Rumors of Wars

26 01 2009

Before a war breaks out people talk at each other, not with each other. When the talking stops war begins. I’m not talking of guns and bombs. I’m talking about trade wars. The first war of words came from the new Obama Administration Treasury Secretary nominee Timothy Geithner. He said he believes China is manipulating its currency.

According to the Washington Post, Song Hong said, “The currency rate (China’s) has already appreciated in recent years. The recent depreciation is small and temporary.” Song is a research fellow at the Chinese Academy of Social Sciences (China’s government think tank.) Song said, “The trade imbalance was caused not by manipulation but because China imports so many semi-manufactured goods from elsewhere in Asia, processes them and then exports them again.” Song added, “It’s possible a trade war will occur between the two countries. Even if the U.S. doesn’t go too far in terms of protectionism, the new government will pressure China, and this can trigger trade conflicts.” The fist shot has been returned.

China does manipulate its currency. That’s no secret. So does the US. The difference is that China’s central government manipulates most aspects of its internal and external economy. The US comptroller of the US currency, The Federal Reserve, manipulates our currency daily with the expansion and contraction of the money supply through various interest rate changes, reserve requirements, purchasing of Treasury bills and so on. Every time the Treasury authorizes a Treasury bond sale, our currency is manipulated. When We The People, through our Congressional representatives raise the debt ceiling, our currency is manipulated. Our manipulation is more complicated and relies on the worldwide open market more partly because of our addiction to debt.

China’s government is the regulator and bank, command and control in one. Since it doesn’t have to beg for countries to buy bonds it’s manipulations can come from a position of strength and are very effective. Yes there are things it could do such as allow monetary flow in and out of the country for a more open market, and thus the criticism.

What are the implications if trade wars begin? Inflation and possible shortages of everything from China. Even if no wars take place and China gradually allows its currency to go with the market, their currency value will rise against the dollar and electronics, shoes, clothing …… virtually everything we buy from them will go through the roof. If strong trade wars take place through protectionism, tariffs and quotas can be placed which will raise prices and infuriate trading partners, businesses and customers. Add to that our fiscal irresponsibility. Because of the emergency measures of spending currently underway we will go into a period of inflation, possibly even hyper inflation. This chart is 1914 to 2008

inflation-1914-2008-pnet

If trade wars break out, interest rates will go through the roof because China will not buy our bonds and will flood the market with the Trillion dollars of our debt it holds. It would also sell our dollars it holds from the trade imbalance instead of buy our bonds and our dollar could plummet again. The last bad inflation period was 1978-1982. Anyone alive then remembers that it was like doing business in financial quicksand. Try to buy or sell a home with interest rates at 19%.

If trade wars break out, the smartest businesses will be prepared by alternate or self sourcing. A massive resurgence of manufacturing in the USA could happen if severe enough. Unfortunately, a real war may be the trigger factor. Will the USA be willing and quick enough?

Now, these problems are gigantic to us, so this little video is to help keep our puny problems in perspective.

Advertisements




Don’t Look At This

14 01 2009

Don’t look at this unless you want to be very bothered – 14.5 Trillion possible for the National Debt by 2010.

What The ....... !!!

What The ....... !!!

In 1983 I wrote a paper called “Social Insecurity” for my English 101 class. I saw the problem back then when the national debt was just tipping one trillion dollars. The social security tax was raised in the Regan Administration from 5% or so to over 7%. Since that time the debt has grown consistently. Economists say that it has to be measured in non inflated dollars so the GNP percentage is used. The problem now is that not only is the GNP shrinking but the spending is going up. The Federal Deficit for the US government is projected to be 1.2 Trillion dollars in 2009 alone.

Think about it. The deficit in 2009 will be greater than the whole national debt was in 1982. The debt in 1870 was 2.5 billion. In 1910 it was 2.6 billion. 40 years and virtually no increase. Since the creation of the Federal Reserve the debt has increased by over 4,500 times. Yes, yes inflation, I know, but inflation isn’t a good thing. I feel very strongly that if we don’t get back to a sound monetary and economic policy, Thomas Jefferson’s fears will come true.

The home price acceleration was artificially created by bad government regulation, 911 fallout and corruption in the mortgage industry and Wall Street. The perfect storm of those factors caused the bubble. What our governmental leaders are doing now is trying to prop up the bubble. It’s like trying to catch a falling knife. Our legislators are not trained knife jugglers and we will be cut deeply by these measures.

Our countries economic situation is like a cancer patient being given heroin and cocaine, heroin to make us think everything is wonderful and cocaine to keep us energetic. The cancer doesn’t go away. The government projected deficit in 2008 was that the debt would be 11.5 trillion by 2012. Depending on what set of books you want to look at, we’re there now. When Pelosi and crew get done by the end of 2010 we could be looking at 14.5 Trillion (a billion just ain’t what it used to be).

The Federal Government has become the religion, the god, the almighty that our founders feared. That is why they built in the limiting enumerated powers in the constitution and the three separate branches. We are now worse off than having a despotic king. Taxation Without Representation caused the Revolutionary War. Taxation Without Competent Representation may cause even worse – Every man, woman and child becomes a slave in the land of the free. We have allowed despotic or incompetent congressmen who control the power of the purse (the president simply has to agree) to run us into the ground. There is a tipping point and we are there now. If all the debt we hold were restructured to pay out 5% (high for now but when inflation kicks in that will be a very low figure) we’d be paying $550 billion per year. When the debt is 14.5 Trillion the interest would be $770 billion, the largest portion of any category of the budget. When inflation kicks in the interest payments go through the roof.

In Fiscal Year 2008, the interest paid was $412 billion. Compare that to NASA’s $15 Billion, Education’s $61 billion, and the Department of Transportation’s $56 billion.

Sorry to give the bad news. The only way to get out of it is to reduce or eliminate benefits and programs. We will have to pay down the debt, something we have not been willing to do. The people scream for more. “Don’t touch my Social Security, or Prescription Drug Program, or my Bridge to Nowhere. We can’t keep what we don’t pay for. The house of cards will fall if we don’t take it down piece by piece.

Do we have the leadership that has the courage and stomach to do the right thing, to do the hard thing? We’re in this bus together. I don’t know exactly the implications of “Staying the Course.” Is the bus heading for a wall or a cliff? Do we really want to add speed to the bus?








%d bloggers like this: