Ford’s Mulally on China, Trade

September 18, 2012

Allen Mulally, CEO of Ford, was a guest on “CBS This Morning” today.  When asked about the complaint filed with the World Trade Organization by the Obama administration about Chinese subsidies for their auto industry, Mulally dodged the question and gushed praise for trade with China, noting that the Chinese auto market is even bigger than the U.S.  (I can only assume he was talking about the potential  Chinese market, as far fewer autos are currently sold there than in the U.S.)  He also praised President Obama’s trade deal with Korea and free trade in general. 

Like other CEOs of other companies, Mulally is focused on one thing only – total sales volume and profits.  He couldn’t care less where Ford builds its cars.  If it builds cars in China and sells lots of them there – great.  If it builds Fords in Mexico and sells lots of them in the U.S. – that’s great too.  If building some of them in the U.S. makes a great selling point for the “buy American” consumers, then that’s what they’ll do.  More trade equals more potential customers.  For that reason, Ford and every other company will support any politician who promises more of it. 

There are a couple of points that need to be made here.  As I pointed out in Five Short Blasts, the interests of corporations have long since diverged from the interests of the common good of Americans.  What does Ford care if America is bankrupted by an enormous trade deficit with China?  That’s of no consequence to them.  All they care about is selling more cars to the Chinese.  Meanwhile, Americans are put out of work and the government runs huge deficits to offset the negative effects of the trade deficit. 

Secondly, I’ve been saying for some time that nothing will change until economists grow spines, pull their heads out of the sand and once again consider the full spectrum of economic consequences of population growth.  In the meantime, our leaders will continue to take their economic advice from economists wedded to a flawed 19th century trade theory.  But I’m afraid it’s worse than that.  Even if economists did come to see that free trade with overpopulated nations is a sure-fire loser, the people who bankroll political campaigns still won’t care.  They’ll continue to pay their politicians for policies that serve their interests. 

It would take a grass roots uprising by voters, demanding that the newfound wisdom of economists (if you can imagine such a thing) be heeded, and it would take a strong leader who puts America’s interests first above all others to really make a difference.  Any one of these three things is unlikely.  A combination of the three happening in concert seems almost beyond the realm of possibility. 

Sorry for the pessimistic outlook but, since writing Five Short Blasts, my appreciation of the challenges associated with changing the course of globalization has steadily grown.  Nevertheless, I’ll keep plugging away at trying to make a difference. 

Hey, Mulally, I’m more glad than ever that I bought a new Chevy Malibu last year instead of that Mexican-made Fusion your people tried to sell me!


The Effects of QE-Infinity

September 18, 2012

Among my predictions for 2012 (made in November of 2011) was the following (one of my “long-shot” predictions):

  • The Federal Reserve will implement yet another round of “quantitative easing.”  The Fed will issue to each bank a sum of money sufficient to pay down each home mortgage on its books by an amount of about $10,000, in effect paying off $10,000 worth of everyone’s mortgage.  The total program will amount to approximately$1 trillion in new, printed money.  The goal of the program will be to re-energize the housing market, essentially providing every homeowner with $10,000 of additional equity in their homes. 

On Wednesday of last week, the Federal Reserve did indeed announce a third round of quantitative easing, a program in which it will buy approximately $40 billion worth of mortgage backed securities every month from now on, until unemployment returns to a normal level.  While this isn’t exactly what I predicted – forking over $10,000 in printed money to every mortgage holder – the effect may ultimately prove to be about the same, boosting home valuations by that amount or more. 

While nobody – and I mean nobody, including the Federal Reserve – really understands the ultimate consequences of this move – I thought it’d be interesting to consider the possibilities.  This is a bit off-topic for this blog, but not entirely, since this move by the Fed will surely cause distortions in the economy (that much is certain) that will mask the effects of trade and population growth to which this blog is devoted.  With that said, the following are some possible consequences of “QE-Infinity,” a term I saw used in an article that I think more accurately captures the scope of this latest round of easing (money printing).

  1. The intent of this round of easing is to more directly impact the housing sector of the economy than previous rounds of easing have done.  In essence, this round of easing is an attempt to reinflate that bubble.  Will it work?  First of all, consider the impact on the market for mortgage backed securities.  Every month, between new and existing homes, approximately 5 million homes are sold in the U.S.  If you assume that, on average, each is financed by a mortgage of $150,000, then that’s a total of $750 billion in mortgages.  All of these mortgages are then bundled into “mortgage backed securities” and sold by the banks to anyone who will buy them, including foreign investors, flush with American trade dollars that they need to plow back into American assets.  So an extra $40 billion per month injected into that market isn’t a lot.  The Fed’s hope is two-fold:  that the additional money will then make it possible for the banks to loan more money and that the additional supply of mortgage funds will drive down interest rates.  Regarding the latter effect, I have my doubts.  With a greater demand for their mortgage backed securities, banks can lower the interest rates that they’ll have to pay on those securities, but what motivation is there for them to pass those savings on to their mortgage customers?  In all likelihood, those savings will go right to the bottom line of the banks.
  2. There is already no shortage of funds available for mortgages.  The banks are flush with cash, thanks in large part to the earlier rounds of Fed easing.  The problem with the housing market is that lending standards have tightened dramatically (as well they should have), pushing sub-prime borrowers out of the market.  Unless the Fed also exerts pressure on the banks to once again relax their lending standards, it’s difficult to see how this round of easing will translate into more lending. 
  3. With the Fed stepping into the mortgage backed securities market in a not-insignificant way, others will be effectively crowded out of that market and forced to invest their money elsewhere.  Treasuries?  Maybe.  But that bond market is already over-inflated.  The more likely candidate is the stock market, where valuations are currently reasonable and not over-inflated like the bond market.  An additional $40 billion a month poured into that market, over time, will tend to drive the stock market much higher, but eventually it too will become overinflated.  Then what?  Who knows?
  4. A higher stock market will certainly make people who own stocks feel wealthier.  That will translate into more consumer spending, some of which will be spent on housing, but some spent on manufactured goods, most of which are imported today.  So, expect some slight boost to jobs and downward pressure on unemployment, but also expect our trade deficit to worsen.  So any positive effect on our manufacturing sector will be offset by more intense competition from foreign manufacturers.  The net result is likely to be a weakening of our manufacturing sector – just the opposite of what the Fed would like to see.
  5. Eventually, that additional $40 billion per month will end up in Americans’ pockets.  (America is the only place where American dollars are legal tender.)  The question is which Americans – bankers or real walk-around people?  And will they spend it or save it? 
  6. If they do spend it, how long will it be before inflation begins to take off?  That’s always been the predicted effect of money printing – runaway inflation.  But it hasn’t happened yet (at least not “officially”), perhaps because the previous programs weren’t big enough and didn’t last long enough.  But this one is big and it will go on forever until one of two things happens – until unemployment comes down or until inflation takes off, thus triggering the Fed’s other mandate – fighting inflation.  There’s a risk here.  If the Fed doesn’t back off on this easing in the face of quickening inflation, it raises the spectre of hyperinflation like what happened in post-WWI Germany.  Investors might flee the market in droves.   
  7. This huge influx of money into the economy may make lawmakers feel more at ease when it comes to cutting the federal budget deficit.  If they do, then the federal government will effectively pull money out of the economy as fast as the Federal Reserve puts it in, and the effect will be zero.  (Although a reduction in deficit spending will tend to dry up the supply of treasuries, likely blowing the bubble in that market even bigger.)  

I can tell you this:  quantitative easing on a global scale (other central banks are doing it too) is powerless to reduce unemployment on a global scale in the long run, since worsening unemployment is driven by consumers’ growing inability to utilize products as over-crowding worsens.  Japan is living proof of this.  Their people consume little not because they lack money – they save tons of money – but because their crowded living conditions make it impossible to consume. 

But if people don’t consume, then inflation will never be a factor either.  Is it possible that all of this QE-Infinity money will do absolutely nothing other than make a very few people very, very rich?  I don’t know.  Neither does anyone else.  Anyone who says they do, including the most esteemed economists, are only guessing or wishing.  In the end, someone will prove to be right, but probably for all the wrong reasons. 

It saddens me to see this ever-greater reliance on money printing to prop up the economy, since it reduces the chances that anything will ever be done to address the root causes of our problems – trade imbalances driven by flawed trade theory and the destructive use of population growth to prop up macroeconomic growth.  In the meantime, distortions in the economy can only worsen.


The Population Density Factor in the National Election

September 12, 2012

http://www.cnn.com/ELECTION/2012/ecalculator#?battleground

OK, here’s a fascinating analysis of the electoral map of the United States that you won’t find anywhere else.  When one looks at an electoral college map like the one you’ll find with the above link, you can’t help but be struck by how the vast majority of the U.S., at least in terms of surface area, is solidly in Romney’s camp.  Yet, Obama leads in electoral votes.  How can this be? 

Population density seems to be playing a critical role.  Of the 16 blue states on this map (those Obama is expected to win), the average population density is 928 people per square mile.  Of the 20 red states – those Romney is expected to win, the average population density is only 60.  The average population density of the six states leaning one way or another is 130.  The average population density of the 9 states considered “toss-ups” is 149. 

In other words, those states favoring Obama are 15 times as densely populated (on average) than those states favoring Romney.  The states that are toss-ups or leaning one way or the other fall in between in terms of population density. 

Perhaps this shouldn’t be surprising.  As populations become more crowded, it’s an inescapable fact that government must play an ever-greater role in maintaining an orderly society.  What’s less obvious to most (but not to those who understand the relationship between population density and unemployment) is that the government must play a greater role in providing a social safety net as populations grow more crowded.  I doubt that many people in the blue states really understand this.  But it seems that they sense it.  At the same time, the theme of smaller government plays well in sparsely populated states where people don’t sense the need for more government because they’ve never experienced living in crowded conditions. 

Sadly, this is a bad omen for the Republican Party.  I say “sadly” because all people would be far better off living in less crowded conditions where there is less need for government involvement in our lives.  The Republican philosophy will slowly resonate with fewer and fewer people.  It may explain why President Obama continues to enjoy as much support as he does in spite of the terrible economy and high unemployment.  Only a few decades ago, when the country was less crowded and more prosperous, he’d have been swept out of office in a landslide.  Today, however, a growing number of people sense that the laissez faire capitalism and globalization advocated by Republicans in this ever-more-crowded, dog-eat-dog world actually offers little hope of a better life.  While Democrats advocate the same things, at least they also favor maintaining a strong safety net (but at a cost that can’t be sustained). 

If Republicans want to prevent their electoral map from slowly shrinking as more states grow more crowded, they’d be wise to wake up to the role of population density in driving unemployment and poverty, and to the fact that the population growth they promote as a source of economic growth is actually choking the life out of their party.


Trade Deficit with S. Korea Worsens in July

September 12, 2012

Last month, with the release of the June trade results, I began tracking our trade deficit with S. Korea, now that the trade deal with that nation that President Obama hailed as a big win for American workers, has been in effect since March.  Through June, our trade deficit was 18% worse than the same four-month period in 2011.

Yesterday, the BEA (Bureau of Economic Analysis) released figures for the month of July.  Our trade deficit with S. Korea widened further, now running 21% worse than the same five-month period last year. 

Before the trade deal was enacted, I predicted that it would actually drive our trade deficit with S. Korea higher, based solely on the fact that S. Korea is 15 times as densely populated as the U.S.  So far, it looks like a good call.  And, when you understand the role of population density disparities in driving global trade imbalances, it was an easy call to make.  Too bad for American workers that economists and our political leaders don’t understand it.  Looks like we can kiss more American manufacturing jobs goodbye.  Thanks, President Obama.


Exports Fall in July, Lag President’s Goal by Record Amount

September 11, 2012

Wonder why you’re worse off than four years ago?  Wonder why we’re so heavily dependent on deficit spending just to keep the economy on an even keel?  Look no further than the July report on international trade, released this morning by the BEA (Bureau of Economic Analysis). 

The fact that the overall trade deficit held relatively steady at $42 billion is bad enough, but dig deeper and the picture gets uglier.  The trade deficit in manufactured goods jumped over $3 billion to $40.1 billion, continuing an ever-worsening trend and close to the worst level of the Obama administration.  Of course, the trade deficit with China gets much of the blame.  It rose for the fifth consecutive month to a new record – $29.4 billion.  But China isn’t the only story.  The trade deficit with Germany rose to $4.9 billion, just shy of the record of $5.0 billion set in December of last year.  The trade deficit with the rest of the Euro zone was $7.0 billion. 

Remember when, in January of 2010, President Obama vowed to double exports in five years to boost our manufacturing sector?  Overall exports actually fell in July and lagged that goal for the 12th consecutive month, and the shortfall increased to $19.9 billion.  Here’s a chart of our “progress”:  Obamas Goal to Double Exports

But what really matters are exports of manufactured goods, since that’s where the jobs are.  In that category the story is even worse.  Manufactured exports plunged by $3.3 billion and lagged the president’s goal for the 10th consecutive month by the largest amount yet by far – $13.4 billion.  Here’s the chart:  Manf’d exports vs. goal.

And the deficit in manufactured goods continued its worsening trend:  Manf’d Goods Balance of Trade.

Both President Obama and challenger Mitt Romney have pledged to pursue more free trade deals in an effort to open up more markets to our exports.  The problem is that, with each new market that we open, ours opens even wider and for every job created by those exports, two jobs are lost to another wave of imports.  When will a leader step forward with the “brass” (as Obama put it, or was it Biden?  I forget.)  to actually do something about trade policy that’s rooted in failed economic theory developed when trade consisted of swapping tea for beaver skins?


August Employment Level Falls 119,000, Unemployment Hits 11%

September 10, 2012

The Bureau of Labor Statistics (BLS) reported on Friday that the economy added 96,000 jobs while unemployment fell to 8.1%. 

The number of jobs added (as reported by the “establishment survey” portion of the report) fell well short of the number need to keep pace with growth in the labor force – about 125,000 per month (thanks primarily to the idiotic practice of importing more workers). 

So we should have seen a rise in unemployment.  Instead, the unemployment rate, which is determined by the “household survey” part of the report, fell by 0.2% to 8.1%.  Why?  Because, as noted broadly throughout the media on Friday, another 368,000 workers mysteriously vanished from the labor force once again.  Since August 2008 (exactly four years ago), the population has grown by nearly 10 million people.  Yet, during that time frame, the size of the civilian labor force actually shrank by 1,000 workers.  Of the ten million people we’ve added in the past four years, not a single one needs to work for a living?  Puh-lease.  No one could be gullible enough to believe this.  Here’s a prediction:  next month (the last report before the election), the labor force will shrink further, enought to bring the unemployment rate down to 7.9% – the level it was at when Obama took office.

But, while the media correctly reported on the supposed-contraction in the labor force as a bogus reason for the lower unemployment rate, amazingly (to me, at least), none reported the fact that the “employment level” from the same household survey – the equivalent of the establishment survey report of the number of jobs created – actually declined by 119,000 jobs. 

Here’s the data from the household survey, which includes a calculation of unemployment that’s more realistic, holding the size of the labor force as a fixed percentage of the population:  Unemployment Calculation

And here’s a chart of the unemployment rates:  Unemployment Chart.  Note the divergence between government myth (U3 and U6) vs. reality (U3a and U6a) since the beginning of the recession, in spite of the fact that they were in perfect agreement before the recession began.  And note how very little progress has been made in reducing real unemployment. 

To underscore the point about the lack of growth in the labor force in spite of growing the population by 10 million, here’s a chart of those two figures, along with the employment level, which fell for the 2nd month in a row:  Labor Force & Employment Level

Per Capita Employment also fell for the 2nd month and it remains near its lowest level of the recession.  This figure is analagous to the BLS’s “labor force participation rate” which, as was also broadly reported in the media on Friday, fell to its lowest level since the 1930s. 

The number of Unemployed Americans rose to its highest level since December of last year – over 17.5 million unemployed.  (And that doesn’t include the under-employed.)

The point here is that unemployment isn’t getting better, and it’s no surprise to anyone who understands that the root causes of our high unemployment – the trade deficit and continued immigration-driven population growth – have been completely ignored by this president, just as it has been for the past two generations.


Obama’s Speech: Where’s the Vision?

September 7, 2012

I don’t have much time to comment this morning, but can’t let Obama’s acceptance speech last night pass without comment.  Like Romney’s, it was loaded with motherhood and apple pie stuff, and gushed empathy for the middle class.  But contrary to speculation that Obama would put forward a new vision for America, all we got was a rehash of timid policies.  More emphasis on education.  A reiteration of the already-failed goal to double exports.  (Although it was interesting to note that the 5-year time frame wasn’t mentioned.  I guess now we’ll just wait for inflation to do the job.) 

Unlike four years ago, Mr. Obama is no longer promising to get tough on trade.  Now he admits that he’s a free trade theory convert.  At least he’s being honest this time, but now we know that there is absolutely no hope of any progress toward restoring a balance of trade and bringing American manufacturing jobs home.

Most disturbing was his “plan” for jobs.  600,000 additional jobs in gas exploration and production.  A million new manufacturing jobs in the next four years.  And that’s about it.  The Democrats complained about the Republicans’ arithmetic on the deficit.  OK, let’s do some arithmetic.  Seventeen million Americans are out of work.  The president holds out hope for hiring 1.6 million of them.  In the meantime, he also promises to import at least two million immigrants into the labor force, and he promises to cut the deficit by $4 trillion over ten years, which will cut about 4 million jobs from the economy.  When I do the math, we end up with 20.4 million unemployed Americans by the end of his next term.  By contrast, Romney says he has a plan to create 12 million new jobs, but hasn’t said how. 

Regardless of how the election turns out, the presidency will indeed be Clint Eastwood’s empty chair for the next four years.