Global Economy Locked in Schizophrenic Tug-of-War

March 31, 2009

The global economy is locked in an unprecedented tug of war of ideologies, between those commited to propping up the failed free trade model and those who recognize the role of the global trade imbalance in collapsing the economy.  The following linked article is a perfect example of the former contingent.

http://www.reuters.com/article/topNews/idUSTRE52U1YY20090331

The World Bank, led by Robert Zoellick, has announced a paltry $50 billion program aimed at restoring global trade.  Such a feeble attempt is laughable but not surprising, given that Zeollick, America’s Trade Representative from 2001 to 2005, was completely ineffective  and presided over the worst run-up of the U.S. trade deficit in history. 

But the following is an example of new thinking that is emerging.  It seems that the International Monetary Fund sees global trade transitioning to a reduced level and, in some cases, vanishing altogether.

http://www.reuters.com/article/ousiv/idUSTRE52T2D420090330

Marek Belka, director of the IMF’s European department, said … some export-dependent countries would need to find other sources of business when the dust settled.

“What we are seeing now is the sheer implosion of international trade. I think it’s transitory.

Belka said that if the downturn caused U.S. consumers to save more of their money, and buy fewer goods from abroad, exporters around the world would feel the pinch.

“There will be less trade between the United States and China, … there will be less trade everywhere,” Belka said.

“We have to be prepared in our trade policies to look inside and in our immediate neighborhood,” he told the U.N. Economic Commission for Europe meeting.

“I think that domestic economy and intra-regional integration will play a larger role than before. We should not count on global trade to such an extent as we are counting now.”

I believe it’s this new thinking that Obama is counting on to help the U.S. restore a balance of trade.  But I also believe it’s naive to expect it to work.  You can be sure that if customers walk into a Toyota, Hyundai or Mercedes dealership tomorrow or next year, they’ll be just as eager as ever to sell that customer a new car.  Walmart will be just as eager to maximize profits by offering cheap products from China.  Drug companies will be just as eager to maximize profits by taking advantage of tax breaks in Ireland.  Nothing is going to change by itself.  If that’s what Obama thinks will happen, he’ll be sorely disappointed.

At the same time, there’s a schizophrenic approach to the dollar.  Foreign holders are worried about their dollar-denominated investments, like treasuries, but can’t unload them out of fear of driving down the dollar, eroding their export market.  The administration would like a weak dollar to help restore a balance of trade, but fears the resulting rise in oil prices and the prospect of rampant inflation. 

The outcome of this tug of war is clear – the U.S. will move toward a balance of trade.  Whether it happens sooner or later, or whether it’s done through some kind of global cooperation or through the imposition of tariffs or other protectionist measures by the U.S. remains to be seen.  Regardless of whether or not economists and world leaders ever come to understand the root cause of the imbalance in global trade that collapsed the economy, most now understand that such an imbalance can’t be tolerated forever.

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Obama Auto Plan Comes Up Short

March 31, 2009

http://www.reuters.com/article/topNews/idUSTRE52T4Z320090330?sp=true

The linked article contains excerpts from Obama’s remarks about his administration’s plans for the auto industry.  The following is an outline of the key elements of that plan:

  • GM’s CEO Rick Wagoner has been ousted, replaced by COO Fritz Henderson.
  • GM gets 60 days to come up with a “better plan,” which involves shedding more brands, striking a deal with bondholders, and creating a “credible model” for “succeeding in this competitive global market.”
  • Chrysler gets 30 days to close a deal with Fiat.  (Fiat promises to build “new fuel-efficient cars and engines here in America.)
  • Fiat promises to repay American taxpayers before taking a majority ownership in Chrysler.
  • Both GM and Chrysler will go through some sort of government-sponsored bankruptcy, but not liquidation.
  • The government will back GM and Chrysler warranties in a bid to alleviate consumer concerns.
  • Acceleration of Recovery Act funds for government fleet purchases, though he didn’t say what percentage of these purchases would be American cars.  (Remember, the “buy American” provision of the Recovery Act had to be watered down to respect existing trade treaties, which includes Japan and Germany, but not Korea.)
  • Boosting funds to finance units like GMAC.
  • Sales tax deductions for the purchase of new cars (not necessarily American cars).
  • A “Director of Recovery for Auto Communities and Workers” to help affected communities.  No specifics about what this means.

The president’s plan misses entirely the real crux of the problem for the domestic auto industry – falling sales, most recently hammered by the deepening recession but in a much longer term slide due to an endless supply of foreign manufacturers getting free access to our market while we get nothing in return.  Even when confronted with blatant “dumping” by Japanese and German manufacturers, and by Mexico raising tariffs on American imports, the president has chosen to look the other way.  And after being crowded out of the small car market by a horde of imports, forcing the domestics to turn to the small truck and SUV market as its last bastion of profitability, the adminstration plans to force them out of that segment of the market as well, leaving it entirely to a swarm of imports.  (See Obama Backs Automakers, Fails to Act on Trade Problem.)  Obama speaks of a “competitive global market.”  There’s no such thing!  There’s only an American market open to global competition.  All other markets are either closed to American manufacturers or are so badly emaciated by over-crowding as to have the same effect. 

Experts have repeatedly warned that consumers will not buy autos from bankrupt auto companies.  Government backing of warranties won’t change this.  Small cars are predominantly purchased by young buyers and, among this demographic, it’s just not cool to drive American cars.  How much less will they buy them once they’ve been further stigmatized as loser-mobiles?

Regarding Chrysler, Obama just destroyed whatever bargaining power Chrysler may have had left in their negotiations with Fiat.  Fiat can now demand all of their assets while taking on none of the debt.  They will also build one or two models in the U.S. while using the deal with Chrysler to open the gates to a flood of imports from Italy.  Bye-bye more market share for domestic manufacturers. 

GM already planned to rid themselves of Hummer, Saturn and much of Pontiac.  But that’s not enough for Obama.  More brands have to go.  GMC is redundant with Chevy trucks, so that seems an obvious choice, except that GM makes a nice premium on GMC with little more effort than sticking a different badge on the truck.  So they can probably kiss that profit stream goodbye.  That leaves Chevy, Buick and Cadillac.  Will one or more of them have to go too?

When it comes to tax incentives to purchase new cars, 75% of the taxpayer money used to fund the program will go to boost foreign car sales.  So the net result will be to do more harm than good for domestic manufacturers. 

In the end, the plan is to reduce GM and Chrysler to bit players in a horribly glutted small car market, one small piece of a strategy to reduce our dependence on foreign oil.  But the crown jewel of that plan was the “cap and trade” item in Obama’s budget, the only thing that might motivate a switch to small cars by raising gas prices, already axed in the name of fiscal responsibility.  So we will be left with low gas prices fueling America’s appetite for SUVs and trucks, but now with only imports to choose from.

Four or eight years from now, when Obama is gone, the last vestige of the now-gutted domestic auto industry will be gleefully abandoned by his Republican replacement and held up as a shining example of how the free market purges itself of “inefficiency.”  Never mind that the market was never free or that millions of jobs have been purged with it.  Who cares?

With unemployment in Detroit at 22.5% and at 12.0% for Michigan as a whole, a state of depression has now been over-layed by a sense of hopelessness.  No one should take any perverse delight in the demise of the auto industry and the state of Michigan, because Michigan is a bellwether – the canary in the coal mine – for the American economy as a whole.


Tough Choices Highlight Need to Amend Constitution

March 29, 2009

http://blogs.reuters.com/great-debate/2009/03/26/to-pay-for-vital-programs-congress-must-make-tough-choices/#comment-11315

The linked editorial by Deborah Weinstein, executive director of the Coalition on Human Needs, speaks to the need to make tough choices to fund the intiatives proposed by President Obama in his budget.  In a particularly cynical mood, I wrote the following response:

This may be the fatal flaw in democracy – the inability to make tough choices. Like a family with four children that is run democratically, the end result is inevitably a bankrupt household loaded with toys, run by truant, morbidly obese children, lying around in front of the TV amid the clutter of empty pop cans, potato chip bags and candy wrappers.

How can any tough choices ever be made when we are governed by people interested above all else in re-election who will tell us what we want to hear – that we can have it all while reducing taxes further with each election cycle?

I see absolutely no hope that these problems will ever be addressed.

What hope can we have that any of our problems will be addressed when one party tells us that we can have it all, to be paid for later, while the other party tells us that we can cut taxes more and more without consequence?  Both parties say they want fiscal responsibility, but the time is never right.  There’s always some crisis that must be dealt with first. 

Then I remembered that similar problems are dealt with successfully all the time at the state level.  The arguments about spending and taxes are virtually the same, yet compromise is ultimately reached and budgets are balanced.  Why?  Because it’s mandated by the state constitutions.

In the 222 years since the Constitutional Convention in Philadelphia in 1787, the constitution has been amended eighteen times to add 27 amendments.  Only one amendment, the 16th, ratified 96 years ago in 1913, dealt with the economy and the financing of our federal government.  The 16th amendment established the income tax, addressing the fears of many that the United States would soon become insolvent without it.  Until that time, all federal revenue was generated from tariffs on imports and from some small “excise taxes” that were nothing more than incomes taxes disguised to skirt questions about their constitutionality. 

Just imagine what our nation’s leaders in 1913, concerned about insolvency then, when our national debt was about $2.6 billion, would think if they could see the state of our nation’s finances today.  Today, our national debt is 5,000 times higher.  Even adjusted for inflation and population growth, the per capita share of the national debt burden is about 77 times higher.  In 1913, we had no trade deficit, while in 2008 our trade deficit was $677 billion.  In 1913 we were self-sufficient in energy resources while today we import 75% of our energy needs.   I think it’s safe to say that the framers of our constitution and even our nation’s leaders in 1913 who were so concerned about the potential for insolvency would be absolutely stunned and aghast at what has become of our country, now bankrupt in every sense of the word. 

Because of the political consequences associated with making tough choices, none are ever made.  There is talk in Washington of a complete overhaul of regulation of our financial industry.  But the problems go much deeper and the need for reform extends much further.  Nothing less than constitutional amendments are needed if we are to have any hope of a return to fiscal responsibility and any hope of dealing with mortal threats to the continued viability of our nation, including the trade deficit, energy policy and overpopulation. 

If our philosophical differences prevent us from reaching agreement on how to balance the budget, let’s begin by agreeing that it needs to be done and mandate it through an amendment to the constitution.  If we can’t agree on how long to wait for our free trade policy to eventually restore a balance, we can agree that an enormous, perpetual trade deficit is unsustainable and amend the constitution to require a balance.  If we can’t muster up the courage to utter even a peep of concern about the potential for population growth to transform us into another India, then let’s amend the constitution to at least force a discussion on where we’re going and just high high we’re willing to let our population rise. 

The framers of our constitution could never even begin to imagine the breadth and depth of the problems that now beset us.  Otherwise, they would surely have included mandates to force us to deal with them.  But we can see the problems clearly.  The question is, do we have the courage to act, as our forefathers surely would have if they had a crystal ball, or is this also too tough a choice for us to face?


Obama Backs Automakers, Fails to Act on Trade Problem

March 27, 2009

http://www.reuters.com/article/politicsNews/idUSN1838682720090326?sp=true

The linked article reports on Obama’s cyber town hall meeting yesterday in which, in response to a question, he promised additional support for U.S. automakers. 

President Barack Obama said on Thursday struggling U.S. auto companies could expect new government aid if they commit to “drastic” restructuring, promising to unveil a rescue plan in coming days.

That’s the good news.  But Obama then went on to chastise the domestic automakers for focusing on “gas-guzzling SUVs.” 

Without elaborating on a bailout price tag or specific restructuring steps for Detroit manufacturers, Obama said he wanted all major players to help overhaul a business model he called unsustainable.

“I know that it is not popular to provide help … to auto companies,” he added. “If they’re not willing to make the changes and the restructurings that are necessary, then I’m not willing to have taxpayer money chase after bad money.”

Obama has long said Detroit should build more fuel-efficient vehicles rather than focus on gas-guzzling sport utility vehicles and less efficient pickups. Sales of both models have plunged and GM, Ford and Chrysler are overhauling their product lines to emphasize efficiency.

Never, ever have I heard even a peep of protest about foreign automakers’ participation in this same segment of the market.  Apparently it’s OK for the imports to build and aggressively market their own competing models of gas-guzzling SUVs, including the following:

  • Acura MDX
  • Acura RDX
  • Audi Q7
  • BMW X3
  • BMW X5
  • BMW X6
  • Honda Pilot
  • Hyundai Santa Fe
  • Hyundai Tucson
  • Hyundai Veracruz
  • Infiniti EX35
  • Infiniti FX50
  • Infiniti QX56
  • Isuzu Ascender
  • Kia Borrego
  • Kia Sorento
  • Land Rover LR2
  • Land Rover LR3
  • Land Rover Range Rover
  • Lexus GX470
  • Lexus LX570
  • Lexus RX350
  • Mazda CX7
  • Mazda CX9
  • Mercedes Benz GLK
  • Mercedes Benz GL-Class
  • Mercedes Benz M-Class
  • Mercedes Benz R-Class
  • Mitsubishi Endeavor
  • Nissan Armada
  • Nissan Mirano
  • Nissan Pathfinder
  • Nissan Xterra
  • Porsche Cayenne
  • Saab 9-7x
  • Subaru Tribeca
  • Suzuki XL7
  • Toyota 4Runner
  • Toyota FJ Cruiser
  • Toyota Highlander
  • Toyota Land Cruiser
  • Toyota Sequoia
  • VW Tiguan
  • VW Touareg
  • Volvo XC60
  • Volvo XC90

So now our domestic automakers will be forced by the government to abandon this segment of the market, awarding it completely to imports.  Obviously, the executives at GM and Chrysler have felt compelled to keep their mouths shut when they see Obama and his auto task force arrive at such a sophomoric analysis of the domestic automakers’ problems.

But worst of all (not reported in this article, but receiving broad coverage in the Detroit area media), were Obama’s statements immediately following the above quotes.  The reason that he sees the domestic automakers’ business model as unsustainable, and I’m paraphrasing here, is that “foreign competition is here to stay.”  He sees no need to do anything about the idiotic trade policies that have destroyed the domestic auto industry and the entire manufacturing sector of our economy.  In his mind (which is to say in the minds of the auto task force, led by free trade advocate Larry Summers), the answer is to more fully engage in the race to the bottom.  That is, cut workers’ pay and benefits.  Eliminate jobs.  Close factories. 

Unfortunately, none of those actions will make one bit of difference in making the domestic auto industry more viable and robust.  Foreign automakers will simply match them cut-for-cut to maintain and even boost their market share.  We keep inviting in more foreign automakers (soon India’s Tata Motors, China’s Chery Automotive, Fiat and Renault will enter the fray) without getting any access to equivalent markets in return.  How the auto task force can be so blind to this issue, allowing our domestic industry to be painted into an ever-tighter corner, is beyond me. 

Thus far, in violation of his promises to the American people, the Obama Administration has done absolutely nothing about unfair, lopsided trade deals.  Even the imposition of tariffs by Mexico on American goods has been met with silence and indifference.  Trade ministers around the world must grab their bellies and roll in the aisle with laughter every time our economic leaders and trade negotiators leave town.  In the global trade community, the U.S. is the village idiot.


CIA Sees Trade Deficit as a “Long-Term Problem” for U.S.

March 25, 2009

https://www.cia.gov/library/publications/the-world-factbook/geos/us.html

If you’ve never visited the CIA’s “The World Factbook” web site, you really should take a look.  There you’ll find a whole encyclopedia of information and objective analysis of every nation on earth, including the U.S.  Here’s an excerpt from the CIA’s analysis of the U.S. economy:

Long-term problems include inadequate investment in economic infrastructure, rapidly rising medical and pension costs of an aging population, sizable trade and budget deficits, and stagnation of family income in the lower economic groups.

It’s encouraging that even the CIA can understand the threat to our economy posed by our trade deficit.  I hope Obama reads this in his daily intelligence briefings.  The question is what he plans to do about it. 

Secondly, what’s to be done about the costs associated with our “aging population?”  More population growth, adding younger workers, is no way to address it.  That’s been the approach for decades and now we see that the end result is nothing more than an even larger aging population.   The time has come for a population management policy.  (See the 29th Amendment to the Constitution of the United States.)


Green Leader Calls for Halving U.K. Population

March 25, 2009

http://www.timesonline.co.uk/tol/news/politics/article5950442.ece

Thanks to one of my readers for bringing this linked article to my attention.  It seems that one of English Prime Minister Gordon Brown’s key “green advisors” has called for the U.K. to reduce its population by half to build a sustainable society. 

JONATHON PORRITT, one of Gordon Brown’s leading green advisers, is to warn that Britain must drastically reduce its population if it is to build a sustainable society.

Porritt’s call will come at this week’s annual conference of the Optimum Population Trust (OPT), of which he is patron.

It’s significant that influential leaders are beginning to muster the courage to raise this issue.  Is anyone on this side of the Atlantic listening?  Of course, if they understood that their economy would actually be enhanced instead of harmed by such an approach, their job would be that much easier.  But regardless of whether overpopulation is addressed out of concern for the environment or out of concern for its effect upon unemployment and poverty, the end result is the same and I’ll be just as happy. 

You would think that environmentalists would be the first to jump on this bandwagon but, amazingly, they’re among the most resistant.  They fear that linking the environmental movement with a drive to reduce our population will stigmatize them as being too radical.  Here’s an example in this same article:

Population growth is one of the most politically sensitive environmental problems. The issues it raises, including religion, culture and immigration policy, have proved too toxic for most green groups.

Such views on population have split the green movement. George Monbiot, a prominent writer on green issues, has criticised population campaigners, arguing that “relentless” economic growth is a greater threat.

Environmentalists who fear tackling the population issue focus instead on reducing per capita consumption.  For example, they point to the low per capita consumption of energy in densely populated societies like Japan as evidence that nations like the U.S., with much higher per capita consumption, are being wasteful and can dramatically reduce consumption without significant harm to the economy.  However, they don’t understand that per capita consumption of energy in places like Japan is low not because they are more efficient, but because over-crowding has driven down their standard of living.  Low per capita employment in providing goods and services for domestic consumption is an inescapable consequence, making them dependent on exports to prop up their economy.  Without a high per capita consumption market like the U.S. to absorb their productive capacity, their economy would quickly collapse, just as ours would if we tried to emulate their rate of consumption. 

The only solution that relieves the strain on the environment and resources, while retaining the ability to enjoy a high standard of living, is to implement a population management policy that, through non-coercive measures, encourages a reduced birth rate, ultimately resulting in a slow decline in the population.  I hope that America is represented at this OPT conference and I hope that we pay close attention.


Bold Action on Trade Needed to Complement Stimulus Plans

March 24, 2009

As the Obama administration and the Federal Reserve have announced trillion dollar stimulus or bail-out plans one after another, I haven’t had much to say specifically about each.  But this may be a good time to stop and consider these actions as a whole.

The stimulus plan itself – the one that included spending on infrastructure and renewable energy, was probably a good thing.   Jobs will be created, though the number remains a question, as does whether or not it will be enough to actually stem the slide in the economy.  Halting that slide is crucial, since it will be impossible to make any progress on reducing our national debt while in recession. 

That leaves two other announed plans, I think, although it’s getting hard to keep track – the Fed’s plan to buy Treasuries using printed money and the government’s plan to buy up “toxic assets,” supposedly in partnership with private investors.  But nearly all of the money will be ponied up by the government – in other words, the taxpayers.

The strategy is clear:  re-start the debt machine, piling more debt onto consumers, and do it with government programs that pile more national debt onto future taxpayers.  But this time, regulate it so that it’s good debt instead of the bad debt that collapsed the economy in the first place.  There’s only one way to do all of this, and that’s to stimulate a demand for labor that’s so vigorous that it sends incomes soaring again. 

Such a strategy has only one chance of success (albeit a slim one), and that requires that the trade deficit be completely eliminated, bringing six million manufacturing jobs home again.  Ideally, we might even return to a trade surplus, enabling us to start paying down our debts.  Otherwise, a continuing trade deficit demands that deficit spending be maintained to avoid lapsing into recession once again. 

The problem is that the administration has done absolutely nothing to address the trade deficit so far that has any chance at all of being effective.  It has talked of the need to reduce the trade deficit, talked of the need to renegotiate NAFTA (the North American Free Trade Agreement), talked of labeling China a currency manipulator and, I believe, has quietly put the rest of the world on notice that a trade deficit will not be tolerated much longer. 

But all of this talk is a complete waste of time, as proven by over three decades of trying to talk down the trade deficit.  The fact is that the nations with whom we have the largest trade deficits in manufactured goods – China, Japan, Germany, South Korea and a host of others – are all overpopulated and completely dependent on sustaining their trade surplus with the U.S. to avoid economic collapse.  Even if they are sincere in their promises to stimulate domestic consumption and eliminate their dependence on exports, they’ll find it impossible to do so.  In addition, regarding the trade deficit in oil, the administration’s moves to boost the production of renewable energy are quickly being overwhelmed by population growth.  With each passing day, we grow more dependent on imported oil, not less. 

The fact that the administration has taken this approach is not surprising and, in fact, is what I predicted.  But time is marching on and we’re now two months into Obama’s administration.  How long will they be patient when the monthly data shows the trade deficit resuming its upward trend, as it surely will?  If they don’t act quickly (no later than the end of this year) to begin imposing tariffs, the only measure that has any chance of restoring a balance of trade, then his economic plan will fail and he will be a one-termer, to be replaced by someone completely devoted to free trade, regardless of the consequences. 

This president who, if he can be believed, seems to understand the consequences of a trade deficit, may be our only chance to rescue the sickened, fallen corpse of the American economy from the global hordes of parasitic economies that are feeding on it.  But to be successful, time is needed to demonstrate the benefits of a judiciously-applied dose of protectionism and the restoration of a balance of trade.  Unless those benefits are realized by 2012, he’s a goner and, so too, will be any hope of salvaging America’s future.