Now let’s shift to Richard Weltz’s American Thinker post, Anyone Want to Connect the Petro-Dots? quote:

• George Soros and his various money-distribution organizations such as MoveOn.org spend heavily on behalf of Obama’s run for the presidency.
  
• Soros invests over $800 million for a large stake in Petrobras, the Brazilian oil company.
• The U.S. arranges for the Ex-Im Bank to guarantee loans of $2 billion to Brazil for exploration of offshore oil finds. end quote.

Victor Davis Hanson highlights President Obama victory lap in Brazil: “Last week, President Obama went to Brazil and declared of that country’s new offshore finds: “With the new oil finds off Brazil, President (Dilma) Rousseff has said that Brazil wants to be a major supplier of new stable sources of energy, and I’ve told her that the United States wants to be a major customer, which would be a win-win for both our countries.”

The administration has run record deficits, generated record unsustainable debt, and generated 9% unemployment in the process, so what does it do? Shuts down virtually all oil exploration and promoted bullet trains and the already failed Chevy Volt which runs on gas.

Who wins, the American workers? No. The American consumers? No. George Soros? Why yes! The value of George’s Petrobras investment has multiplied dramatically. The profits generated with the Brazilian offshore production will be tremendous. Oh, and those profits will be enhanced with the subsidized financing provided by Eximbank!

One more thing, who do you think Soros will support in the 2012 presidential race?

Aha, the ethanol monster raises its ugly head! This blog has discussed the horrible economic and environmental impact of ethanol several times. See for instance: Flushing Your Money Down the Drain and Gore Took His Profits…Can Congress Take Its Losses?. Congress of course did not take its losses but continued on the path of subsidy, mandates and restraint of trade that is the foundation of ethanol.

The impenetrable roadblock to economic rationality here is the union between the big farm lobby and the environmental lobby. Corporate farmers dominate. They are rent-seekers pure and simple. They take your hard earned dollars all the was to the bank as compensation for producing a useless product that absent government mandates no one would buy. The environmentalists are emotional tree huggers grasping at pseudo science to satisfy the need to feel good. These two are often on different sides of an issue, but here they are in bed together.

What is sad to me is to see intelligent politicians like Newt Gingrich support and are paid by the farm lobby. I guess everyone has his price. And no political party is immune to the trade!

He attributes the major cause to “quantitative easing,” the artificial creation of money as a way to spur full economic recovery. Theoretically this is supposed to lift spending and thus lift businesses; in essence it’s supposed to prime the pump.

“What really happens is that the money first goes to the financial markets, whose players mostly create bubbles by investing in whatever is fashionable. The reason is twofold. One, financial players expect to make quick money. Two, families and businesses reeling from the credit excesses of recent years are not ready to borrow as much as their governments say they should (the personal savings rate has trippled in the U.S. since 2007) and banks are probably not willing to lend as easily as they used to.”

“For a while, then, it looks as if more quantitative easing is necessary because consumption remains insufficient and unemployment high. So central banks print even more money. To justify themselves, sometimes they point to (highly unrepresentative) consumer price indexes that show low inflation. Until, of course, it is too late and the symptoms begin to show up everywhere.”

Llosa points out that even the Fed’s efforts are being discovered for the fraud that they are. Ten year Treasury yields have shot up, despite efforts of the Fed to keep them low by printing money. This is of course dishonest. “What governments, particularly in the United States and Europe, are doing is attempting to whittle down their huge debts by debasing their currencies while continuing to borrow scandalous amounts of money. They are also hypocritically using the devaluation of their currencies brought about by quantitative easing to compete internationally — while accusing others, with good reason, of manipulating their own money to keep up their export machines.”

Watch out, the endgame will be painful, perhaps worse than the Carter years!

This for the simple reason that China is the world’s second biggest economy. It’s the exporter to the west and a major holder of US dollars to which its value is pegged.

Who would buy and hold Yuan? Who would import anything from China, that’s who. In fact those who import may also export. How happy they should be to avoid messy currency conversions.

Is the Yuan a good proxy reserve currency? Almost to the extent the dollar is a reserve currency.

So, some of the speculation in the Oster, McMahon, Lauricella article, Offshore Trading in Yuan Takes Off, makes abundant sense.

“Already, banks such as Citigroup Inc. and HSBC are offering investors yuan-priced options and interest-rate derivatives. Mutual funds dedicated to yuan-priced investments have already been created.”

“The move has opened the doors to wider issuance of yuan-denominated bonds and other investments. McDonald’s Corp. and Caterpillar Inc. recently became the first U.S. non-financial corporations to sell debt priced in yuan, in what is being nicknamed the “Dim Sum” bond market.”

“A big driver of the increase in yuan holdings offshore is emerging economies, major trading destinations for China. HSBC forecasts that at least half, or nearly $2 trillion worth, of China’s cross-border trade with emerging markets could be settled in yuan annually within three to five years.”

“For example, countries rich in natural resources that export commodities to China could get paid in yuan and then use the yuan to buy finished goods and services from China—cutting out the cost and hassle of converting to dollars.The moves come against a broader background of growing Chinese concern over the country’s reliance on the dollar.”

“Long term, the offshore yuan market could decrease demand for the dollar and lower its value. That’s in part because Chinese companies doing business with counterparts in other countries wouldn’t need U.S. dollars to conduct that business as they do today.”

China is on the move. The international Yuan trading is a positive step in making global trade more efficient. It may soon be convertible and compete with the US dollar as a reserve currency. In that eventuality, the US fiscal house had better be in balance, because our reserve currency pinnacle will no longer provide a safe haven for our spendthrift ways.

We won’t reduce deficits and their concomitant generation burdening debt until we reform congressional spending. Listening to another commission or task-force will not do the trick. Congress must get serious and tell the truth to the America people–there is no free lunch, THERE IS NO FREE LUNCH!

In addition to reducing the deficit, we must promote an environment for growth: certainty of taxation well into the future, certainty of limited regulation of business, and elimination of rent-seeking-giving subsidies and regulations.

All the principles of freedom and growth are anathema to the current state of Obamaism: Instead of reforming Medicare, Medicaid and Social Security Obama’s Democrats added Obamacare as an additional unsustainable entitlement with concomitant business and personal uncertainty. Instead of cleaning up the Fannie-Freddie generated financial mess Obama’s Democrats continued the charade of propping them up to do more future damage. Instead of cutting unnecessary spending, Obama’s Democrats passes such folly as cash for clunkers and bought GM for the UAW. So, bottom line, oppose Obama’s Democrats while they’re in office and turn them out of office ASAP.

A few basic economic growth imperatives;

• Repeal Obamacare while eliminating employer tax benefit subsidies, while eliminating interstate insurance competition barriers and while enacting stringent malpractice tort reform; reform Medicare over time as a high-deductible insurance policy with means testing; and reform Social Security with later retirement, means-testing and private accounts as an option for the means tested high-earners.
• Go for a flat, low-rate income tax both personal and corporate, eliminating extraterritorial corporate taxation, and all personal deductions, including home mortgage deductions.
• Eliminate all federal agency rule-making. If Congress can’t define it specifically as a law, then it should not govern, period! Now, there will obviously be extremely well defined and narrow exceptions to this like the difference in typeface, boldness or color of signs and warnings!
• Abolish all subsidies and mandates, farm subsidies/mandates, green subsidies/mandates, ethanol subsidies/mandates. If a product or service is not in and of itself economic enough or green enough to make it in the free market, then it should fail. In no case should it be subsidized.
• Eliminate all trade barriers that protect unions or their work rules. The Mexican trucking proscription under NAFTA is an example.
• Negotiate, sign and ratify as many free trade deals as are reasonable. As the world’s largest consumer, we hav the leverage, if we would only use it intelligently.
• Preclude all public service unions. Repeal Taft-Hartley and minimum wage laws.
• Eliminate all unnecessary government spending like, NPR, NEH, Department of Education, etc.
• Eliminate and forego all unfunded mandates to the states. Federalism must be re-energized and government pushed down to lower levels.

We need to get the point across to the American people that we are broke. We can’t afford the free lunches anymore. We need individual responsibility. We are not a socialistic nation.

In short, if we got government out of the way, this country would once again blossom!

• Even if the Yuan appreciates the U.S. trade deficit will not reduce until we reduce our “chronically low”savings rate and diffuse the disincentive to manufacture.
• Washington can’t afford a weak dollar policy because the only thing standing between the U.S. and a Greek style sovereign debt crisis is the dollars status as a reserve currency. (CBO projects debt at 140% of GDP in 20 years!) Reserve currency status in not guaranteed!
• A strong Yuan would reduce Americans’ real income because it would kill U.S. jobs that depend on Chinese exports. The stronger Yuan will reduce China trade, thereby reducing Chinese trade surplus in turn reducing in recycled dollars reinvested in the U.S. promoting economic growth and lower interest rates.
• A strong Yuan would slow China’s rapid growth which is facilitating its transition from export dependency into a more balanced consuming nation.
• Finally, a strong Yuan would hurt and force out some export oriented businesses thus eliminating demand for excess low wage labor and disrupting China’s goal of attaining a “harmonious society.”

Monday’s paper details the planned continued pressure on China, U.S. to Step Up Pressure on China.” Direct pressure and international pressure on China will indeed continue. It has in the past led to small increases in the Yuan and no doubt will continue to do so.  China may in fact revalue to a much greater extent, compelled to do so to control internal inflation.

But will this help a nation of spendthrift dependency brought about by the so called progressive leftists? And, how long will the dollar last as a reserve currency? The international confidence which made the dollar the reserve currency is evaporating. “As sound as a dollar” is sounding laughable.

Obama continues to borrow, tax and spend at an unsustainable pace. He and the Democrats added the unsustainable entitlement of Obamacare upon the unsustainable entitlements of  Medicare, Medicaid and Social Security all growing out of control. The Fed’s continuing monetization of debt, devaluation of the dollar, reduces confidence, the confidence necessary to maintain the reserve currency status. This fiscal and monetary combination is a catastrophe.

Sad that Dee Woo’s arguments are probably correct!

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.

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

“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