U.S. Recovery Plan - Turning the Chinese into Americans

There have been many stories in the news lately, detailing statements from the U.S. government about the dollar. Statements known as “talking up the dollar” have been coming very frequently from Geithner, Bernanke and Obama. This, of course, is meant to make people around the world believe that, even though they’re doing nothing about it (and are actually making things worse every day), effective policies to keep the dollar strong will come in the future.


However, this strategy goes deeper than that. The U.S. government has now embarked on some pathetically futile strategy to try to change other peoples’ behavior to suit American economic needs. This is very evident in this recent speech by Bernanke, as reported by the NYT:


http://www.nytimes.com/2009/10/20/business/economy/20fed.html?hp


The problem, in essence according to Bernanke, is that people in Asia, and especially China, don’t spend money like drunken sailors, as is the custom in the U.S.. If the Chinese started consuming their own goods instead of selling them to other countries (and getting rich in the process), then the U.S. could become more competitive on the international arena.


It’s like asking the sports team you’re playing against to bench its best player, in order to make the game more fun for everyone else. How quaint.


The average person might not think much of a statement like “the trade imbalances on the world market are too large, and should be reduced by increased domestic consumption in China”. But it is in its core, a pathetic, vain and useless attempt to deal with the economic crisis in the U.S. by trying to take a non-existent shortcut.


Geithner, Bernanke and Obama know that the U.S. can’t export its way out of the crisis, because American goods cannot compete. If the dollar were to implode, American exports probably would be competitive for a while based on price alone, but the larger implications would unequivocally be irreversible, long-term economic stagnation. So again, the only way to take this shortcut is to tell others to change their ways. Now, how likely is it that that will happen?


Bernanke goes on to say that China should increase its social protection for citizens as a way to increase domestic consumption. Now, I’d be the first to agree with such a policy, but alas, China does not care about its own citizens. China is simply the authoritarian political/economical system it has always been. It doesn’t matter if the country calls itself communist, capitalist or imperial: the outcome is the same (the same goes for Russia, by the way). Much like the United States, whoever grabs the power has the power.


The much criticized “Asian values doctrine” can actually be helpful in this context. This doctrine, much favored by the Chinese government, is influenced by Confucianism and other eastern philosophies, but as applied to modern society, it proclaims that individual considerations, be they materialistic or human rights related, should be sacrificed for the good of the authority. I have myself met many Chinese students who have defended this doctrine vigorously.


Where does that leave the Chinese consumer? When, at any time, your house might be bulldozed for a new dam project, your farm taken away because a local politician sold it, or your salary might be cut in half, what is the most rational thing to do in order to protect yourself from catastrophe? You save money!


American politicians seem to think that Asian people save money as some kind of old, funny habit. In fact, they are just being rational, and Americans should obviously be doing the same thing, considering the fact that there is no social safety net in the U.S., and that we have a casino economy.


The Chinese will probably increase their own consumption eventually, but in order for that to be of any help to the U.S. they would have to start buying lots of American goods, and I don’t see that as very likely.


If the Chinese do increase their domestic consumption of domestic goods, I’m sure that won’t be at the expense of exports to the U.S.. They’ll just make up for that by building more factories and enlisting more unemployed people from the countryside to work in them.


Moving on to those who actually control things in China. Why the hell would they try to export less?? In 2007, George W. Bush asked Hu Jintao if they couldn’t please let the Chinese currency appreciate against the dollar. Jintao simply responded: “Why?”.


Embarking on a policy to export less, when exports have taken China out of the dark ages and into the light, would be something that not even a retarded Chinese equivalent of George W. Bush would attempt.

Advocating that the Chinese should be turned into Americans is so pathetic, I’m almost out of words.


Wait, I have a suggestion: if China actually were a communist country, exactly as described by Marx, then it would export almost nothing. So, the plan is simple: invade China, overthrow the authoritarian capitalist government, and install a philosophically pure communist rule! Then America can have its wonderful bubble/casino economy back on its feet!






Moreover, I advise that the winner-takes-all voting system should be destroyed.

Ease of Doing Business at Home - Difficulty of Competing Internationally

“Saturn builds cars that Americans wanna buy!!”

I’ve seen this commercial very often in the last few weeks, but the guy in the clip did not really hit the nail on the head, now that Saturn will be closed. Apparently, Saturn did not make cars that Americans want to buy… (They were supposed to merge with “Penske”. Maybe it was George Costanza’s shoddy work on the “Penske file” that killed the deal…)


The Saturn brand was started as a way for American cars to compete with Japanese and European cars. In the commercial, the message is that what Americans now want in a car is fuel-efficiency, design, reliability and other things that are usually associated with foreign cars. By imitating these foreign cars, Saturn has claimed to also possess these attributes. However, just saying it, doesn’t make it so.


It has become blatantly apparent that the American car industry is uncompetitive. It is, however, not only the car industry that is uncompetitive. The U.S. manufacturing industry, about 7% of the economy, has been shrinking steadily for decades, and the size of it is now almost half of what it is in most other industrialized countries, as a portion of GDP.


There are several reasons for this, but one of the most important ones is that U.S. industrial goods cannot compete in the international trade arena.


It is quite easy to get a grip on the market dynamics of a domestic market; the market within just one country. For instance, if you raise the fuel efficiency standard on cars, cars will become more expensive, and in the short term, fewer people will buy them. That’s the easy bit.


Industrial products, and cars in particular, are for the most part dependent on international trade. When it comes to very advanced industrial goods, it is usually not possible to sell them in a single market and still be profitable; you need more customers, and industrial products almost always fit in to some type of chain of products that are dependent on each other.


For 30 or 40 years in the western industrialized world, a steady stream of legislation and industrial policies have followed much the same path. Legislation with respect to efficiency standards, safety standards, health care, vacation time and much more has followed the same trajectory in most industrialized countries: a significant increase in these standards and rights.


However, the exception is the United States.


As I outlined in my post about circular looting, (in the list to the right on March 19) I believe that the political system which allows large-scale corporate donations to politicians has created a “business-friendly” climate in the United States. This climate has been developing over the last 30 or 40 years, and has led to policies that make it as easy as possible for companies to turn quick profits in the U.S., at the cost of long-term perspectives.


Think of it this way: as U.S. automakers were making money selling gas guzzlers in the U.S. (while not being able to sell them elsewhere), automakers in Europe and Asia were being subjected to ever stricter regulations on efficiency standards, forcing them to develop better engines. In the U.S., on the other hand, the powerful industrial companies have stood in the way of any changes that might hurt their bottom lines in the short term.


This process also applies to a lot of other areas. European and Asian automakers had to deal with higher costs for vacation time, labor rights and taxes. This was by no means easy for these companies, but what this actually does in the long term is to make them more competitive.


The politicians of Europe and Asia developed this legislation because they thought it was the right thing to do. A cleaner environment and 6 weeks of vacation for everybody were simply seen as moral imperatives. They did not think of the eventual side effects.


Because industrial companies in Europe and Asia have had to fight much harder to remain profitable, they have developed better products and improved productivity and technology, while they have also had less of an impact on the environment and created better working conditions.


(Nowadays, it is widely known amongst economists that the previous estimates of American workers being more productive than others are not true. The PC revolution did increase this productivity, but it was later just inflated by Wall Street profits, which later turned out to be an illusion of productivity)


OK, I know what you’re going to say: the UAW has cost the American auto industry so much that they are the reason American cars are not competitive. I agree that there is some truth to that. The UAW is what I would call a “labor aristocracy union”. Such unions are very selfish (in the beginning very racist), and have no concern for society as a whole. That is very different from European unions, which would for instance fight for more vacation for everybody, not just autoworkers.


However, the over-reaching of the UAW does not explain the fact that innovation was stifled, and that such massive lobbying to stop any improvements was undertaken for decades. The auto companies also agreed that they should be the ones to pay for workers’ health insurance, which is something I disagree with. This stance comes from the anti-socialist movement of the early 20th century. Again, the companies chose this path themselves.


The short-term perspective of the American industrial sector which has involved fierce resistance to any environmental, safety or labor-related reforms, has brought the sector to its knees. In economic boom times, the American model works. In economic recessions, the weak will be taken to the slaughter.


This is the perfect example of what the Freiburg school of economics is all about: we need capitalism, but the framework within which capitalism exists can make it stronger, and make it function much better.


A “Freiburgian” would say: Saturn didn’t make cars that Americans wanted to buy, because the economic and societal framework surrounding the auto industry promoted a hunt for short-term profits.






Moreover, I advise that the winner-takes-all voting system should be destroyed.

Secret: No More Money Market Fund Protection - The Illusion Continues

This is just a quick note on the state of the market and the economy right now. I am very bothered by the false spin that has been coming out of almost every media outlet and the government ever since this spring. The absence of reasonable economic analysis is almost complete.


The government and the media are currently putting ordinary people at risk by not telling them that certain guarantee programs are ending. As of last week, September 18, the Treasury Department’s ” Temporary Guarantee Program for Money Market Funds” HAS ENDED.


Click to view: http://www.treas.gov/press/releases/tg76.htm (note that this only says that the program will end on September 18, there is no announcement that it has actually ended, which it has)


They obviously don’t want anyone to know this, because they don’t want anyone to withdraw money from these funds. If you remember, this program was started last autumn, because the withdrawals that were seen during the most chaotic days could have absolutely destroyed the stock market. The program was initiated not out of concern for ordinary people who had money in these funds, but as a way to support stock prices. The consideration is the same today.


I have not seen a single media entry, except one mention on the CNBC website, telling this story. The problem with these funds is that people see them as savings accounts. In fact, a lot of the money is invested in stocks, and although the fund will not swing like stocks, there is a much higher risk of losing all your money. There is no FDIC protection. A lot of people in Britain and The Netherlands lost money in this way last year.

There are a few people who seem to be keeping an eye on things though. The government is about to hit its debt ceiling of 12 Trillion Dollars soon, and the word is that Geithner is about to ask for it to be raised. In other words, the government has spent so much money bailing out anything and everything, that the $700 Billion last year is now like a spit in the bucket. The question will soon become: who will bail out the government? The situation is really serious now. Please take a look at CNBC's Heidi Moore's article on that:

http://www.cnbc.com/id/33019073/

The absolute surge in stocks over the summer was not something that I foresaw. I am flabbergasted at it. Then it came to me; this is the same pattern as during the depression. Here’s what happened back then:


- 1929: crash


- Early 1930: stock market up by 50%


- Late 1930: stock market down 50%


A lot of things are different now, but I wouldn’t be surprised if the same thing happens within 4-5 months. By this I mean, of course, that the crash and the 50% surge has already happened, and we're just waiting for the 50% drop. After that, all the terrible mistakes that the Treasury, the Fed and Congress have made will become very apparent. They have essentially done everything wrong in the handling of this crisis.


This is my basis for this accusation: this crisis has been dealt with as if it were a smaller, cyclical crisis, but the medicine has been administered on a massive scale. I believe that this is a structural crisis, and that none of the cyclical theories apply. Now we will only get debasement of currency, more unemployment, and a downward-spiraling trend.




Moreover, I advise that the winner-takes-all voting system should be destroyed.

Low-Hanging Fruit

Over the last few months the American media has been reporting that the economy seems to be recovering across the board. The stock market has risen almost 50% on these news, anticipating a full-blown recovery.


I have argued before that the supposed recovery is only an illusion, and I will continue to explain why below. I would also like to remind readers that this year’s pattern in the stock market is actually very similar to the pattern during the Great Depression (I won’t go into that further right now, but I recommend reading John Kenneth Galbraith’s “The Great Crash of 1929).


News stories tend to be self-reinforcing. Journalists feed on each other’s sentiments and the reactions from readers. That is why you get news cycles that eventually peter out, while others take their place. In yesterday’s New York Times, Robert Schiller makes the connection between news cycles and the stock market in the article An Echo Chamber of Boom and Bust.


In my view, what Schiller argues is a somewhat exaggerated view on the impact of news cycles on the stock market, but I think the Schiller’s thesis is nevertheless relevant at this point in time.


Journalists in the mainstream media are generally painfully ignorant of economics as a subject. On the CNBC website, I went through all the profiles of the journalists that I regularly see on the network, and only ONE person, Michelle Caruso-Cabrera, has any sort of degree in economics (she is, by the way, a border-line fascist, so her “insight” should be taken lightly). The so-called “chief economics reporter”, Steve Liesman, seems to have no education whatsoever in economics.


Without really knowing what they’re talking about, journalists have over the last 6 months or so all jumped on the recovery story bandwagon. I’m not sure how it started, but it might have been because of the stimulus money, the supposed optimism of the Fed and other government officials, but the recovery story in its essence is this:


The economic crisis is leveling out


“Leveling out” is a term that usually implies that the worst is over and that a change in direction is about to come. However, I would argue that it definitely does not have to mean that, and in the case of this crisis, does not mean that.


By far the most important measure of how well an economy is doing is employment. The “real unemployment rate” in the U.S. is currently between 16% and 18%. That is basically the percentage of people of working age who don’t have jobs (and who don’t study, are housewives or are on disability). That is in my mind the only relevant figure. One of the most important factors in the “recovery story” is that job cuts are leveling out. In other words, companies are currently cutting jobs at a slower pace.


As the economic crisis has been going on for over a year, this makes perfect sense. What companies have been doing is that they’ve been picking low-hanging fruit. They’ve been laying off staff-members without whom they can still function, in order to preserve cash. They’ve gotten rid of an extra secretary, some superfluous salesmen, and they’ve stopped having donuts delivered every morning.


When companies have gotten rid of all their non-essential spending, they couldn’t possibly get rid of more spending at the same pace without drastically changing their business model and becoming an entirely different company (although this has happened as well). That job cuts are leveling out is an economic inevitability.


To illustrate this, I would ask you to think of the U.S. economy as a regular guy. This guy loses his job. This is what he will probably do:


1. He’ll stop going as much to restaurants


2. He’ll stop taking expensive vacations


3. He won’t buy a new car


What this guy is doing is picking low-hanging fruit. He is cutting down on non-essential things, but, for now, he won’t do something radical like selling his house. As a result of cutting down on expenses, he now has more money than he would have had if he had kept going as if nothing happened, but that does not mean that he is on his way to recovering his old life-style. He has not gotten a new job.


In order for our guy to keep cutting down on expenses, he would have to do something more radical, like selling his house and moving into an apartment. He’s very reluctant to do that, because that would radically change his life-style.


Just like the guy has not gotten a new job, and keeps cutting down on expenses, U.S. companies don’t have any new or improved revenue streams. Demand is not up, domestically or abroad. U.S. exports are not very successful, judging by the trade deficit. For U.S. companies to start hiring again, and for the guy to get a job again, the money has to come from somewhere. you can’t just will it to happen, or magically create it.


The important thing to remember is that companies are still cutting jobs, at a pace that would have been utterly frightening only three years ago. This means that, if anything, demand for goods and services will keep going down and down and down. This will force companies to cut even more jobs, and the cycle continues.


So I ask again: what has improved? A leveling out is not an improvement. This is the basic thing that U.S. journalists do not seem to understand. Journalists have been jumping for joy, saying that the car industry is coming back as a result of the “cash for clunkers program”. But again, where’s the money coming from? It’s coming directly from the government, so the “improvement” is just an illusion.


When the government hires someone, it is not “job creation”, and when the government spends money, it cannot be counted as economic improvement. Government spending can do all sorts of things, but it is a type of economic activity that must not be confused with the market. With respect to the “clunkers” program, government spending is a zero-sum game.


In conclusion: how do you know when the economy is improving? Let me present a few alternatives:


1. You export your way out of the crisis, like Sweden and South Korea did in the 1990s. You sell more abroad than you buy from abroad = more money for the country.


2. You inflate a new bubble of some asset class and try to convince people that the price of this asset class will continue to go up forever. It seems to work for about 5 years and then do a lot of damage, while the elite has gotten richer. This is the traditional approach in the U.S., and the one that seems to be in the works right now.


3. A massive technological leap forward radically improves productivity, like it did during the industrial revolution, and to a smaller extent, in the 1990s with the PC revolution.


4. You permanently re-align the economy at a lower place with lower amounts of consumption compared to before, as Great Britain had to do when the empire slowly crumbled over a few decades. This is also a possibility for the U.S..






Moreover, I advise that the winner-takes-all voting system should be destroyed.