theskeptic's Journal: Wsj article- We Think, They Sweat

http://online.wsj.com/article/0,,SB110376349870907921,00.html?mod=mostpop

We Think, They Sweat

By ANDY KESSLER
December 23, 2004; Page A10

You want a scapegoat for the dollar's almost daily decline -- the Chinese water torture on the U.S. economy? I blame Steve Jobs. Apple is the worst offender in the decline of U.S. manufacturing. Their engineers sit around in air-conditioned offices on streets with cutesy names like Infinite Loop in Cupertino, Calif., and have others make stuff for them. They imported two million iPods assembled by thousands of Chinese workers just last quarter -- an almost $1.5 billion annualized trade deficit in iPods alone.

Those in D.C. who can do something about this -- former railroaders and breakfast cereal moguls, are so worried about trade deficits that they refuse to defend the greenback, even begging China to unpeg the yuan from the dollar so we can decline against it as well. We're in a place called Vertigo. Economists weep 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.

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 on my appropriately blue iPod mini. I happened to turn it over and read the fine print. Sure enough -- "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 sales by over a third, almost all from iPods -- those two million of them at $265 each last quarter and 100 million songs sold via their iTunes service. An iPod is just the combination of some Apple software, cheap disk drives and a $12 chip from a Silicon Valley company named PortalPlayer. I calculated that Apple pays $200 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, e-mails its design to Taiwan to be fabricated, with profits of $5 per chip.

The second change 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-price increase is all due to the iPod (it is), then that business is worth some $15 billion. Add in PortalPlayer's market value of $1 billion and you get a feel for how the world works. A $1.5 billion trade deficit increases wealth in the U.S. by $16 billion. I'll take that trade any day. So will all the holders of the retirement accounts who own Apple's stock. So, why am I caring about deficits again? Trade deficits are an economic construct, and lowering the dollar won't solve a thing. We are moving low-margin, low-pay jobs overseas, but fortunately, are left with high-margin, high-pay 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, 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. A lower dollar means foreigners get a needless discount on our productive stuff -- Pentiums and iPods, Windows XP and Oracle databases, and Cisco routers. They have to buy them anyway to run their economies (well, maybe not iPods) so why discount? Add non-productive but life-enhancing intellectual property to complete the sweep -- drugs, Hollywood movies, U2. A weak dollar won't bring back manufacturing jobs -- with $20/hour here vs. $2 in China, the dollar would have to drop 90%. And why should we encourage low-paying jobs in this country?

Foreigners buy Treasury bonds -- they own 43% of them -- so we don't have to. Who wants 3% returns? We 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 profitable designs and importing more finished goods. Higher salaries and our stock market balance 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. The $4-trillion-plus 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 overlending to wasteful domestic companies. Japan is just emerging 15 years later from a nonperforming-loan hangover. China is face-first in the punch bowl with half its bank loans uncollectible: If their currency spikes, it might go to 100%.

Rather than debase our wallets, Japan and China 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.

Mr. Kessler is author of "Running Money" (HarperBusiness, 2004).