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"The world is not a zero-sum game."

— Warren Buffett

Trading with friends is the real privilege

The Pilgrims understood comparative advantage.

They had to because their voyage had been bankrolled by English investors who expected generous returns in the form of shiploads of North American treasures that the Pilgrims would procure and send back across the Atlantic.

Upon arrival, however, the Pilgrims found they were barely able to keep themselves fed, let alone venture inland in search of something valuable.

When they wrote back to England explaining the dire situation, their investors were unsympathetic, threatening to cut them off from any further supplies if they couldn’t soon offer something of value in return.

Fortunately, the Pilgrim’s neighbors were willing to help.

Rather than seeing the newcomers as a danger, the native peoples of New England viewed their settlements as trading posts — a perspective that proved to be the Pilgrims’ unexpected salvation.

From the natives’ point of view, the inhabitants of those trading posts were pathetically helpless — unable to do something as simple as track and trap a beaver, for example. 

But the helpless newcomers did have desirable things that the natives didn’t know how to make, like metal and glass. 

This created the opportunity for mutually beneficial exchange. 

The Plymouth colonists traded what they had brought from England (their knives were especially prized) for things considered far more valuable in England (mostly animal pelts).

Their new trading partners thought this was a very good deal.

Beaver pelts, in particular, were in high demand in Europe, but "tracking the remote beaver in distant ponds and rivers was a labor-intensive task," as Bhu Srinivasan writes in Americana: A 400-Year History of American Capitalism.

So the colonists wisely left it to the experts and traded for them instead.  

Srinivasan helpfully puts this into modern terms for us: "Adept at hunting beaver over the ages as part of their own winter clothing, the Native Americans had a competitive advantage in procuring a valuable commodity that the colonists were willing to trade for."

This was a lifeline for the Pilgrims, who desperately needed to ship something of value back to England in order to secure continued support from their increasingly impatient investors.

It was a good deal for both sides: "The Indians, without the technical ability to forge shining knives or intricate metallic objects, were able in turn to procure such luxuries in exchange for what was to them the simple act of hunting and preparing beaver." 

Trade was a positive-sum exchange and would continue to be so for centuries, as Srinivasan concludes: "This intersection of competencies, the comparative advantages of nations, remains the fundamental basis for all global trade." 

Well, it did, at least.

Four centuries after the Pilgrims landed in North America, here is how the leader of the free world now views global trade: "I spoke to a lot of leaders — European, Asian, from all over the world. They are dying to make a deal, but I said 'we're not gonna have deficits with your country' ... to me a deficit is a loss."

But it's not a loss! It's a gain!! 

For both sides!!!

The seller gets money in return for doing something they’re good at and the buyer gives money in return for something they’re not good at.

By definition, both sides of any voluntary trade benefit because if they didn’t, it wouldn’t happen.

That is intuitive enough that even 16th-century Pilgrims understood it without needing economists to explain it to them.

The president needs some economists to explain it to him.

The positive sum benefits of trade have only grown since 1600, but President Trump made it clear this morning that he still cannot see them: "We are not gonna lose a trillion dollars for the privilege of buying pencils from China."

No, Mr. president, the privilege we’re paying for is that we don’t have to make pencils.

Instead, we can buy them with US dollars, which is much easier than making them, and spend the time we save doing something more profitable (like writing newsletters) or doing nothing at all (also like writing newsletters).

Nor do we "lose" the dollars used to pay for pencils or whatever else we don’t feel like doing ourselves.

With the exception of physical cash, US dollars cannot leave the US banking system, so whatever we spend on exports will, by definition, be used to either buy US exports or invest in US assets.

It’s a very good deal and if we buy imports with physical cash, it’s an even better one.

The astounding fact that foreigners send us cars, bananas, avocados and even pencils in return for the rectangular pieces of paper that the US government prints in arbitrary amounts is the ultimate economic privilege.

Incredibly, it’s an even better deal than exchanging glass trinkets for beaver pelts.

Comparative advantage has been making the world wealthier for centuries.

And the virtuous circle of US trade deficits and US investing has been making Americans even wealthier for decades. 

Now, it's over.

— Byron Gilliam

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Hating on Crypto (With Love)

Forward Guidance host Felix Jauvin dives into current crypto market positioning, stablecoin monetization, Hyperliquid’s HLP and much more ft. James Cristoph, a member of 0xResearch’s Telegram group.

Listen to 0xResearch on Spotify, Apple Podcasts or YouTube.