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  • Denial springs eternal

    Denial springs eternal

    Can the US inflate and trade its way back to economic health?


    US Trade Representative Susan C. Schwab on Charlie Rose recently explained how free trade and a weak dollar benefits Americans. Her key point is that the US economy creates 15 million new jobs every year and loses 13 million as the economy shifts from growth in one area to growth in another. In the process, only 3% of jobs lost are due to foreign job competition. Meanwhile, cheap imports allow Americans to spend more on domestic goods and services because more disposable income is left over due low prices of imported consumer goods. She also claims that a weak dollar helps US manufacturers compete.

    About 16 minutes into the interview, Schwab talks about China. China exports a lot of low tech gear, like shoes and toys, where the US is strong in high valued added goods and services. US exports to China have gone up an average of 20% per year since China joined WTO in 2001. China's exports to the US increased off a much larger base. At 18:30 she states that the problem with trade with China is PR: "It's very visible. You go into a store and the label says Made in China," that China sells toys and games, footwear and apparel while the US sells China "Industrial equipment, machines..."


    AntiSpin: She is correct that China ships a lot of toys and games, footwear and apparel to the US by unit volume, but is unit volume as relevant as dollar volume? The World Trade Organization (WTO) web site, where we got the data to create the chart below, show that in fact China by dollar volume primarily sells power generation, electrical and machinery equipment not toys and games.


    The US in 2007 imported from China approximately $80 billion in power generation,
    electrical machinery and equipment and about the same dollar volume in everything else,
    including the toys, games, footwear and so on you see at the local mall.


    How about the growth in high intellectual property rights value goods? Take office and telecommunications equipment exports, for example. Surely the US is growing in this area relative to China, especially considering the competitive boost a weak dollar is having for companies like Cisco and IBM. Schwab claims in the interview that a weak dollar is helping US exporters.

    Again, the WTO data do not bear this out.


    Key: China in orange, USA in green

    In 2006, US office and telco equipment exports by the US were up to 19% to $135B from $110B since 2002 when the dollar began to weaken by 50% against and index of other currencies. Yet without accounting for inflation, US exports are still off from a $150B level achieved in 2000. In inflation adjusted terms, dollar volume is off at least 20%. Meanwhile, China's office and telco equipment exports are up from $75B in 2002 to $275B in 2006, a 270% gain.

    Didn't the US make this mistake with respect to Japan in the 1970s, incorrectly assuming that Japan was destined to make low quality, low intellectual property value goods while the US excelled in high quality, high intellectual property value goods?

    The weak dollar policy is just as misguided, as the data on office and teco equipment show. It is not helping US exporters. This is especially true if your company is a manufacturer of goods that require energy to manufacture, you are getting killed by inflation.

    A new level of this inflation epiphany appeared yesterday when DOW Chemical announced an emergency increase in prices of its products.
    Dow Raising Prices Most Ever as Energy Costs Surge
    May 28, 2008 (Bloomberg)

    Dow Chemical Co., the largest U.S. chemical maker, will raise prices the most in the company's 111- year history because of surging costs for energy and raw materials used to make Styrofoam, pesticides and plastics. The ``unparalleled'' increases of as much as 20 percent on all of Dow's 3,200 products are needed after a 42 percent jump in first-quarter spending on raw materials and energy, Chief Executive Officer Andrew Liveris said today. The increases take effect June 1, the company said in a statement.

    Dow plans to pass on some of an expected $7.4 billion increase in energy and materials costs this year that Liveris said is due partly to the U.S. government's failure to develop policies to solve a ``true energy crisis.'' Higher food, fuel and metals prices are contributing to inflation and helped boost U.S. consumer prices 3.9 percent in the year ended in April.

    ``This is our largest across-the-board increase,'' Liveris said today in an interview at the company's headquarters in Midland, Michigan. ``We have a tsunami landing on us here,'' he said, adding that Dow has been boosting prices for four years.

    ``Dow is probably leading the charge here in being this aggressive, and others are probably going to follow suit,'' Tom Uutala, who helps manage $60 billion, including Dow shares, at Victory Capital Management, said in a phone interview from Cleveland.

    Liveris said today the U.S. government's failure to develop a comprehensive energy policy is causing the nation's chemical industry to lose ground to global competitors.

    ``The country now faces a true energy crisis, one that is causing serious harm to America's manufacturing sector and all consumers of energy,'' Liveris said in the statement.

    This is the first such emergency increase in the $54 billion company's 111-year history. The company was able to maintain its policy of giving customers 90 days notice on price increases even during the 1970s oil shock. This time the company is giving customers four days' notice.

    Noteworthy is the absence of DOW CEO Leveris' criticism of "speculators" who have been blamed by many recently for the increase in energy prices. We remain skeptical.

    What DOW Chemical and other manufacturing companies are experiencing is as we described in our inflation analysis Inflation in America - Part I: Five signs of inflation; the purchasing power of profits and bank balances is declining rapidly with respect to energy input costs in the production cycle. From a cash flow perspective, DOW is finding itself in the same position as your local restaurant. This is the dark side of the policy of using currency depreciation to grow exports. Short term, it gives the economy a nominal growth boost; long term, it wrecks the nation's competitiveness.

    The administration's de facto weak dollar policy is ruining US competitiveness, not helping it, and the resulting inflationary impact on consumers and businesses is hammering the economy, not improving it.

    The US needs to open its eyes and understand that China will continue to grow high value exports to compete in key areas of US competitive advantage just as Japan did in the 1980s and 1990s. The first step toward fixing the damage is to confront the problem head on, and stop using ideology based and politically expedient short term policy measures to paper over structural economic weakness.

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    Last edited by FRED; 05-30-08, 10:45 AM.
    Ed.

  • #2
    Re: Denial springs eternal

    Originally posted by FRED View Post
    ...What DOW Chemical and other manufacturing companies are experiencing is as we described in our inflation analysis Inflation in America - Part I: Five signs of inflation; the purchasing power of profits and bank balances is declining rapidly with respect to energy input costs in the production cycle. From a cash flow perspective, DOW is finding itself in the same position as your local restaurant. This is the dark side of the policy of using currency depreciation to grow exports. Short term, it gives the economy a nominal growth boost; long term, it wrecks the nation's competitiveness.

    The administration's de facto weak dollar policy is ruining US competitiveness, not helping it, and the resulting inflationary impact on consumers and businesses is hammering the economy, not improving it.

    The US needs to open its eyes and understand that China will continue to grow high value exports to compete in key areas of US competitive advantage just as Japan did in the 1980s and 1990s. The first step toward fixing the damage is to confront the problem head on, and stop using ideology based and politically expedient short term policy measures to paper over structural economic weakness...
    And one of the drivers of this shift will be the increasing energy cost of moving raw materials and finished goods around the world, as Rubin points out in the video that zmas28 found and you've posted here:
    http://www.itulip.com/forums/showthr...6914#post36914

    Comment


    • #3
      Re: Denial springs eternal

      Yes, amazing how high oil prices affect shipping costs. Although if China continues to subsidize oil prices - this too can become a competitive advantage: just fuel the ship in China. Not an option if you're a truck driver.

      Comment


      • #4
        Re: Denial springs eternal

        The unprecedented aspect of Dow's increase is that it was unforeseen and virtually immediate, not necessarily the absolute number, right? Given their use of crude, 42% in the first quarter seems about right. This is an oil story first, turning into an inflation story down the road.

        The above analysis wants us to see the increase in crude as part of the weak dollar policy, more than from peak cheap oil. However, the Dow case looks to be more about demand for energy/oil than supply of currency.

        I guess what I'm saying is that there are two potential causal stories here, both with merit, but which should likely be distinguished and analyzed individually.

        Comment


        • #5
          Re: Denial springs eternal

          The world's finest high end audio equipment used to be manufactured primarily in denmark (scan-speak, Dynaudio, Plitron, etc)

          They are ALL now manufactured in china. (we are talking speaker drivers and transformers, but they are also going into finished products as well). The chinese have a whole high-end audio buisness springing up that not only competes on Quality with anything made anywhere in the world, but ALSO on PRICE. And because IP enforcement is weak, you can get "copies" of items that are exact (made in the same plant) without the brand added costs.

          Comment


          • #6
            Re: Denial springs eternal

            Originally posted by cmraynew View Post
            I guess what I'm saying is that there are two potential causal stories here, both with merit, but which should likely be distinguished and analyzed individually.
            I don't see that happening.

            Comment


            • #7
              Re: Denial springs eternal

              Originally posted by cmraynew View Post
              The unprecedented aspect of Dow's increase is that it was unforeseen and virtually immediate, not necessarily the absolute number, right? Given their use of crude, 42% in the first quarter seems about right. This is an oil story first, turning into an inflation story down the road.

              The above analysis wants us to see the increase in crude as part of the weak dollar policy, more than from peak cheap oil. However, the Dow case looks to be more about demand for energy/oil than supply of currency.

              I guess what I'm saying is that there are two potential causal stories here, both with merit, but which should likely be distinguished and analyzed individually.
              finster says it's all money supply. respect that.

              ej says it's both oil supply/demand and money supply/demand... he's been saying that for years on end.

              take your pick.

              obviously there is less oil vs all the nations going after it. yeh, capitalism! they got cars in shithole countries now.

              obviously the usa has lost its monopoly on currency and the war has screwed up its relationship with suppliers.

              obviously, it's both oil and money. so the rational argument is over...

              how much of each is contributing but even more important...

              WHAT THE HECK ARE WE GOING TO DO ABOUT IT???

              a) i cannot control oil supply.

              b) i cannot control oil demand, except my own.

              c) i cannot control dollar supply.

              d) i cannot control dollar demand.

              all i can do is try to see where a, b, c, d are going and hedge/invest accordingly.

              see bonds shit the bed today?

              U.S. data, price worry trigger global bond rout

              By Natsuko Waki
              Reuters
              Thursday, May 29, 2008; 4:41 AM

              LONDON (Reuters) - Investors dumped safe-haven bonds in major economies on Thursday, pushing euro zone government borrowing costs to a nine-month high following upbeat U.S. economic data and inflation concerns from costly oil.

              World stocks hit this week's high and the dollar rose broadly after Wednesday's data showed a jump in new orders for long-lasting U.S manufacturing goods outside of transportation, suggesting surprising strength in the factory sector. A gauge of business investment also posted a surprise rise.

              The data, which followed easing concerns about the credit crisis nine months after its initial outbreak, triggered a sell-off in U.S. Treasuries and Japanese government bonds. Euro zone government bonds, already under heavy pressure from data showing a pick-up in German inflation, followed suit.

              ---

              what'd gold/silver do? splat!



              silver? splat! usual pattern...



              platinum, the pure industrial... splud! (like splat but softer)



              hedgies don't tie platinum into the bond/oil trade... so we see.

              bonds down, pms down... c'mon folks, put the thinking caps on. what's with that?

              why are fixed income investors scared out of bonds AND hard assets at once? should not pms rise when bonds sell off?

              no! the inflation risk is 2nd order... via central bank funding cause/effect.

              what i'm saying is that the hedgies have this HUGE trade in the collapse of usa treasuries that shows up as a pm sell-off when bonds tank.

              but what do i know?
              Last edited by FRED; 05-30-08, 10:46 AM. Reason: Cleaned up the language a bit

              Comment


              • #8
                Re: Denial springs eternal

                The question is: Without an expanding credit supply, can they afford to raise prices?

                This credit contraction will give DOW and its customers a beating... I wonder how many of its customers will close down?

                Comment


                • #9
                  Re: Denial springs eternal

                  Originally posted by FRED View Post
                  Denial springs eternal

                  Can the US inflate and trade its way back to economic health?


                  US Trade Representative Susan C. Schwab on Charlie Rose recently explained how free trade and a weak dollar benefits Americans....
                  Oh boy. :rolleyes:

                  We've been hearing this drumbeat out of Wall and Washington at least since NAFTA, and what do we have to show for it? We're now being told we have to tighten our belts, while our trading partners are doing famously well. Fewer Americans can afford to own and drive cars, while more and more Chinese can.

                  What's that definition of insanity? When you keep trying the same thing over and over thinking you will get a different result?
                  Finster
                  ...

                  Comment


                  • #10
                    Re: Denial springs eternal

                    Originally posted by Finster View Post
                    Oh boy. :rolleyes:

                    We've been hearing this drumbeat out of Wall and Washington at least since NAFTA, and what do we have to show for it? We're now being told we have to tighten our belts, while our trading partners are doing famously well. Fewer Americans can afford to own and drive cars, while more and more Chinese can.

                    What's that definition of insanity? When you keep trying the same thing over and over thinking you will get a different result?
                    I find it interesting that the widespread opinion about NAFTA in Mexico is that it benefits the USA a great deal more. That opinion is not as widespread in Canada, but I sense it is growing, especially now that the Big 3 owed auto plants are shutting down one by one north of the border.

                    Your comment above implies that some in the USA [perhaps many?] also think NAFTA is a losing proposition for the US? Now how can that agreement really be a lose-lose-lose between the three parties to it?

                    Comment


                    • #11
                      Re: Denial springs eternal

                      Originally posted by Sapiens View Post
                      The question is: Without an expanding credit supply, can they afford to raise prices?

                      This credit contraction will give DOW and its customers a beating... I wonder how many of its customers will close down?
                      The problem DOW Chemical has is not that usage of its products is going cease, but that too many of its products are still fungible commodity chemicals, and DOW is no longer the low cost global producer.
                      "...Sinopec says it is in discussions with Sabic that may Lead to Sabic joining an ethylene project at Tianjin, China that was originally conceived as a joint venture between Sinopec and Dow Chemical. Dow pulled out of the discussions a couple of years ago..."
                      Where they compete head-to-head with companies like SABIC or Aramco they are dead, unless they can sell those businesses to their lower cost competitor (e.g. GE Plastics), close them out, or persuade their competitors to JV if able to bring something unique by way of production technologies, marketing capabilities, etc. to the table.
                      Aramco confirms 'mammoth' Dow deal

                      by Reuters on Sunday, 13 May 2007
                      Saudi Aramco and U.S. Dow Chemical Co. announced on Saturday a deal to build a petrochemical plant that industry insiders expect to be the largest foreign investment in Saudi Arabia's energy sector.

                      The cost of the Ras Tanura plastics and chemicals complex would be "mammoth", said Saudi Aramco's President Abdallah Jumah, although he declined to give details.

                      Earlier this week, industry sources said the plant would have an investment cost of at least $20 billion. Costs have risen with soaring inflation in the energy industry from an Aramco estimate last year of around $15 billion...

                      ...The world's largest oil exporter Aramco chose Dow last July to discuss the plant, which Aramco will supply from the nearby 550,000 barrels per day Ras Tanura oil refinery and Ju'aymah gas processing plant...
                      http://www.arabianbusiness.com/12536...mmoth-dow-deal
                      Edit added: Ref. the last paragraph above, although Saudi Aramco will be exporting less first order petroleum as a result of diversion for feedstock for projects such as this, we should remember that, to the degree they are exporting any higher order product made from such feedstock, they are still exporting the "contained energy" to the rest of the world.
                      Last edited by GRG55; 06-01-08, 02:58 AM.

                      Comment


                      • #12
                        Re: Denial springs eternal

                        Originally posted by GRG55 View Post
                        I find it interesting that the widespread opinion about NAFTA in Mexico is that it benefits the USA a great deal more. That opinion is not as widespread in Canada, but I sense it is growing, especially now that the Big 3 owed auto plants are shutting down one by one north of the border.

                        Your comment above implies that some in the USA [perhaps many?] also think NAFTA is a losing proposition for the US? Now how can that agreement really be a lose-lose-lose between the three parties to it?
                        Because it was thought up by politicians.:rolleyes:

                        I think there are mixed feelings all around. From wikipedia:

                        Public opinion toward NAFTA in Mexico, Canada and the United States is mixed. A July 2004 survey conducted by CIDE and COMEXI in Mexico showed that 64 percent of the Mexican public favored NAFTA. The Program on International Policy Attitudes reported in a January 2004 poll that 47 percent of Americans thought that NAFTA has been good for the United States, while 39 percent thought it had been bad for the country. A recent Rasmussen report, however, shows that only 16% of likely Democratic voters in the 2008 presidential election support NAFTA, while 53% disapprove of the trade agreement.

                        A Canadian poll conducted in June 2003 by Ipsos Reid found that 70 percent of Canadians supported NAFTA, while only 26 percent were opposed. However, a May 2004 Ipsos poll found that "Six in ten Canadians (62 percent) disagree that Canada should sign a trade agreement that would open Canada’s public services to competition from foreign companies" and "A further six in ten (60 percent) disagree that government should sign deals that would allow corporations to directly sue the Government of Canada if our public policies impair their ability to make profits".

                        Despite their support for NAFTA, the polls in Canada and Mexico have tended to show that citizens see their own country as the loser in NAFTA, and to see the United States as the winner. The U.S. public has viewed Mexico as the winner and has been narrowly divided about whether the United States is a winner or loser in NAFTA.

                        Comment


                        • #13
                          Re: Denial springs eternal

                          Originally posted by grg55
                          Now how can that agreement really be a lose-lose-lose between the three parties to it?
                          studies in behavioral economics have shown that the [negative] marginal utility of a loss is about twice the utility of a gain of equal objective magnitude. i.e. the pain of a loss is much greater than the pleasure produced by an equal gain. so the polls, toting up the perceptions or feelings of the populace, do not calculate the balance sheet in an objective fashion.

                          Comment


                          • #14
                            Re: Denial springs eternal

                            Originally posted by jk View Post
                            studies in behavioral economics have shown that the [negative] marginal utility of a loss is about twice the utility of a gain of equal objective magnitude. i.e. the pain of a loss is much greater than the pleasure produced by an equal gain. so the polls, toting up the perceptions or feelings of the populace, do not calculate the balance sheet in an objective fashion.


                            Apparently our Finster is one of those feeling that pain...

                            Originally posted by Finster View Post
                            ...We've been hearing this drumbeat out of Wall and Washington at least since NAFTA, and what do we have to show for it? We're now being told we have to tighten our belts, while our trading partners are doing famously well...

                            Comment


                            • #15
                              Re: Denial springs eternal

                              Originally posted by GRG55 View Post
                              I find it interesting that the widespread opinion about NAFTA in Mexico is that it benefits the USA a great deal more. That opinion is not as widespread in Canada, but I sense it is growing, especially now that the Big 3 owed auto plants are shutting down one by one north of the border.

                              Your comment above implies that some in the USA [perhaps many?] also think NAFTA is a losing proposition for the US? Now how can that agreement really be a lose-lose-lose between the three parties to it?
                              It wasn't intended to be a commentary on NAFTA per se, but I'm gonna have to go along with Zoog on this one. Anything that requires thousands of pages to define "free trade" can't really be very free. In general, a forcible intervention in the marketplace - all the more so one that requires an army of lawyers and bureaucrats to interpret and implement - is a lose-lose proposition for the market participants at least on a net basis. If, for example, you and I were to engage in a free exchange, we do so because each of us believes he will benefit. An external interference or forcible modification therefore can only hobble our ability to achieve what we ourselves deem in our own best interests.

                              This of course is not to claim that the net result is symmetric. My observation is with respect to the US, and since the direction of the US economy has been down and presumably the interest of the US government is the welfare of the US, it is more than an open question whether its aggressive globalization policy is playing its advertised role.
                              Last edited by Finster; 06-04-08, 03:54 PM.
                              Finster
                              ...

                              Comment

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