Posted by Michael A. Kamperman on June 22, 2010
Here we go again. China once again throws us a bone to pacify the barking dogs calling for reform. First China “pretended” to run a trade deficit right before the Treasury had to declare whether or not China was a currency manipulator. Predictably, Geithner took a pass. The next month China once again ran a huge trade surplus. Now China has decided to adjust its currency, the yuan, to a basket of currencies including the euro and the yen as well as the dollar. This decoupling of the dollar is nothing more than a smoke and mirrors trick. China still plans to go “slow.” In fact, Nouriel Roubini pointed out this new structure would allow China to actually weaken its currency against the dollar in the event the euro and yen were to fall significantly against the dollar. What is actually happening is having the yuan tied to the dollar has stuck China with the unintended consequence of seeing its currency rise in value against the euro, whose countries represent its largest trading partner. Despite all the talk about China being concerned about our fiscal position China never took the step to diversify away from the dollar when the dollar was weakening against other currencies. Now that it is strengthening they suddenly want diversity. And predictably, this move occurs right before the G-20 meeting next week where pressure was about to be ramped up on China to reform. Now they can wink and say they already did.
China’s policies are destabilizing the global economy to the benefit of China. Currently China purchases only one dollar worth of goods from us for every four dollars it sells us. Even Japan is only at a two to one ratio vs China’s four to one ratio. Additionally, China has horrific working conditions for little pay. The time has come for the U.S. to tell China the free ride to development is over. Not only must China begin to import more goods, but it must also begin to improve working conditions and raise workers pay. If this costs it some exports, then so be it. There is a direct link to the debt crisis in the West and China’s flooding Western market with cheap goods based on a manipulated currency on the back of all but slave labor. Workers in the West that are forced to compete are being forced to take big pay cuts. Less income reduces their ability to pay their debts.
The upcoming G-20 summit represents an opportunity for President Obama to stand up and be counted. He should not tell others simply what they want to hear. He should not concern himself with America’s likability by the rest of the world. he should tell China the jigs up and gradualism they crave is unacceptable. He should tell Europe, particularly Germany and the U.K., that austerity will solve nothing and will ultimately trap the Western World in a prolonged debt induced depression. He should stand up for Radical Keynesianism. It’s actually comical that the Great Depression of the 1930’s demonstrated Keynes was right and the Austrian Economists were wrong. So who is the world turning to during the next debt-induced Great Depression but the Austrian Economists. Finally, he should then turn the microphone to the U.S. Congress and admit the stimulus bill he championed was too small, not too big. He should lay before them another stimulus bill for 2011-2012 of more than one trillion dollars. This time he should he include massive infrastructure spending, which will improve America’s productivity. He could show real leadership. While not holding my breath, I remain hopeful.
Posted by Michael A. Kamperman on November 10, 2009
Next Next week President Obama is scheduled to travel to Asia. He will go to China and the early word is he intends to confront Chinese leaders about their manipulation of their currency the yuan. It does not float freely against the major currencies of the world like the dollar, yen, pound, and euro. Instead the yuan is fixed to the dollar at an exchange rate that is too low and it gives China a competitive advantage in competing for exports against almost every other nation in the world. It also makes imports in China expensive thereby encouraging domestic production. President Obama and most world leaders would like to solve their economic problem of creating jobs by expanding exports to other countries. China’s cheap yuan is an obstacle to achieving this goal. If the global economic pie were expanding then China’s cheap yuan would be an annoyance. But because the pie is shrinking other nations are jealously eying China and looking for ways to either gain some of China’s export jobs or get some of the jobs they shipped to China back. Also, most nations not only want a bigger share of China’s export market, they want a bigger share of China’s domestic market. The concept of rebalancing global trade is a good thing as long as it is about having China buy a lot more from us, not sell less to us. It is a good thing as long as it is focused on expanding the global economic pie and not focused on getting a bigger share of a shrinking pie. China has had to pivot its economy to focus more on the domestic market in order to maintain its economic growth targets because global trade has shrunk by almost 20% in the last year.
President Obama risks a global trade war if his focus is on cutting China’s share of global trade rather than on having China open its markets to outside competition more quickly. The value of the yuan is not main the problem. It is merely one of the tools China uses in its strategy of shipping as much as it can in finished goods to everyone else and buying as few finshed goods as it can from everyone else. The President needs to emphasize that trade with the U.S. and other developed nations is on a quid pro quo basis. China never should have been allowed to manipulate its currency. But because China is actually the world’s second biggest economy, then any abrupt change in yuan policy could cause unintended consequences. It is best to slowly position the yuan to float over time and in the short run to focus on having China quickly open its domestic markets to world exports.
President Obama will not be able to solve the America’s economic woes simply by focusing on exports. The U.S. economy is currently around $14 trillion and global trade ex-U.S. is currently around $11 trillion. Of this amount about 40% is regionally based between neighbors, similar to our inter-state commerce. Additionally, approximately 20% of global trade is energy related. This leaves about $5 trillion worth of ocean-crossing tradable goods and services above and beyond the $1 trillion we already have. Other nation’s are not going to willingly turn their share over to us. If ocean-crossable global trade expanded by 50% and we captured 50% of the increase, it would still represent less than 10% of the U.S. economy. Never mind the question of how will the world grow 50% if the U.S. consumer is forced to sit on their wallets? What President Obama should tell China is to open up their markets or we will shut ours. Then, he should come home and work on fixing the broken credit markets and creating jobs for Americans whereby they make and sell things to the world’s number one consumer, namely other Americans.
Posted by Michael A. Kamperman on October 9, 2009
Some Governors at the Fed have recently been speaking out about the need for a rapid exit strategy from the Fed’s accommodative policies. They must think a speculative pop in the markets is equivalent to price stability and economic stability, which are the two things the Fed is charted by Congress to focus on. Is the home listed from a realtor down the street from you in a bidding war? Is your friend from college who has been unemployed for a while inundated with job offers? The American people are suffering. They are unemployed and they cannot sell their home because their mortgage is underwater. The objective of the hawkish Fed governors speaking about the need to have a rapid exit plan is not intended to push for interest rates to be raised in the near term. The comments are intended to push for an end to quantitative easing and the other policies the Fed has put in place to provide extra support to the economy. To date the Fed has done too little, not too much. Consumer credit fell another $12 billion in August despite getting a big boost from auto loans because of the cash for clunkers program. The banks are continuing to tighten credit standards. Auto sales fell back to extremely depressed levels in September as soon as the clunker program ended. Home prices will begin falling again now that the first time home buyers tax credit is no longer driving home sales. How could anyone at the Fed be worried about exit strategies when the real U-6 unemployment rate is 17%.
The hawkish Fed governors are simply too concerned about inflation returning. They see the dollar falling and gold reaching new highs and they assume the markets are signaling significant inflation is just around the corner. Not a chance. Real wages in the last unemployment report rose by only a penny over the preceding month. Hours worked fell to 33.0. Every industry has significant amounts of idle capacity. Inflation comes from too many dollars chasing too few goods. Since over half of the country has a subprime credit score, access to cash to purchase goods is restricted. Since industrial capacity is still way below 80%, there is no shortage of goods in any sector of the economy. Until these dynamics change there is no reason to fear inflation. It doesn’t matter how high gold gets, because the fundamentals of the economy will not support inflation.
What the hawkish Fed Governors should be panicked about is deflation. The fundamentals of the economy point to deflation. In the Great Depression deflation ended in 1933 after FDR declared a bank holiday and created FDIC, which ended the bank runs and brought money out from under the mattresses and back into the banks. He also ended the physical exchange of paper dollars for gold. He ordered the conversion of gold money for $20.67 per ounce in U.S. paper dollars. Then, in January of 1934 FDR devalued the dollar by 40% by raising the gold per ounce conversion rate to $35. We have no such tricks up our sleeve today to end deflation. What we do have to end deflation is quantitative easing. The Fed Governors need to be talking about why they need to print more money rather than how quickly they are prepared to withdraw support for the economy.
