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3 Economic Misconceptions That Need to Die

By The Motley Fool Posted 3:35PM 02/13/12 http://www.dailyfinance.com/category/economy/
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By Morgan Housel


At a conference in Philadelphia last October, a Wharton professor noted that one of the country's biggest economic problems is a tsunami of misinformation. You can't have a rational debate when facts are so easily supplanted by overreaching statements, broad generalizations, and misconceptions. And if you can't have a rational debate, how does anything important get done? As author William Feather once advised, "Beware of the person who can't be bothered by details." There seems to be no shortage of those people lately.

Here are three misconceptions that need to be put to rest.


Misconception No. 1: Most of what Americans spend their money on is made in China.


Fact: Just 2.7% of personal consumption expenditures go to Chinese-made goods and services. 88.5% of U.S. consumer spending is on American-made goods and services.


I used that statistic in a recent article, and the response from readers was overwhelming: Hogwash. People just didn't believe it.
The figure comes from a Federal Reserve report. You can read it here.

A common rebuttal I got was, "How can it only be 2.7% when almost everything in Walmart (WMT) is made in China?" Because Walmart's $260 billion in U.S. revenue isn't exactly reflective of America's $14.5 trillion economy. Walmart might sell a broad range of knickknacks, many of which are made in China, but the vast majority of what Americans spend their money on is not knickknacks.

The Bureau of Labor Statistics closely tracks how an average American spends their money in an annual report called the Consumer Expenditure Survey. In 2010, the average American spent 34% of their income on housing, 13% on food, 11% on insurance and pensions, 7% on health care, and 2% on education. Those categories alone make up nearly 70% of total spending, and are comprised almost entirely of American-made goods and services (only 7% of food is imported, according to the USDA).

Even when looking at physical goods alone, Chinese imports still account for just a small fraction of U.S. spending. Just 6.4% of nondurable goods -- things like food, clothing and toys -- purchased in the U.S. are made in China; 76.2% are made in America. For durable goods -- things like cars and furniture -- 12% are made in China; 66.6% are made in America.

Another way to grasp the value of Chinese-made goods is to look at imports. The U.S. imported $399 billion worth of goods from China last year, which is 2.7% of our $14.5 trillion economy. Is that a lot? Yes. Is it most of what we spend our money on? Not by a long shot.

Part of the misconception is likely driven by the notion that America's manufacturing base has been in steep decline. The truth, surprising to many, is that real manufacturing output today is near an all-time high. What's dropped precipitously in recent decades is manufacturing employment. Technology and automation has allowed American manufacturers to build more stuff with far fewer workers than in the past. One good example: In 1950, a U.S. Steel (X) plant in Gary, Ind., produced 6 million tons of steel with 30,000 workers. Today, it produces 7.5 million tons with 5,000 workers. Output has gone up; employment has dropped like a rock.

Misconception No. 2: We owe most of our debt to China.


Fact: China owns 7.6% of U.S. government debt outstanding.


As of November, China owned $1.13 trillion of Treasuries. Government debt stood at $14.9 trillion that month. That's 7.6%.
Who owns the rest? The largest holder of U.S. debt is the federal government itself. Various government trust funds like the Social Security trust fund own about $4.4 trillion worth of Treasury securities. The Federal Reserve owns another $1.6 trillion.



Both are unique owners: Interest paid on debt held by federal trust funds is used to cover a portion of federal spending, and the vast majority of interest earned by the Federal Reserve is remitted back to the U.S. Treasury.
The rest of our debt is owned by state and local governments ($700 billion), private domestic investors ($3.1 trillion), and other non-Chinese foreign investors ($3.5 trillion).

Does China own a lot of our debt? Yes, but it's a qualified yes. Of all Treasury debt held by foreigners, China is indeed the largest owner ($1.13 trillion), followed by Japan ($1 trillion) and the U.K. ($429 billion).

Right there, you can see that Japan and the U.K. combined own more U.S. debt than China. Now, how many times have you heard someone say that we borrow an inordinate amount of money from Japan and the U.K.? I never have. But how often do you hear some version of the "China is our banker" line? Too often, I'd say.

Misconception No. 3: We get most of our oil from the Middle East.


Fact: Just 9.8% of oil consumed in the U.S. comes from the Middle East.

According the U.S. Energy Information Administration, the U.S. consumes 19.2 million barrels of petroleum products per day. Of that amount, a net 49% is produced domestically. The rest is imported.

Where is it imported from? Only a small fraction comes from the Middle East, and that fraction has been declining in recent years. Last year, imports from the Persian Gulf region -- which includes Bahrain, Iran, Iraq, Kuwait, Qatar, Saudi Arabia, and the United Arab Emirates -- made up 9.8% of total petroleum supplied to the U.S. In 2001, that number was 14.1%.

The U.S. imports more than twice as much petroleum from Canada and Mexico than it does from the Middle East. Add in the share produced domestically, and the majority of petroleum consumed in the U.S. comes from North America.

This isn't to belittle our energy situation. The nation still relies on imports for about half of its oil. That's bad. But should the Middle East get the attention it does when we talk about oil reliance? In terms of security and geopolitical stability, perhaps. In terms of volume, probably not.
http://www.dailyfinance.com/2012/02...=maing-grid7|main5|dl20|sec1_lnk3&pLid=135597
 

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Since when econ is an interesting subject for you Scott puff_>>
 

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The UK and Japan for example have been into us for a lot longer then China has and China in the last 25 years has been snapping up treasuries faster then anyone by a long shot. China hold like 1/3 of all foreign debt. Those two trends going forward at this pace will obviously have serious conflicts down the road. China will basically be holding the dollar hostage. US housholds dont even own as much a china now. Thats not good. So, its true its only 10% of our public debt, its growing at a rapid pace. I dont see any changes coming either, its not like we can all start investing in bonds and save money anymore, with the 70% of GDP being consumption. And of that 70% GDP being consumption we also hold a Trillion dollar trade deficit annually. We have become more efficient no doubt but we have also sent off entire industry's to other nations. Its funny he brings up steel because steel being one of them. Now we import steel from China and Canada. I seen it first hand at my old employer.

How long does that consumption credit card last? And the bit about oil, is interesting... we discovered oil, invented the engine and now we have lost 50% of its production. Sure, only some of it comes from the ME but again, trending forward. He says things that are true but only true now, if you look at projections and trends its rather grave on all three fronts. Although i think oil is on the decline as far as power... someday soon we will see alternative sources i believe. Lets hope so. Then we can ignore the ME all together.
 

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US companies are making big bucks in China too, Apple, IBM, Coke, Pepsi, P&G, McDonalds, Boeing, Microsofts...and all the US farmers....etc are making shit loads of profits from Chinese market. China will be biggest trade partner for the US in few years. We're depending on them just as much as they're depending on us. Chinese personal saving rates are very high. US econ policy should target Chinese middle class. Those clowns in DC should make it easier for Chinese to own vacation properties in the US, meaning more cash is coming in the US economy and states can collect property tax, it's a win win for everyone.

The policy works very well for the Canucks.
 
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I see too much Chinese crap on the shelves at China Mart er I mean Wal-Mart despite what the article says but it was a very in interesting read...
 

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Since when econ is an interesting subject for you Scott puff_>>

If I find a news story or commentary on the net that I think other posters might want to read or discuss I post it. Most of them end up below RR's Immigration thread by the end of the day :)
 

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Just finished this book:

51JI3UixFpL._BO2,204,203,200_PIsitb-sticker-arrow-click,TopRight,35,-76_AA300_SH20_OU01_.jpg


This book gives a clear, concise, non-partisan explanation of who owns America and what we can do about it. I highly recommend this book.
 

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US companies are making big bucks in China too, Apple, IBM, Coke, Pepsi, P&G, McDonalds, Boeing, Microsofts...and all the US farmers....etc are making shit loads of profits from Chinese market. China will be biggest trade partner for the US in few years. We're depending on them just as much as they're depending on us. Chinese personal saving rates are very high. US econ policy should target Chinese middle class. Those clowns in DC should make it easier for Chinese to own vacation properties in the US, meaning more cash is coming in the US economy and states can collect property tax, it's a win win for everyone.

The policy works very well for the Canucks.


they already are, surpassed Canada
 

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If I find a news story or commentary on the net that I think other posters might want to read or discuss I post it. Most of them end up below RR's Immigration thread by the end of the day :)

Exactly the same thing I do then you jump in my thread and insult me and call me names.
 

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Just becasue someone says they are "facts" doesnt mean its true. I say bullshit to everything stated.
 

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Exactly the same thing I do then you jump in my thread and insult me and call me names.

I posted an article. I didn't state an opinion. If I'm posting something that I'm in agreement with I'll say so. All your posts have the same agenda. What's the worst I've called you, a fruitcake? You're the guy who started a thread, "What really happened on 9/11?" and then never replied in it. Steak says you're "Batshit Crazy." I think he's pretty much on the mark.
 

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heh.....who is "we" in that sentence?

Hahaha, Titusville, im not that far out of that area. You know the birth place of Mr Heisman. And oh yhea, Oil was drilled there.
 

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The Chinese commie VP Xi Jinping caused some major traffic jams in downtown Des Moines yesterday. The commie penned 2 contracts $4.5 billions with a local soybean exporter and $3.5 billion with a meat producer. US farmers are gaining market share in China but it's still very slow. Obama has to do more to make those commies to open its market for US farm producers.
 

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China Reduces Holdings of U.S. Treasuries to Lowest Level Since June 2010


By Cordell Eddings and Daniel Kruger - Feb 15, 2012 4:28 PM CT

China is the largest foreign lender to the U.S. Photographer: Nelson Ching/Bloomberg

China, the largest foreign lender to the U.S., reduced its holdings of Treasuries in December to the least since June 2010 amid efforts to assist Europe in addressing its debt crisis.

The world’s second-largest economy decreased its U.S. debt securities by $31.9 billion from November, or 2.8 percent, to $1.11 trillion, according to Treasury Department data released yesterday. Its position in longer-term notes and bonds also fell $32.5 billion, or 2.8 percent, to $1.1 trillion, the least since June 2010. Japan, the second biggest buyer, increased its holding by $3.5 billion to $1.04 trillion.

“We continue to see Chinese Treasury holdings trending lower as they are acting on their desire for diversification and as they may get more involved in the situation in Europe,” said Ian Lyngen, a government bond strategist at CRT Capital Group LLC in Stamford, Connecticut.

China’s policy makers have advocated diversification of the nation’s foreign exchange reserves away from U.S. assets. China may support Europe through channels such as the International Monetary Fund, the European Financial Stability Facility and the European Stability Mechanism, said People’s Bank of China Governor Zhou Xiaochuan.

http://www.bloomberg.com/news/2012-...of-treasuries-to-lowest-level-since-2010.html


*******************************

:grandmais
 

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Good points! But to throw some economic perspective in to this just like you all love...

China doesn't buy our debt to lend us money. No one buys our debt to lend us money. They buy our debt to save... it's the most risk free savings in the world. China puts our USD in to our treasuries because that is the most useful thing they can do with that USD. They aren't going to store it in a bank vault, they aren't going to spend it on American made goods at a higher price than we bought it from them.

The US does not rely whatsoever on China buying our debt. In fact the reason why China has so much of our money in the first place is because of our debt.

Go figure!
 

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They buy our debt to save... it's the most risk free savings in the world.

Of course it is. The Dollar is the preferred trade exchange for oil. Thus the Dollar is the global currency. We own a printing press. Therefore, if we go down so does everyone else. In a vacuum your logic works, but we dont live in a vacuum. The only alternative is to inflate. Im curious to see what happens to the 2 Trillion in reserves, what happens to the phoney CPI when the economy gets going again? Besides, if we are going to be stuck in a Keynesian box, China also buys Treasuries to keep their Yuan lower thus making their products cheaper.
 

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