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Thread: Economic MAD approaching its logical conclusion?

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    Default 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 at 09:24 PM.

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