chambers from Old Raleigh Financial Group here in lovely Raleigh, North Carolina. Today on Meet the Masters Matthew, I got to call you a smarty pants. I read your bio and stuff. I did deep research as far as Google. This guy is cool. Matthew Klein is an economics commentator for Barron Magazine. His latest book is, Trade and Balances and How Global and Trade and Financial Systems Can Transmit Problems from One Society to Another. Did I get that right? Did I botch it? How did I do?
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Good. Yeah, I got a good buddy there and he relaying the same information. All right. Are you ready, man? Are you ready?
Give me an amen. Give me an amen on this. No. I want to talk about a book that you put out called Trade Wars Are Class Wars. I want to get your thesis of this book, so let just get into it. Let me you a question here. Trades surpluses and deficits are mainly the result of domestic savings surpluses and deficits, which are themselves a result of domestic income inequality. Can you explain that a little bit?
Yeah, sure. Basically the global economy as a whole all output is either consumed or used for investment so there no savings globally. It all either invested or consumed, there no extra. All income, similarly, is spent globally. For any individual entity or any subgroup that it is, income and spending don necessarily balance and you can get surpluses and deficits.
When we think about trade, it essentially saying that we drawing lines around, geographic lines for countries and saying, all of the entities in that country; governments, business, households, collectively they all either spending more than they earn, in which case, they have a trade deficit, or they spending collectively less than they earn, and they have trade surplus.
What I mean by that domestic savings and balances lead to trade, in general, the balances between households, businesses and governments actually tend to be a lot larger than the national level. A lot of those internal ones cancel each other out to a large degree. When we talk about quality [inaudible 00:03:48] factor, the key thing to bear in mind is that different entities tend to save and spend in different ways. If you have changes in the distribution of income from entities that, for example, might spend most of what they earn or all of it to entities that do not, then you can have changes. People are overall spending and saving for that society.
To be concrete about this, people at the upper end of the income distribution generally have household saving rates of 40% to 50%. We got data on this. It quite high. Then the higher up you go, it goes even higher.
Companies are interesting situations because companies, in theory, they can boost their CapEx or pay workers more and function equivalently in terms of doing things like spending and saving dynamic, but if they don if they just retain earnings on the balance sheet, then that going to lead to trade surpluses because it depriving spending power of others.
Governments, it depends on their budgetary situation. Usually governments run budget deficits and that going to contribute overall to trade deficits, but again, you have to look at it in totality and how all those things add up.
It a situation that tying back into the concrete value of the book where two things; one, you see a lot of corporate profits, free cash loads rising and corporate investment rates going down. You have households, what looks like a transfer of income towards people in the upper portion of the distribution who generally save a lot more. That is going to create a bias towards trade surpluses in that society offset by other things.
Okay. I do want to talk to how you got to this point in your personal history. As I said, you have an interesting background. I think Yale was in there, in my deep research online, as I said. Do you want to expand on that thesis of the book a little bit more?
Yeah. The big takeaway is that when we look at why countries are having trade conflicts with each other, it really important to understand that it not because of geopolitical conflicts or incompatible national interests or things like that. It not really right to talk about the US versus China. It really more appropriate to talk about things going on in each country that are creating economic imbalances that transmit across borders and then hurt people in other countries. It not that the Chinese government is doing things to harm American workers for the benefit of Chinese workers. It that the Chinese government is doing things to hurt Chinese workers and that a consequent of this is that American workers are also harmed. It really important to understand, those trade wars are class wars. It that we really would benefit from looking at this not in terms of national conflicts. We really looking at economic sectors and whose actual interests are being served by these changes.
Interesting, yeah. That right there is what interests me. You just stripped it back. This is an economic problem. You can pull away all the politics and everything. All right. It interesting. That leads me to this, how does Matthew Klein get into this business of trying to understand trade wars and their implications? Tell me about your history.
Yeah. Basically if you want to go all the way back, I studies history in college
I like to go back to elementary school, if you will please. Your favorite teacher in elementary school, shout out.
I wouldn have gone that far, back all the way, but you brought it up.
Yeah, Ray Dalio is the founder of it. I didn know anything when I started there. They took the view, which I think was a relatively enlightened view, that whatever their accumulated knowledge was so much larger than anything could have learned in school for a new hire out of college. It doesn even matter what you studied in college because there no difference between having studied nothing and having studied something was, from their perspective, essentially zero, which worked out very well in my favor. Then they just divert you and teach you everything from scratch. That was really a fascinating learning experience.
I realized, this market in finance and economic stuff is really interesting. It a fun elaborate series of puzzles with very real world implications. I wanted to learn more about it and then eventually get into explaining it to people. He a fascinating guy. He has a very long background and had been in markets for a long time and went off. Now I think he mostly consulting. He a professor at Peking University business school of finance.
Yeah. He was at Columbia for a while before that. I think he moved to China, I think it was almost 20 years ago at this point that he been in China. He just a fascinating guy. I replica hermes evelyne bags
remember they passed along his newsletter when I was there and I started reading it and just learned a whole lot of things about I really didn understand how economics and finance worked, but he would break it down into this very simple, true by definition equations about When I say equations, I literally mean this plus this equals this, not anything too complicated. It really fundamental what the implications are and you could draw those out. Things like, If globally all production is either consumed or invested, but individual companies consumption and invest in production domestic spending is not equal, then there has to be transfers on net of resources from one side to another and make those things balance out.
That a really important point and people say, we should all trade surpluses, and I like, you can Trade surpluses and trade deficits, or more broadly surpluses and deficits, you going to save and you going to borrow, but those things, they all balance out. There a thing called a symbiotic relationship, it called a parasitic relationship, whatever, but you can buy assets unless someone is selling them to you. The idea that no one should be borrowing or running debt anywhere is impossible essentially, or it means that no one is saving also. That [inaudible 00:11:57].
Right. One of the interesting points that Michael introduced to me over time is really again, you wrapping your head around it and it very counterintuitive, which is that because of this, what we talking about with spending and saving and stuff, the distribution of income in a society can have really significant macro implications. People talk about income inequality and they talk about a lot of things of what it could do. For either direction, you can talk about it as a system of incentives, you can talk about whether people think it fair.
You can talk about all sorts of things, but in a much more fundamental basic level, the fact that you can have a situation where concentrating income will lead to shifts between consumption and spending or not, redistributing from the other will lead to more consumption and less savings, that also has some interesting implications too, whether it good or bad, depending upon specific circumstances of society, that just a fascinating thought. Once you really internalize that in your head, it hard to get out of your head. I think it really affects all sorts of things about your thinking of it.
Well actually, normally you might reasonably say, is good for these reasons or bad for these reasons, but at this much more basic level, this is what going to realistically going to occur if you do it. I think that just really fascinating. That plays a big part in terms of the thinking we have in the book and also in terms of the We talking about the history of trade in the book and development because those things are really tied together. It really interesting.
Yeah. Talk to me about that because Do you want to start before World War I? I think this is going to be from a US perspective obviously. Go ahead. What happened?
Yeah. Starting with World War I is useful. One of the points that we make in the book is that in a lot of ways, the situation we have now and really have had for the past two or three decades is very similar in a lot of ways to what existed in the late 19th century and early 20th century. Yeah, I think it definitely makes sense to look back that far to look at it. Again, this isn something that necessarily be obvious unless you happened to have all this framework and interested in history.
Essentially, you have a world where you have a lot of manufacturing is being produced in Europe, really northwest Europe and the United States. Then there a whole network of colonial and quasi colonial imperial relationships. What is going on in a lot of countries is that, and this isn true for all trade, but a lot of trade consists of trade sections, like the manufacturing powers mostly in northwest Europe and their colleagues on land, to a lesser extent between Europe and the United States, it mostly what trade is. Trade is a share of global economy was, in retrospect, relatively high. It would end up going down actually or much lower, basically after World War I really until you get into the and it would be lower as a share of the global economy than it was in the late 19th century. That trade was very much within these big blocs.
You think about the British empire including India, Australia, Canada, a large portion of trade that Britain has was with them. I think it was half, something like that. You add in the United States, it also huge. From the perspective of the US, it was small because the US was not actually involved in international trade. The US was really focused on its own evolvement in wars.