2009 Predictions Updated Through 1st Quarter

Just want to let my readers know that I’ve just finished including the 1st quarter update in my 2009 Predictions.  Just bear in mind that these predictions were made on November 8th, only days after Obama was elected, because they’re proving to be so accurate that you’d think I was writing them as events unfolded. 

The predicted lack of action on the trade deficit by Obama, though predicted, is a major disappointment.  I was hoping to be pleasantly surprised, but that’s not been the case.

And just in case anyone thinks things are starting to improve, the monthly ADP Employment Report this morning forecast that March job losses soared to just shy of 750,000 jobs! 

The G20 meeting is shaping up to be a slug-fest.  The world is dividing into two camps – the nations with trade surpluses and those with the trade deficits.  In other words, the parasites and the hosts.  The parasitic economies of the world desperately want to keep the blood flowing, while the host economies are reaching for the fly swatter.  It’s going to be great fun watching how this plays out.

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14 Responses to 2009 Predictions Updated Through 1st Quarter

  1. Clyde Bollinger says:

    This piece of drivel appeared in the St. Louis Post-Dispatch this morning.

    By Steven Thomma and Kevin G. Hall
    MCCLATCHY NEWSPAPERS
    04/01/2009

    LONDON — With economic peril spreading around the globe, President Barack Obama and other world leaders will convene today in London, desperate to avoid the mistakes that plunged the planet into the Depression in the 1930s and seeking common approaches to jolt their economies back to life.

    Obama landed in London on Tuesday evening, ready to plunge into meetings today and Thursday. Topping his agenda is affirming national government plans already under way to spend $2.5 trillion to stimulate economies and working out a new global framework to regulate financial markets. This could include extending the regulatory net over hedge funds and offshore tax havens, as well as identifying gaps in regulation between countries.

    Another crucial goal: making sure that developed countries avoid protectionism, or shutting themselves off from international trade, a key mistake that helped worsen the worldwide depression more than seven decades ago.

    Obama and European allies also seek to empower the International Monetary Fund and World Bank to boost economies great and small and to discourage the erection of trade barriers.

    That may be difficult given growing political pressures in many nations. Thousands of protesters are expected to flood London’s streets, underscoring how the loss of jobs and pensions in Europe magnifies social stress and political tension.

    The American president is the fresh face among world leaders, many of whom already were in office when the global financial system went into cardiac arrest last fall. Starting with a dinner this evening, Obama and colleagues then will work through the day Thursday on what originally had been billed as rewriting the global rules for finance.

    The meeting involves the so-called G20, a group of 19 countries with major economies plus the European Union. Together they represent 85 percent of the world’s economy, from old European powers to emerging powerhouses such as China and Brazil. Others beyond the 19 are attending as well, including Spain and the Netherlands.

    “The stakes for this summit are very high,” Michael Froman, the White House’s deputy national security adviser for international economic affairs, said in a London briefing Monday. “They are magnified by the fact that much has happened since the last G20 summit in November.”

    • Pete Murphy says:

      Interesting, Clyde. Perhaps the reason that statements coming out of the G20 are dominated by concerns about “protectionism” is that for the parasitic economies (who dominate the G20 in terms of numbers), they know that they would quickly adopt protectionist measures of their own if they were the ones with the deficits. And the host economies fear a backlash from the pasitic economies (not in terms of a trade war, but in terms of escalating tensions) if they impose a balance of trade themselves. I think this is why the U.S. is pushing so hard for these countries to boost their domestic consumption. The problem is, as you and I and my other readers know, that’s just not going to happen because it’s not possible. I’m afraid that, without an understanding of the role of population density in driving these huge trade imbalances, the rebalancing that is sure to happen will be accompanied by some serious escalation of tensions.

  2. Clyde Bollinger says:

    So true, there is not the capacity in the most over populated countries to achieve a balance by increased consumption. The majority of any balancing solution will have to be done by a transfer of money as in tariffs. In any case, jobs in the US with decent wages producing the goods we need and want will make a large part of the problem go away. This is one of the really beneficial characteristics of your tariff idea. Fewer goods coming in due to the added cost drives the need to make them here. Making the goods here means more jobs, more wages, more taxes and more prosperity.

  3. Clyde Bollinger says:

    Great idea. I’ve never considered Buffet to be more than a lucky old fart with lots of money and very little sense. The import certificates idea is a stroke of genius and consderably beyond his normal capacity. It also is good subject matter, light years ahead of the ‘cap and trade’ nonsense. Elimination of the ‘protectionist’ stigma is a really god idea.

    • Pete Murphy says:

      My only concerns with the system are two-fold:
      1. That it be used to balance trade in manufactured goods, not total trade. Otherwise, we’d be turned into a nation that uses a surplus in trade in manufactured goods to offset our deficit in oil, turning us into another parasitic economy and masking our problem with overpopulation. It would turn major oil exporters like Canada, Venezuela and Saudi Arabia into the world’s dealers in IC’s. They would undoubtedly charge a premium for them, allowing them to reap the benefits that we would otherwise enjoy if we simply employed tariffs.
      2. It would subject nations with whom we have no problems in trade to a level of bureaucracy that they don’t deserve.

      Still anything that moves us toward a balance of trade would be a huge step in the right direction.

  4. Clyde Bollinger says:

    The original piece I read was more of a definition than an explanation. After your reply, I found and read Buffet’s Fortune piece.
    He doesn’t get it.
    He still thinks that competetion will make a difference and that our trading partners would increase domestic consumption if they had the incentive to do so. He also doesn’t define ‘consumables’ in the piece, but as you, I suspect he includes commodities such as oil. Only manfactured goods should be included, at least in the beginning. I was impressed with the fact that he recognizes the problem the deficit is causing. So many members of the economic community either don’t realize the problem exists or, as I suspect, are so clueless that they keep silent rather than expose their ignorance.

  5. Bruce Smith says:

    Hi Pete.

    I’ve just had chance this weekend to compare some global trade statistics for the US with population density figures which seem to bear your trade argument out. One thing I did out of curiosity as a sort of weighting exercise was to divide a country’s trade import amount with the population per square kilometre and I was quite surprised to see the high factor I derived for Southern Ireland, Eire,in comparison with say somewhere like Germany which has a higher population density. I’m just curious as to whether you know the reason for this particular economic miracle?

    • Pete Murphy says:

      Yes, I can answer your question about Ireland, Bruce. I too noticed that the U.S. trade deficit with Ireland is completely out of proportion with what my theory would predict for a country with a population density relatively low, at least compared to nations like Germany. Nearly all of the U.S. trade deficit with Ireland is due to pharmaceuticals. It just so happens that I have a relative who works for a major U.S. pharmaceutical company with manufacturing operations in Ireland, and so I put the question to him. He replied that it’s all about favorable tax treatment by Ireland.

      In performing my analysis of trade results, I found that there are some factors I had to “strip away” in order to reveal the relationship between trade in manufactured goods and population density:
      1. Trade in natural resources completely obscures the relationship, so you must separate that from trade in manufactured products.
      2. Because small island nations generally have economies based almost strictly on tourism, I found it necessary to eliminate them from my data base. In spite of the fact that they are almost universally densely populated, the U.S. has a trade surplus in manufactured goods with them. That’s because of the tourism economies. Tourist dollars are used to buy American goods. Therefore, I eliminated from my data any island nation of less than 1,000 square miles.
      3. Tiny city-states like Singapore, Luxembourg, San Marino and others also cloud the relationship. In those cases, I rolled their data into the larger neighboring country. I think that, in general, you’ll find the relationship becomes stronger for larger nations. My theory applies best to larger regions that encompass both urban and rural regions. The smaller the country, the greater the chance that some factor may be at work skewing the data. Consider the Netherlands, a very small, densely populated country. The U.S. has a nice trade surplus with them in manufactured goods, most likely because they have the only deep-water port on the European Atlantic Coast. However, the U.S. has a significant trade deficit in manufactured goods with the E.U. as a whole.

      I’m glad to hear that you’re taking in interest in this theory and checking data for yourself, Bruce. Please feel free to contact me anytime you have questions.

  6. Bruce Smith says:

    Many Thanks Pete. I was in Dublin about three years ago and was astonished at the high level of house prices. I’d been vaguely aware that Eire was regarded as a “Celtic Tiger” economically and that much of this was to do with a business friendly tax regime. ( I assume that much of this is related to corporate tax levels? Also I guess it’s about American drug manufacturing companies not having to pay the sales tax (VAT) for importing into the European market? Certainly, I was not aware that the pharmaceutical industry played such a large role in its economy. Clearly Eire’s economic history is worth studying if only to get a better understanding of how government involvement in markets can have a dramatic impact. On this subject here is a web site reference you might find interesting if you’ve not already seen it. It’s an article by Professor Michael Pettis on the recycling of export surpluses mainly Chinese:-

    http://mpettis.com/2009/04/is-governor-zhou-a-closet-bernanke-ite/

  7. Bruce Smith says:

    As if on cue here is an article on the future of the “Celtic Tiger’s” economy in a recent Financial Times article:-

    http://www.ft.com/cms/s/0/4b946536-2787-11de-9b77-00144feabdc0.html

    The corporation tax rate is described as being at a low 12.5%.

    • Pete Murphy says:

      Your observations about the tax advantages associated with exporting into the European market are also a big part of it. My relative mentioned to me that there were also advantages asscociated with marketing into Europe, but he wasn’t quite so clear about just what that advantage was. The VAT explanation you just gave seems to explain it. I don’t know if you picked up on this fact somewhere else on my blog but, when the U.S. trade deficit in manufactured goods is expressed in per capita terms (divided by the population of the nation in question), our largest deficit by far is with Ireland, at -$4,306 per person in 2006. That’s 25 times worse than our per capita deficit with China.

      The linked article you provided was interesting but, I must admit, my head starts spinning around in circles when they start using these convoluted currency valuation and reserve arguments to explain the trade deficit. All of the focus is on China, but never mentioned is the fact that, in per capita terms, China ranks only number 19 on America’s list of trade deficits. We have many that are worse, all over the world, with rich and poor countries alike. But the one thing that seems to dominate the list is high population densities.

  8. Bruce Smith says:

    Thanks Pete for this latest information. Purely by chance I’ve just come across this recent British newspaper’s article about Eire’s nice little racket as a tax avoidance haven :-

    http://www.guardian.co.uk/business/2009/feb/04/tax-gap-series

    I’m sure that the Southern Irish will be smiling at the notion that after the Irish Potato Famine they now have their revenge in that the British tax payer will be having to pay extra tax to make up for the tax avoidance of British based companies using Eire taxation rules! Seriously though the whole pretense of right wing political parties that they want minimal government involvement in the market is revealed as blatant hypocrisy with schemes like these. The reality is that in order to maximize profits businesses will always make use of governments! This, of course, raises the question as to whether exports are actually channeled through third countries for tax evasion, or minimization, reasons, particularly professional services?

    • Pete Murphy says:

      Bruce, in the case of Ireland, that’s certainly true: pharmaceuticals are manufactured there purely for the purpose of tax evasion.

      You’ve contributed a lot to my understanding of what’s going on in Ireland to create such a huge trade surplus with the U.S. I appreciate it. And it’s fun to get a Brit’s perspective.

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