A 3-Year Recession?

February 27, 2008

http://www.marketwatch.com/news/story/bernankes-recession-here-11-reasons/story.aspx?guid=%7B39D13A23-5028-4976-9883-BB1975099038%7D

I thought this was a great article.  I can’t find fault with any of Paul Farrell’s 11 reasons, and most of them can be tied either directly or indirectly to our trade deficit.  Will the recession last until 2011?  Well, I doubt it.  I believe that the government will weave a new rug under which to sweep these problems more quickly than that.  But the next recovery won’t feel like much of a recovery (kind of like the most recent one) and the next recession will come sooner and be deeper than anyone would like.  But let’s get through this one first.

Pete


American Workers’ Earnings Fall 1.2% in Past Year

February 20, 2008

http://www.usatoday.com/money/economy/2008-02-20-real-earnings_N.htm

This merely continues the three-decade trend in falling earnings that I detailed in the first chapter of Five Short Blasts.  This trend will persist as long as our enormous trade deficit lasts.  When I update the book for the 2nd edition, those graphs of income and especially net worth (following the collapse of the housing bubble) are going to look like they fell off a cliff!

The downward spiral continues.  Wages can’t even keep pace with the price of cheap imported junk.  Isn’t globalization wonderful?

Pete


A Glimpse into the Future?

February 16, 2008

Last night I tuned into a PBS broadcast about a development in the Netherlands called “Borneo Schorenberg.”  (Not positive I’ve got the spelling correct.)  The point of this piece seemed to be that The Netherlands, concerned about protecting what little rural area they have remaining (The Netherlands is the most densely populated nation in Europe with over 1,000 people per square mile), wanted to construct a dense residential area close to the center of Amsterdam to prevent further urban sprawl.  “Borneo Schorenberg” is a region of docks along the waterfront that had fallen into disuse because Amsterdam’s seaport is too small and constrictive for large, modern ships.  (Rotterdam is The Netherlands’ major seaport, the only significant port on the entire Atlantic coast of Europe.)  So it was decided to turn it into a residential area.  The goal was to pack in as many people as possible without resorting to high-rises that are generally perceived as undesirable places to live.

The planners and developers spoke proudly of their results.  To my eye, it was horrifying.  It appeared very much like a vast prison complex, dominated primarily by sprawling, 3-story structures consisting of tiny apartments with tiny balcony areas.  But it also included a modernistic structure, approximately 20 stories high, with flat sides clad in zinc (in other words, the exterior was galvanized sheet metal), and the sides were checkered with identical windows.  The kind of future that I envisioned in “Scenario 1″ in Chapter 12 of “Five Short Blasts” immediately came to mind.  This huge, galvanized sheet metal box structure had a court-yard and the view inside the courtyard was very much like that of a courtyard in a prison.  The streets between these “prison complexes” were choked with people.  The only redeeming quality of the whole thing was that people had a waterfront view. 

One of the planners remarked toward the end of the piece, “It took the people who lived here a while to realize how nice it was.”  Translation:  People will eventually resign themselves to their fate.  (Kind of like the way Americans have resigned themselves to “globalization?”)

There are beautiful things to see in The Netherlands, but this isn’t one of them.  It’s a shame to see such a quaint, pretty country being devoured by population growth run amok. 

Pete


Treasury International Capital Report

February 16, 2008

http://eresearch.fidelity.com/eresearch/goto/markets_sectors/landing.jhtml?bar=s

This link will take you to a calendar of economic data releases available on Fidelity.com.  Check the “Treasury International Capital Report” for February 15th.  But to make things easy, I’ve quoted the text of the report below.  I’m posting this because it’s a good illustration of the sell-off of American assets needed to finance the trade deficit.  Notice that foreign demand for U.S. bonds last month was flat.  Bond auctions have been going badly since the Fed lowered interest rates.  Although the Fed has officially cut interest rates to 3.5%, the interest on 10-year bonds has actually jumped back up to close to 3.8% to attract buyers.  And foreign purchases of U.S. stocks was strong.  That’s because foreigners have to use the dollars they’ve gotten through trade to buy one of three dollar-denominated investments:  U.S. bonds, bonds of U.S. corporations or stocks of U.S. corporations.  Either that or they have to sit on the money and earn no interest at all.  At any rate, the sell-off of American assets continues at a furious pace to finance the trade deficit.  What happens when these assets are depleted?  If changes aren’t made to balance our trade equation, we may find out and it won’t be pretty.

“Definition
These Treasury data track the flows of financial instruments into and out of the United States. Instruments tracked include Treasury securities, agency securities, corporate bonds, and corporate equities.”

“Highlights
Net foreign purchases of long-term U.S. securities rose $56.5 billion in December vs. $90.9 billion in November. December’s increase is on the low side but does match the nation’s roughly $60 billion monthly trade deficit, a match up that excludes the nation’s roughly $35 billion monthly federal deficit but still enough to limit reaction in the financial markets. Foreign demand for Treasuries and federal agency bonds was flat in December, but not demand for U.S. corporate bonds and, interestingly, U.S. equities which was very strong. By banking region, holdings of U.S. securities in China showed a solid increase, this despite talk in the markets that Chinese investment in the U.S. is slowing. In sum, the decline in the dollar has not limited foreign demand for U.S. securities, at least not yet.”

Pete


Decoupling of the Interests of Big Business and Individual Americans

February 15, 2008

I just finished watching the Nightly Business Report on PBS, which included an interview by Susie Gharib of Caterpillar’s CEO, Jim Owens.  She questioned him at length about Caterpillar’s role in the global economy.  She asked Mr. Owens what is the biggest thing he worries about.  His response was basically that he’s worried about any moves toward protectionism in the U.S.  He explained that, with only 5% of the world’s population, it’s critical to companies like Caterpillar that they have free access to the rest of the world’s market in order to grow their business and maintain their status as a global leader in their field. 

It got me thinking about how critically important it is to understand my theory of “Population Density-Induced Decline in Per Capita Consumption,” (see Figure 6-1 on page 106 of “Five Short Blasts”) and its ramifications for the relationship between individual Americans and corporations.  As you can see in Figure 6-1, their interests were the same throughout human history until an optimum population density was reached, which I believe has happened in the last few decades. 

Once that optimum population density is breached, the interests of individuals decouple from the interests of corporations.  It is in the best interest of corporations to continually grow their sales volume through population growth and through marketing to very densely populated countries.  Although per capita consumption may be in decline, total consumption will always grow as the population grows.  They couldn’t care less about declining per capita consumption.

However, once the optimum population density is exceeded, it is in the best interest of individuals to refrain from trading with countries more densely populated than our own because of the effects of rising unemployment and declining quality of life. 

Corporations don’t care about risiing unemployment.  They actually like it because it drives down their labor costs.  They don’t care about a declining quality of life (except for their top executives).  All they care about is sales volume and profit.

It is critically important to understand this because our country is locked in a tug of war of competing interests.  Corporations insist upon free trade because they don’t want to jeopardize their positions in foreign countries with huge populations (customer bases).  Given a choice, they’d be perfectly happy to surrender the American marketplace if it meant they could sell in China, for example. 

Increasingly, individuals sense that free trade is at the root of their economic demise and they are growing impatient with our nation’s trade policies.  They understand that our enormous trade deficit is sucking the life blood from our economy. 

So don’t be confused.  The old adage that “what’s good for Bull Moose Motors is good for America” no longer holds true.  It broke down when that optimum population density, which was effectively magnified by free trade with grossly-overpopulated nations, was breached.  Stand up for your interests.  Write your senators and congressmen today to demand an overhaul of our trade policies to restore a balance of trade! 

I have absolutely no problem with corporations making plenty of money.  But a couple of boundaries need to be established:  (1) trade (especially in manufactured goods) must be balanced and (2) they can’t use population growth to increase volume.  The U.S. population must be stabilized. 

Pete


Manufacturing Fell Off a Cliff in the Last Month

February 15, 2008

http://eresearch.fidelity.com/eresearch/goto/markets_sectors/landing.jhtml?bar=s

See my previous post about the 2007 trade deficit figure.  I’m not sure how the government is pumping up our exports figure, but none of the other manufacturing data in the economy supports it.  For example, using the link above, check out the results of the latest Fed surveys of manufacturing activity in the New York state and Philadelphia areas.  (Click that link, then go to the “Empire State Mfg Survey” release on Friday, Feb. 15th.)  Check out the graph that shows the results of the both the Empire State and Philadelphia surveys.  The trend has been down significantly for the past four years but really fell off a cliff last month! 

Pete


2007 Trade Deficit

February 15, 2008

http://www.usatoday.com/money/economy/2008-02-14-trade_N.htm

The Commerce Department released the December trade figures yesterday.  The good news is that the deficit shrank a bit in 2007 from the record in 2006.  The bad news is that it’s still a staggering $712 billion.  Don’t look for much further improvement.  The monthly data has been hovering in the $58-63 billion range for quite a while now. 

Almost all of the focus in this article is on our trade deficit with China.  But the size of the deficit with China should be a surprise to no one.  What did we expect when we applied to China the same trade policies that were already a proven failure in the rest of the world.  Of course our deficit with them dwarfs all other countries.  They’re one sixth of the world’s population.  Take our deficit with Japan as an example.  Japan is only one tenth the size of China (in terms of population), but our deficit with China is less than three times the deficit with Japan.  In terms of per capita deficit in manufactured goods, our deficit with Japan is three times as bad as the deficit with China.  Our per capita deficit in manufactured goods with Germany is twice as bad as it is with China.  (Note that both Japan and Germany are much more densely populated than China.)  In terms of per capita deficit in manufactured goods, China is only number nineteen on the list of the top per capita deficits in manufactured goods. 

The article also observes that, in spite of the fact that the yuan has risen over 15% in the last 2 years, prices of Chinese imports hasn’t changed.  Also, in spite of the fact that the dollar has plunged 24% against the world’s currencies and 37% against the Euro, exports have risen only 12%.  None of this should come as a surprise either because our trade deficit is not about costs.  It’s about the disparity in population density between us and these other countries.  They will simply cut their prices right along with the falling dollar in order to maintain market share.  The key factor will remain unaltered:  that we are giving free access to our market to countries who have no market (or markets badly stunted by over-population) to offer in return.  The only way to rectify this situation is through a tariff structure on manufactured goods that is indexed to the population density of our trading “partners.”  Failure to take such a measure only assures that the host-parasite relationship between the U.S. and over-populated nations will persist.  The global trade welfare state will be sustained. 

Pete