Archive for category Foreign Trade
Will China Fall Off the Seesaw?
Posted by Tom in Centrally Managed Economy, Financial Policy, Foreign Policy, Foreign Trade, Monetary Policy, National Debt on April 2, 2010
In the second of three major Stratfor’s geopolitical updates Peter Zeihan treats, China: Crunch Time. (Note: last month’s predictions on Germany were prescient. See: Germany’s Upcoming Remake of the European Union.) In this analysis of China Zeihan discusses the rebalancing that the major commercial nations are currently undergoing and indeed striving to attain.
China’s economic system is inherently unstable. It is closed, highly regulated, overly export dependent, without private capital allocation, and dependent on a controlled currency. Historically this is much like Japan and East Asia in the ’90s. China “funnels these massive deposits via state-run banks to state-linked firms at below-market rates. It’s amazing the growth rate a country can achieve and the number of citizens it can employ with a vast supply of 0 percent, relatively consequence-free loans provided from the savings of nearly a billion workers…It’s also amazing how unprofitable such a country can be. The Chinese system, like the Japanese system before it, works on bulk, churn, maximum employment and market share.” The consequent effects include: inefficient capital use, a large number of property bubbles, regional disparity, a tiny consumer base, and over-dependence on exports, foreign consumption.
A major structural factor in the global economy that has the past 30 years protected China is also a core tenet of U.S. foreign policy: Bretton Woods. Bretton Woods was essentially an agreement between the U.S. and the Western allies that gave the allies near duty-free access to American consumers in exchange for the right of the U.S. to call the shots in security and foreign policy of the rebuilding allied nations. “In essence, the Americans took what they saw as a minor economic hit in exchange for being able to rewrite first regional, and in time global, economic and military rules of engagement.” Thus was the USSR contained. China eventually benefited.
The Obama administration is rethinking Bretton Woods, ostensibly to update the global financial system, but in reality the National Export Initiative is much more mercantilist calling for the doubling of U.S. exports in five years and targeting countries like China. While the NEI is vague as to method and optimistic in aim, it spells a policy shift. Trade policy will no longer be subordinate to foreign and military policy but potentially “a beast unto itself!” Zeihan gives the 1980s Japan as his perfect analogy, not a good outcome for China.
China has no good options. “China, which unlike Japan is not a U.S. ally, would have an even harder time resisting should Washington pressure Beijing to buy more U.S. goods. Dependence upon a certain foreign market means that market can easily force changes in the exporter’s trade policies. Refusal to cooperate means losing access, shutting the exports down.” China’s only recourse would be to stop purchasing U.S. debt which is unlikely: a. Beijing can’t safely invest in China’s undeveloped capital markets. b. And the bond purchases largely fuel U.S. consumers’ ability to buy China exports. We are China’s market with more disposable income than all China’s other markets combined!
“STRATFOR sees a race on, but it isn’t a race between the Chinese and the Americans or even China and the world. It’s a race to see what will smash China first, its own internal imbalances or the U.S. decision to take a more mercantilist approach to international trade.”
For another somewhat similar perspective see the Economist article, Hope at last.
This report is paraphrased in part and republished republished in part with permission of STRATFOR. I highly recommend becoming a member.
Germany’s Upcoming Remake of the European Union
Posted by Tom in Economics, Foreign Policy, Foreign Trade on March 16, 2010
Stratfor’s Peter Zeihan pens a dynamite geopolitical intelligence report this week on Germany, the first of three key national reports. He starts out with the geographic and historic perspective: Germany lying between Russia and France wanted economic and military dominance. Its strategy in 1871, 1914, and 1939 was to avoid a two front war by pre-emptively attacking France. After WWII the allies sought to reshape the regional dynamic so that Germany’s military policy would be subordinated to NATO and its economic policy subordinated to the European Community, eventually the European Union. Germany got what it needed economically so it didn’t seek it militarily; Europe got German capital and economic dynamism.
Stratfor points out that this money-over-sovereignty paradigm was best represented by the euro. But Stratfor always doubted that the euro would last. “Having the same currency and monetary policy for rich, technocratic, capital-intensive economies like Germany as for poor, agrarian/manufacturing economies like Spain always seemed like asking for problems. Countries like Germany tend to favor high interest rates to attract investment capital. They don’t mind a strong currency, since what they produce is so high up on the value-added scale that they can compete regardless. Countries like Spain, however, need a cheap currency, since there isn’t anything particularly value-added about most of their exports.” Stratfor anticipated the high inflation in the poorer states that gained access to capital they could not qualify for on their own merits. That access would also generate massive debts.
Both the inflation and the massive debts have come about as have the budgetary accounting tricks to hide the debt. As we have seen the rich nations are unwilling to bail out the spendthrifts. Stratfor “became even more convinced that such inconsistencies would eventually doom the currency union, and that the euro’s eventual dissolution would take the European Union with it. Now, we’re not so sure.”
What if Germany used the current crisis to re-wire the European Union and Euro to its own purpose? On March 13th German Finance Minister Wolfgang Schauble said that if the weak spendthrift nations could not right their finances they should be ejected from the eurozone! Germany is willing to publicly talk about the re-engineering of Europe. Schauble is a recognized powerful figure; he doesn’t make such statements lightly.
Stratfor displays the inflation in terms of labor costs to show Germany’s dominance and corresponding reluctance to support the freeloaders. Note that in the past 10 years Germany has gained about a 25% cost advantage over the “Club Med” spendthrifts:
Stratfor concludes: “The paradigm that created the European Union — that Germany would be harnessed and contained — is shifting. Germany now has not only found its voice, it is beginning to express, and hold to, its own national interest. A political consensus has emerged in Germany against bailing out Greece. Moreover, a political consensus has emerged in Germany that the rules of the eurozone are Germany’s to refashion.” In short, Germany is calling the shots, AND HAS EARNED THE RIGHT TO CALL THE SHOTS!
This report is paraphrased in part and republished republished in part with permission of STRATFOR. I highly recommend becoming a member.
Tom Motherway
Our Creditors Are Nervous……..Do You Blame Them?
Posted by Tom in Centrally Managed Economy, Deficit, Financial Policy, Foreign Trade, Monetary Policy, National Debt, Nationalized Health Care, Social Security, Statism, Welfare on March 15, 2010
Bloomberg reports today that China and Japan reduced their holdings of U.S. Treasuries again in January. In fact, China has been a net seller for three straight months.
“Chinese Premier Wen Jiabao this week sought assurances that the U.S. will protect the value of China’s dollar assets. At a press conference in Beijing marking the end of China’s annual parliamentary meetings two days ago, Wen said dollar volatility is a “big” concern and “I’m still worried” about China’s U.S. currency holdings.”
“Wen urged U.S. officials to “take concrete steps to reassure investors” about the safety of dollar assets, repeating concerns that he expressed a year ago, sparked by a growing U.S. fiscal deficit.”
“China’s share of U.S. bills, notes and bonds in January amounted to 24 percent of the total $3.7 trillion in Treasuries owned by investors abroad, up from 19 percent three years ago, according to Treasury data.”
With record Obama deficits, unsustainable national debt, and gigantic unfunded liabilities from welfare programs like Medicare, Medicaid, and Social Security inflation is a real threat. Add to that the demographically certain bankruptcy of these programs, the worry becomes all the more acute. Instead of a sober attempt to remedy the situation we have a socialist president on a hell-bent-for-leather campaign to add to welfare with Obamacare’s takeover of 16% of the U.S. economy. So Obama’s answer to a non-economic, non-functioning welfare system is to add a gigantic new program to it. How, with gimmicks and double counting!
If your a creditor with long-dated U.S. paper it’s reasonable to think you will be paid back with devalued dollars. And given the uncertainty caused by Obama’s socialistic, statist push of the economy, it’s reasonable to think that American consumers will not be back to buy your exports anytime soon. How can they, they don’t have jobs!
In short, our creditors should worry. And we should worry all the more!
Tom Motherway
SNL Recalls Its Mission-Better Late Than Never
Posted by Tom in Foreign Policy, Foreign Trade, Humor on November 23, 2009
Mark Toomey alerted me to this very funny Saturday Night Live opening skit. Funny, unless of course you name is Barack Obama. (Parental Discretion Advised)
Add Italy to the Shit List
Posted by Tom in Defense, Foreign Policy, Foreign Trade on November 6, 2009
Where will Obama’s Eurocentric worldview lead? Yesterday’s news tells of Italy’s conviction, in absentia, of 23 Americans (CIA agents) charged with kidnapping Osama Mustafa Hasan Nasr and taking him out of Italy and eventually to Egypt. No question of Nasr’s terrorist connections as Italian security forces were cooperating with our CIA operatives. The conviction violates a long-standing principal of international law that officials of foreign governments operating within a country with official consent are immune from prosecution.
Today’s WSJ editorial makes the cogent and obvious point that if American intelligence officials can’t safely cooperate with their in-country counterparts, the both nations are less safe.
We saw in May the results of the Obama worldview when Spain’s top investigative judge launched a new criminal investigation into allegations of torture at Guantanamo Bay indicating that he would investigate high-level Bush administration officials!
Has Obama’s bowing and scraping and apologizing for America taken us to this new low? Does he intend to completely sacrifice US sovereignty to the filth of the UN?
I fear for our nation and our security under this president. And like the 23 US intelligence operatives “convicted,” I will no longer travel to Italy nor will I buy any of its products. Italy, Spain…the shit list is getting longer! Wonder who’ll be next?
Tom Motherway
Dollar Reaches Breaking Point
Posted by Tom in Foreign Policy, Foreign Trade, Monetary Policy on October 12, 2009
Who will fund the record breaking Obama deficits? The dollar is falling as it should with anticipated Obamaflation. Of course Obama and the Democratic Congress are not helping by taking the strong protectionist tack that their union owners demand. This from Bloomberg:
Policy makers boosted foreign currency holdings by $413 billion last quarter, the most since at least 2003, to $7.3 trillion, according to data compiled by Bloomberg. Nations reporting currency breakdowns put 63 percent of the new cash into euros and yen in April, May and June, the latest Barclays Capital data show. That’s the highest percentage in any quarter with more than an $80 billion increase.
World leaders are acting on threats to dump the dollar while the Obama administration shows a willingness to tolerate a weaker currency in an effort to boost exports and the economy as long as it doesn’t drive away the nation’s creditors. The diversification signals that the currency won’t rebound anytime soon after losing 10.3 percent on a trade-weighted basis the past six months, the biggest drop since 1991.“Global central banks are getting more serious about diversification, whereas in the past they used to just talk about it,” said Steven Englander, a former Federal Reserve researcher who is now the chief U.S. currency strategist at Barclays in New York. “It looks like they are really backing away from the dollar.”
via Dollar Reaches Breaking Point as Banks Shift Reserves Update3 – Bloomberg.com.
Obama’s post American world will be dramatically weaker and much poorer.
Tom Motherway
Costs of “Rent Seeking” Behavior?
Posted by Tom in Foreign Trade, Government Regulation on August 22, 2009
We are in the midst of an economic recession, people have lost jobs, can’t make mortgage payments, and some can’t afford groceries. Yet, in the USA the rent-seekers profit by destroying food AT THE CONSUMERS EXPENSE! This is nothing short of a hidden tax benefiting the rent-seekers.
Two articles in this weekend’s WSJ stand out in this regard. The first pictures 72,000 pounds of tart cherries, one farmers allocation, rotting because he was forced to dump them under a price-stabilization program. The second suggests that Obama’s Agriculture Secretary Tom Vilasck will maintain the current import quotas to support the price of sugar despite warnings that there is an impending sugar shortage, even though sugar is used in many of the foodstuffs we consume.
Now, I’m not suggesting that this is an Obama originated problem, it’s an age-old problem indeed. But, it is a horrible economic drag, not only in the USA but worldwide.
I wonder if our economic think tanks can publish a listing of the rent-seeking drags on our economy and attempt to quantify the economic effects on our society, both here and worldwide. This should be a worthwhile education process for the voters and the taxpayers.
Tom Motherway, tom@renohayek.com
Is the System Broken? Where is the Common Good?
Posted by Tom in Foreign Trade, Politics on August 6, 2009
Today’s (8/6/09) WSJ editorial page discussed Obama’s courtship of Republican Chuck Grassley’s vote on the Obamacare package. Seems like a straightforward persuasion attempt. But in a totally off-point issue, Grassley’s desire to support the flagrantly protective tariff against Brazilian sugar based ethanol in favor of the less effective corn ethanol supported by the tariff for his constituents, becomes the trading point, the political point, the unseen point of so-called “compromise.” The editorial hopes that Grassley won’t make Americans pay twice! Good luck!
There is no more common good. This ingrained political behavior is economically called “rent seeking.” For the fat cat corn growers the mandates and tariff bases price supports feed the revenue that would otherwise be non existent. Growers would otherwise need to get an honest, read “economic,” job. That’s too much trouble when the government is there to fund them! For the politicians, the Grassley’s of this world, this “rent seeking” is “contribution seeking” and ultimately “vote seeking,” to sustain them in office.
The Republicans are just as bad as the Democrats in this regard. Frank Murtha logically argues that if he didn’t get the earmark for his district some other Congressmen would get the money for his! It’s a way of life. I fear, it’s unchangeable. The lesson: join the rent seekers or perish? No, that’s not morally correct. That’s not competitive. That will not bring out the best! And, in the end, we will ultimately lose.
By the way, in the same August 6th WSJ, Chad P. Brown has a good op-ed called “Protectionism Exposed.” In it he touts a World Bank website which he helped organize that set outs the various protectionists measures which if unchecked will bring the demise to world trade. It’s worth the look.
Tom Motherway, tom@renohayek.com