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  • Economic MAD approaching its logical conclusion?

    Two stories today indicate the beginning of the end of the long period of tense stability produced by Economic MAD.
    House panel approves China currency bill

    (Reuters) - A congressional panel, in a move likely to increase trade tensions with China, approved on Friday a bill that allows the United States to slap duties on goods from countries with fundamentally undervalued currencies.

    Big Yuan Rise Would Mean Bankruptcies: Chinese Premier

    An appreciation of 20 percent in China's currency would cause widespread bankruptcies in China's export sector, where firms operate on thin margins, Chinese Premier Wen Jiabao said on Wednesday.

    "The conditions for a major appreciation of the renminbi do not exist," Wen said in a speech to U.S. businessmen in New York. He said the appreciation of China's currency demanded by U.S. lawmakers would not bring jobs back to the United States because U.S. firms no longer make such labor-intensive products.
    AntiSpin: More bad craziness from our economic policy leadership. This is Smoot-Hawley version 2.0.

    The Smoot–Hawley Tariff Act of 1930 turned a major recession into The Great Depression by launching a trade war in the middle of a global downturn. World trade fell by 66% between 1929 and 1934.

    As Milton Friedman said, governments never learn.

    The US dollar has fell 16 % against major currencies since 2009 and nearly 50% since 2001 yet US policy makers view China's currency policy as producing an unfair trade advantage.


    The real problem is that the global debt deflation leaves every nation in need of a weaker currency to maintain exports for economic growth. That is especially true of a tangible goods exporter like China. A financial goods exporter like the US needs happy tangible goods exporters like China to finance its trade deficit or its fiscal deficit. Therein lies the conflict.

    When Wen Jiabao says a stronger renminbi will cause mass defaults and economic crisis in China, he's not politicking like the folks on Capital Hill when they say China is manipulating its currency. China will have no choice but to respond with tariffs of its own.

    This bill will either launch a trade war, or create a crisis in the economy of our largest creditor. Neither outcome benefits us.

    The truth is we should never have allowed ourselves to get into this position in the first place, as I explained in Economic MAD back in 2006.

    Instead of beating up our trade partners to sacrifice more to improve our weak export position, we need to boost our private sector to be more competitive. We can do it by investing in transportation, energy, and communications infrastructure that drives private companies to compete for projects and to develop new technologies and lowers the energy tax on consumers and producers. We need to reduce taxes and remove obstacles that hamper entrepreneurs: zero payroll taxes, zero capital gains taxes, and zero health insurance costs for companies under 50 employees. Call it the zero, zero, zero plan. It will be paid for by eliminating government subsidies to the housing industry. From the looks of things, that's coming.

    Philly Fed researchers agree with Postcatastrophe Economy on housing

    With the caveat the "The views expressed are those of the authors and do not necessarily represent the views of the Federal Reserve Bank of Philadelphia or the Federal Reserve System, Fed researches Wenli Li and Fang Yang today issued a detailed report "Benefits and costs of Homeownership" (attached) that questions the wisdom of a government subsidized housing market, as The Post Catastrophe Economy does:
    "Our review of the economic benefits and costs of homeownership suggests that the economic case for subsidizing homeownership has, at the minimum, been oversold. And we have not addressed the offsetting costs. Indeed, economists have found that government subsidies incur a cost to the general economy. For example, in his article, Martin Gervais studied the welfare consequences of the preferential tax treatment of housing capital and found that the current tax structure crowds out business capital and leads to a loss in consumption of over 1 percent.

    "The net dollar value of owning one’s home remains a question for economists and policymakers to consider. One thing that is certain is that homeownership is not for everyone, and thus, based on the economic benefits, the case for trying to achieve a nation of homeowners needs to be rethought."
    Coming from the Fed, despite the disclaimer, this paper reveals a sea change in official philosophy on housing. It reminds me of the "research papers" the Fed issued in 2003 about deflation and how they planned to handle if should it happen here.

    Decades old housing subsidies will in the coming years be dumped onto the ash heap of politically motivated, destructive and destabilizing economic policies along with protectionist auto import tariffs in the 1970s that resulted over-priced, low quality cars for consumers, especially from Chrysler.


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    Last edited by FRED; 09-24-10, 09:24 PM.

  • #2
    Re: Economic MAD approaching its logical conclusion?

    Originally posted by ej
    Decades old housing subsidies will in the coming years be dumped onto the ash heap of politically motivated, destructive and destabilizing economic policies along with protectionist auto import tariffs in the 1970s ..
    i thought you were saving the unrealistic optimistic scenarios for the general public. things are going to have to get pretty terrible here before these things become conceivable, let alone accomplished.

    Comment


    • #3
      Re: Economic MAD approaching its logical conclusion?

      So do we allow China to implement it's version of Smoot–Hawley, while we stand by and watch our businesses pay the price of unfair competition?

      Amid Tension, China Blocks Vital Exports to Japan

      ...

      Chinese customs officials are halting shipments to Japan of so-called rare earth elements, preventing them from being loading aboard ships at Chinese ports, industry officials said on Thursday.

      On Tuesday, Prime Minister Wen Jiabao personally called for Japan’s release of the captain, who was detained after his vessel collided with two Japanese coast guard vessels about 40 minutes apart as he tried to fish in waters controlled by Japan but long claimed by China. Mr. Wen threatened unspecified further actions if Japan did not comply.

      A Chinese Commerce Ministry spokesman declined on Thursday morning to discuss the country’s trade policy on rare earths, saying only that Mr. Wen’s comments remained the Chinese government’s position. News agencies later reported that Chen Rongkai, another ministry spokesman, had denied that any embargo had been imposed.

      ...

      The United States, the European Union and Mexico brought W.T.O. complaints against China last November after it issued regulations limiting the export of yellow phosphorus and eight other industrial materials. American trade officials have been considering for months whether to challenge China’s longstanding and increasingly tight quotas on rare earth exports as well.

      China mines 93 percent of the world’s rare earth minerals, and more than 99 percent of the world’s supply of some of the most prized rare earths, which sell for several hundred dollars a pound.

      Dudley Kingsnorth, the executive director of the Industrial Minerals Company of Australia, a rare earth consulting company, said that several executives in the rare earths industry had already expressed worries to him about the export ban. The executives have been told that the initial ban lasts through the end of the month, and that the Chinese government will reassess then whether to extend the ban if the fishing captain still has not been released, Mr. Kingsnorth said.

      “By stopping the shipments, they’re disrupting commercial contracts, which is regrettable and will only emphasize the need for geographic diversity of supply,” he said. He added that in addition to telling companies to halt exports, the Chinese government had also instructed customs officials to stop any exports of rare earth minerals to Japan.

      Comment


      • #4
        Re: Economic MAD approaching its logical conclusion?

        the somewhat subtle currency war easily morphs into a more overt trade war. that sure solves the "deflation problem" the fed's worried about- everyday higher prices.

        Comment


        • #5
          Re: Economic MAD approaching its logical conclusion?

          Originally posted by EJ View Post
          Decades old housing subsidies will in the coming years be dumped onto the ash heap of politically motivated, destructive and destabilizing economic policies along with protectionist auto import tariffs in the 1970s that resulted over-priced, low quality cars for consumers, especially from Chrysler.
          This makes me happy from a philosophical standpoint and for selfish personal reasons as a renter, that being said, this is going to implode recapitalized bank balance sheets and wreck the commercial paper market. We will be looking at what, in my mind, will be a larger deleveraging than what we saw in 2008. YIKES!!

          Comment


          • #6
            Re: Economic MAD approaching its logical conclusion?

            Originally posted by EJ View Post
            [B]e. We can do it by investing in transportation, energy, and communications infrastructure that drives private companies to compete for projects and to develop new technologies and lowers the energy tax on consumers and producers. We need to lower taxes and other costs that hamper entrepreneurs: zero payroll taxes, zero capital gains taxes, and zero health insurance costs for companies under 50 employees. Call it the zero, zero, zero plan. It will be paid for by eliminating government subsidies to the housing industry. From the looks of things, that's coming.
            Right on. Great Idea.
            CSPAN should invite you for one of their early morning interviews regarding your book and these ideas. Appreciate the leadership.

            Comment


            • #7
              Re: Economic MAD approaching its logical conclusion?

              QUOTE
              Instead of beating up our trade partners to sacrifice more to improve our weak export position, we need to boost our private sector to be more competitive. We can do it by investing in transportation, energy, and communications infrastructure that drives private companies to compete for projects and to develop new technologies and lowers the energy tax on consumers and producers. We need to reduce taxes and remove obstacles that hamper entrepreneurs: zero payroll taxes, zero capital gains taxes, and zero health insurance costs for companies under 50 employees. Call it the zero, zero, zero plan. It will be paid for by eliminating government subsidies to the housing industry. From the looks of things, that's coming.
              UNQUOTE


              Eric, I'm with you on dropping payroll taxes and health insurance costs (I assume you somehow mean for entrepreneurs, rather than every hedge fund that shows up for a hand out) but how does the capital gains tax harm entrepreneurs? A mere 15% on holdings over a year old has been a fine thing, and hardly seems a burden.
              "The test of our progress is not whether we add more to the abundance of those who have much it is whether we provide enough for those who have little." - Franklin D. Roosevelt

              Comment


              • #8
                Re: Economic MAD approaching its logical conclusion?

                Originally posted by jk View Post
                i thought you were saving the unrealistic optimistic scenarios for the general public. things are going to have to get pretty terrible here before these things become conceivable, let alone accomplished.

                I agree. RE is 1/3 of the FIRE animal and its interests are still entrenched throughout government, quasi-government agencies, and public mindset. This ship is not going to turn around easy.

                The system is so rotten to the core, that it must be destroyed before it can be rebuilt. Perhaps the elimination of RE subsidizes is part of the rebuild, but its not going down without a fight and a lot more pain ahead is necessary to be the impetus for real change.

                Comment


                • #9
                  Re: Economic MAD approaching its logical conclusion?

                  Originally posted by dbarberic View Post
                  This ship is not going to turn around easy.
                  That is a big assumption, to think this monstrosity is going to turn.

                  Comment


                  • #10
                    Re: Economic MAD approaching its logical conclusion?

                    Originally posted by dbarberic View Post
                    This ship is not going to turn around easy.

                    Comment


                    • #11
                      Re: Economic MAD approaching its logical conclusion?

                      There is a much wider issue here. EJ touches on the edge of it by introducing new thinking like reducing the tax burden on very small business; but the main issue is to avoid the ramifications of the drive towards protectionism.

                      The answer is surely to take the debate towards local community enterprise and away from globalisation.

                      Both China and the US need to recognise the benefits of increasing the prosperity of the grass roots of their respective local communities. Thereby setting into motion the replenishment of the prosperity of the poor. By that means, they can both direct that new prosperity towards the creation of local community enterprise, creating products to reflect the increased prosperity of their own "local" markets and thus offsetting the effects of currency imbalances.

                      China should respond by taking the US Treasuries it holds and internally exchange them for Vanishing Bonds to be used to create a raft of new businesses right at the grass roots of their nation; to substantially increase their local community prosperity.

                      In that way, the US would then be forced to recognise that that is the only way forward; the reinvigoration of the prosperity of the poor.
                      Last edited by Chris Coles; 10-02-10, 06:48 AM. Reason: spelling

                      Comment


                      • #12
                        Re: Economic MAD approaching its logical conclusion?

                        EJ & Fred,

                        I read this when you posted... started to make a reply, decided not to, started to make a reply... well you understand.

                        While I don't disagree that the tax system in America needs reforming. Badly. I would offer that the terms and policies of trade also need reforming. Even more badly. While there are certainly a lot of very bad policies right here at home that need cleaned up I would offer that this is no excuse for ignoring those on the trade front.

                        The dollar has certainly fallen since our first bubble bust hangover. Arguments can, and have, been made ad nauseum where the dollar should be valued were it and other currencies left untouched by central bank manipulations. But the yaun was revalued in excess right before China was given most valued trading partner status. It was a big boost for them then and it has continued unabated since that time. It is this particular currency peg that has caused the most shifting of production from the US to China. And it has hurt Europe's trade balance with China as well. All the result of a hard, fast currency peg. It was a mistake to begin with and it was a major contributor to the 'Chinese Miracle' that we have been subjected to over the years.

                        And you add to that a VAT system that subsidizes exports and taxes imports. A system designed specifically to generate a positive trade flow for the country exercising it while avoiding sanctions from the WTO. This is the entire reason for going to a VAT system: to generate positive trade flows. And yet another example of underhanded trade policies that our 'free trade at all costs brigade' here in the states chooses to blithely ignore. The Asians and the Europeans have both employed this tax system to great benefit while no one in power raised a voice and pointed out the obvious unfairness of this to Americans who make things for a living.

                        I have said it before and I will say it again: Free Trade as it has been exercised here in the states means nothing more than allowing our trading partners to employ mercantilist policies while we unilaterally disarm.

                        There have been those who benefited greatly from this arrangement. Global corporations who could, and did, move production overseas. Wall Street investment bankers who recycled these trade flows into asset bubbles and treasury purchases. Politicians who were spared the wrath of displaced workers as the inflating credit bubble masked a weakening and, eventually, enfeebled industrial base. These same politicians who were able to run extraordinary deficits by selling treasury debt. etc, etc, etc.

                        The losers? American based production and those who depend on it.

                        I agree with itulip on most issues. And I have to give you credit (groan) for helping to educate me on the basics of the political economy that we are all having to deal with. But at the same time I have to point out that as much as we like to rail against the powers that be here and point an accusatory finger at our own home grown FIRE economy, it is also true that our trading partners are not playing by the same rules that we are. Just because we Americans have a criminal class running things in our markets and halls of power does not mean that the productive side of the economy is not as much a victim of them as our trading partners... plus our trading partners are screwing this productive side as well.

                        Will

                        Comment


                        • #13
                          Re: Economic MAD approaching its logical conclusion?

                          Originally posted by Penguin View Post
                          The dollar has certainly fallen since our first bubble bust hangover. Arguments can, and have, been made ad nauseum where the dollar should be valued were it and other currencies left untouched by central bank manipulations. But the yaun was revalued in excess right before China was given most valued trading partner status. It was a big boost for them then and it has continued unabated since that time. It is this particular currency peg that has caused the most shifting of production from the US to China. And it has hurt Europe's trade balance with China as well. All the result of a hard, fast currency peg. It was a mistake to begin with and it was a major contributor to the 'Chinese Miracle' that we have been subjected to over the years.
                          You ought to read your Hudson.

                          http://www.itulip.com/forums/showthr...s-%28Hudson%29

                          Comment


                          • #14
                            Re: Economic MAD approaching its logical conclusion?

                            Oh I read it, I just don't agree with it... not all of it anyway. :p

                            I can definitely see where Hudson make the case that the machinations of the Federal Reserve and treasury to state that 'we Americans' are guilty of managing the currency. Guilty as charged. The way the Fed and Treasury conduct policy is extremely accommodative to investers, speculators, and it allows American based banks in the loop to exercise power in foreign lands that causes a lot of hard feelings and consternation. As he points out.

                            But he is in left field if he believes that currency pegs and VAT schemes aren't hurting American industry and our middle class. And if he believes that they aren't tilting the field towards our trading partners then I call willful blindness on him. He refuses to see what is in front of him. Of course they do. That is what they were designed to do. That is why they are their chosen policy. That is why these governments refuse to modify them. They work.

                            I am not an economist, I am a research scientist. An engineer. And I don't claim to know all that these guys do. I do not.

                            But I know a good screwing when I am getting one. I see plant after plant after plant move over there. I see our industry get weaker and weaker and weaker. I hear all kinds of rationalizations why we should accept the kind of trade policies that our earlier generations would have put an end to immediately. You think they would have accepted our trading partners instituting a VAT and currency pegs without retaliation?

                            I see a black hole of poor people world wide consuming our middle class. The whole idea of free trade was sold to those of us in the middle class as a way to lift their standards of living. We would pay a bit for it but in the end we would all be better off. I see us rupturing jobs, losing industry, sending American built expertise over without regard to the system that nurtured it one whit. Why should we go along if these countries aren't going to play be the same rules? Why should we not insist on tearing the whole global trade apparatus down brick by brick if in the end all it amounts to is an excuse for the monied traders to scoop out gobs of the capital as it is moved from America to these faraway lands?

                            Why shouldn't we? What is in it for us?

                            As far as I can tell this whole globalization scheme was nothing more than a poorly thought out economists wet dream. Supposed improvements and efficiencies have melted away in the light of taking the theory and putting into practice. I know we used to be the most protectionist country on the planet and had the highest standard of living. I look around and while I may not know the answer I can sure as hell see that this ain't what we were sold on. And as far as the reserve currency goes they can have it. As a complete novice it looks to me like the only way the whole system works is if the country issuing the reserve currency allows its industry to be pillaged and its citizenry to be swamped in debt. Otherwise the whole thing comes crashing down.

                            It seems like everyone loves to criticize the Fed and Treasury for their sins in managing the currency. Fair enough, I love to do so myself and they are a den of thieves if ever there were one. But when it comes to foreign powers pulling trade shenanigans everyone immediately goes blind. Oh no! ~those~ people couldn't be perpetrating a sin! They aren't Americans you silly boy! :p

                            SO guys like me who work in industries that make things that must compete in world trade find ourselves on a playing field where we have the criminal class at the FED and Treasury screwing me at home and foreign powers putting it to me in trade practices while the PTB smile and take their kickbacks from the criminal class. I am beginning to wonder why I shouldn't turn into Pat Buchannan and say to hell with the whole trifling bunch! :-)

                            Will

                            Comment


                            • #15
                              Re: Economic MAD approaching its logical conclusion?

                              Penguin
                              But I know a good screwing when I am getting one. I see plant after plant after plant move over there. I see our industry get weaker and weaker and weaker. I hear all kinds of rationalizations why we should accept the kind of trade policies that our earlier generations would have put an end to immediately. You think they would have accepted our trading partners instituting a VAT and currency pegs without retaliation?
                              Don't fall for the hype. You have to remember that one of the reasons that wages in the US are high in comparison is because of the debt servicing. As a result companies move over there. If the cost of doing business and the cost of living weren't so high, the US would be more competitive.As Hudson says:-
                              the problem is that America has let easy bank credit bid up housing prices for its workers and loaded down their budgets with debt service that, by itself, exceeds the wage levels of most Asian workers.This financialization is largely responsible for the U.S. trade balance moving into deficit (apart from food and arms exports). Homeowners typically pay up to 40 per cent of their income for mortgage debt service and other carrying charges, 15 per cent for other debt (credit card interest and fees, auto loans, student loans, etc.), 11 per cent for FICA wage withholding for Social Security and Medicare, and about 10 to 15 per cent in other taxes (income and excise taxes). To cap matters, the financial burden of debt-leveraged real estate and consumption is aggravated by forced saving pension set-asides turned over to money managers for financial investment in these debt-leveraged financial instruments, and “financialized” wage withholding for Social Security. All these deductions are made before any money is left to buy food, clothing or other basic goods and services.
                              The Western consumer is maxed out and will remain so until the debt is wiped out. Once (if) it is, then the playing field will be more equal and hopefully Western and particularly US efficiency will have a chance of out-competing the Indians (shouldn't be difficult) and the Chinese (who knows?).
                              If you need a perfect example of why devaluation doesn't work, look at the UK. It's been devaluing for a century, sold all it's utility companies to foreigners (and lots of land), has maintained high asset values and rents and consequently manufactures nothing. The UK is the perfect example of the toll-booth economy Hudson warns of. The UK population has been annexed without even realizing it.You should be hoping that Churchill is right and "you can always count on Americans to do the right thing - after they've tried everything else."

                              Comment

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