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Currency Wars, The Cycle of Deflation and Misguided U.S. Economic Policy

Economics / US Economy Oct 17, 2010 - 04:11 AM GMT

By: Gordon_T_Long

Economics

Diamond Rated - Best Financial Markets Analysis ArticleThe critical issues in America stem from minimally a blatantly ineffective public policy, but overridingly a failed and destructive Economic Policy. These policy errors are directly responsible for the opening salvos of the Currency War clouds now looming overhead.


Don’t be fooled for a minute. The issue of Yuan devaluation is a political distraction from the real issue – a failure of US policy leadership. In my opinion the US Fiscal and Monetary policies are misguided. They are wrong! I wrote a 66 page thesis paper entitled “Extend & Pretend” in the fall of 2009 detailing why the proposed Keynesian policy direction was flawed and why it would fail. I additionally authored a full series of articles from January through August in a broadly published series entitled “Extend & Pretend” detailing the predicted failures as they unfolded. Don’t let anyone tell you that what has happened was not fully predictable!

Now after the charade of Extend & Pretend has run out of momentum and more money printing is again required through Quantitative Easing (we predicted QE II was inevitable in March), the responsible US politicos have cleverly ignited the markets with QE II money printing euphoria in the run-up to the mid-term elections. Craftily they are taking political camouflage behind an “undervalued Yuan” as the culprit for US problems. Remember, patriotism is the last bastion of scoundrels

An unusual Wall Street Op-ed piece appeared Wednesday October 13th , written by Yiping Huang, a Professor of Economics - China Center for Economic Research at the prestigious Peking University. He called for common sense from Americans and the G20 regarding the potential for destructive currency wars:

“The upcoming Group of 20 summit in Seoul could become a battlefield of this new conflict. But it doesn't have to be. Rather than focus on currency manipulation, all sides would be better served to zero in on structural reforms. The effects of that would be far more beneficial in the long run than unilateral U.S. currency action, and more sustainable. …  it would be much better for the G-20 to focus on a comprehensive package centered on structural reforms in all countries. Exchange rates should be an important part of that package. For instance, to reduce the U.S. current-account deficits, Americans have to save more. But simply devaluing the dollar would not be sufficient for that purpose. Likewise, China's current-account surpluses were caused by a broad set of domestic economic distortions, from state-allocated credit to artificially low interest rates. Correcting China's external imbalances requires eliminating all of these distortions.”

I have been arguing that the US must address its structural problems for a long time now. Read my articles: 1) INNOVATION: America has a Structural Problem, 2) INNOVATION: What Made America Great is now Killing Her! and 3)  America - Innovate or Die! for the facts that are being continually secreted from you.

We have a Public Policy failure that does not recognize we have a major US structural and secular problem.

The solutions should be central to US mid-term party campaign election platforms. They aren’t?

We all need to appreciate that from a Chinese perspective, with the world’s largest holdings of US$ reserves, a US lead currency war based on dollar debasement is an American act of default to its foreign creditors no matter how you camouflage it. As JP Morgan was reported to have said regarding sovereign defaults on US loans ‘ this is why we have the US navy – to stop that from happening’. So far the Chinese have been more diplomatic, but their patience is wearing thin.

With 25 currency interventions in a one week period, matters are quickly getting out of control. Stephen King, the managing director of economics at HSBC writes:

"the rich Western world has over-consumed in recent years. It has too many debts. But rather than dealing with those debts – living a life of austerity, accepting a period of relative stagnation – the West wants to shift the burden of adjustment on to its creditors, even when those creditors are relatively poor nations with low per capita incomes. And that rankles not just with the Chinese but also with many other countries in Asia and in other parts of the emerging world. During the Asian crisis in 1997-98, Western nations, under the auspices of the IMF, insisted that Asian nations, having borrowed too much, should now tighten their belts. But the US doesn't seem to think it should abide by the same rules. Far better to use the exchange rate to pass the burden on to someone else than to swallow the bitter pill of austerity. No wonder the Chinese are not willing to play ball."

The Chinese reject the conventional thinking.

1- They could point to the yen's extraordinary rise over the last 40 years – from JPY360 against the dollar at the beginning of the 1970s to approaching JPY80 today – and note that, despite this huge appreciation, Japan's current account surplus has got bigger, not smaller.
2- They could argue that America's prescription for China's economic rebalancing – a stronger currency and a boost to domestic demand – was precisely the policy followed by the Japanese in the late-1980s, leading to the biggest financial bubble in living memory and the 20-year hangover that followed.
3- They could argue that the demand for a renminbi revaluation is, in truth, a policy of American default.
4- During the Asian crisis in 1997-98, Western nations, under the auspices of the IMF, insisted that Asian nations, having borrowed too much, should now tighten their belts. But the US doesn't seem to think it should abide by the same rules"
5- They could argue that Chinese manufacturing margins are so razor thin that significant change in exchange rates would wipe them out and force layoffs of millions of Chinese. Labor rates are already climbing in china and further squeezing margins.
6- A revaluation of the Yuan would only push manufacturing to Vietnam, Cambodia, Thailand, Bangladesh and other lower paying nations without improving the developing economies trade deficits.

If we truly wanted to head off this Currency War then it is a matter of doing what we did in 1985 with the Plaza Accord. We need another 2010 Plaza Accord version. But here is the rub. This Plaza Accord is not about the US and G5 as it was in 1985. It is about an Asian Plaza Accord under the support and auspices of the G-20. It is about the Asia export led and mercantilist leadership agreeing amongst themselves. The chances of this happening, the west seeing the requirement for it or the west relinquishing its powers in any measurable fashion are not possible as part of the political gamesmanship presently being played with our lives.
 
Why all this has been allowed to knowingly unfold leads me into a discussion where all ‘government fearing people’ fear to tread. Though I love the country I call home, I am coming to question our government. Frankly, I am losing my trust in its true motives.

I personally now support neither party since they have become the two heads of the same monster which does not operate ‘for the people by the people’.  I don’t believe I’m alone as I sense real anger across America; and the political polls clearly show confidence falling for our political leadership. Americans want their country back!

Almost three-quarters of Americans — 72 percent — have a negative view of the federal government, according to a USA Today/Gallup poll released Wednesday. It is the highest level of dissatisfaction since the Watergate scandal that led to President Richard Nixon’s resignation in 1974.
“The federal government has an image problem,” said Frank Newport, editor-in-chief of Gallup. “It’s like the cable company; they may perform a necessary function but people are dissatisfied with the service.” Newport said when you ask people what they think of the government, “‘Bleah’ comes out of their mouth.” Congress is so polarized that it is hard-pressed to accomplish even the things that the public says are important. When respondents in the Gallup survey were asked what the government should do, more than a third placed top priority on economic and budgetary concerns: 

  • Fifteen percent said the government should “create jobs.”
  • Six percent said “improve the economy.” 
  • Another 6 percent said “balance the budget.”
  • But 4 percent said the government should “expand health care coverage.”
  • And 4 percent said “cut taxes.”

All told, 35 percent mentioned those specific problems. Yet Congress failed to pass even one of 13 regular appropriations bills before recessing last month for the midterm campaign, while lawmakers have made little progress in addressing the deficit.

A PUBLIC POLICY SCORE CARD - WHAT HAVE OUR POLITICAL LEADERS ACHIEVED

Let’s recap where we are because the happy face media doesn’t want to tell you. They are reluctant to inform you because it hurts consumer consumption and therefore advertising revenues. It simply isn’t smart business to publically state the reality of the situation, and by the way, they get sued for any possibly unsubstantiated negative comments that might stop a stock(s) from rising.



Six corporations now collectively control US media and absolutely dominate news and entertainment.

 “When you control what Americans watch, hear and read you gain a great deal of control over what they think. They don’t call it ‘programming’ for nothing” (1).

 Americans now watch on average 153 hours of television a month. You would think with this level of information consumption we would be informed – somewhat?

I’m sure you are all familiar with the facts in the chart above?  No?  Is it because no one tells you? Still skeptical? How many of the following major facts are you familiar


With and you hear your political candidate discussing? Tick them off as you read them.

THE FACTS – JUST THE FACTS! – Of the 3 dozen below  how many will you hear during the campaign?

1- The United States has lost approximately 42,400 factories since 2001.  About 75 percent of those factories employed over 500 people when they were still in operation. Source: The American Prospect
2- The United States has lost a total of about 5.5 million manufacturing jobs since October 2000. Source: The American Prospect
3- The United States has lost a whopping 32 percent of its manufacturing jobs since the year 2000.
4- As of the end of 2009, less than 12 million Americans worked in manufacturing. The last time less than 12 million Americans were employed in manufacturing was in 1941.
5- In 1959, manufacturing represented 28 percent of U.S. economic output. In 2008, it represented 11.5 percent. Source: The American Prospect
6- Ten years ago, the United States was ranked number one in average wealth per adult. In 2010, the United States has fallen to seventh.
7- The United States once had the highest proportion of young adults with post-secondary degrees in the world. Today, the U.S. has fallen to 12th.
8- American 15-year-olds do not even rank in the top half of all advanced nations when it comes to math or science literacy.
9- In America today, consumption accounts for 70 percent of GDP. Of this 70 percent, over half is spent on services. Source: Economy In Crisis
10- In 2001, the United States ranked fourth in the world in per capita broadband Internet use. Today it ranks 15th. Source: MACLEANS.CA
11- In 2008, 1.2 billion cell phones were sold worldwide. So how many of them were manufactured inside the United States? Zero. Source: The American Prospect
12- The television manufacturing industry began in the United States. So how many televisions are manufactured in the United States today? According to Princeton University economist Alan S. Blinder, the grand total is zero.
13- Printed circuit boards are used in tens of thousands of different products. Asia now produces 84 percent of them worldwide.
14- Manufacturing employment in the U.S. computer industry is actually lower in 2010 than it was in 1975. Source: Businessweek
15- One prominent economist now says that the Chinese economy will be three times larger than the U.S. economy by the year 2040.
16- According to a new study conducted by Thompson Reuters, China could become the global leader in patent filings by next year.
17- Back in 1980, the United States imported approximately 37 percent of the oil that we use. Now we import nearly 60 percent of the oil that we use.
18- The U.S. trade deficit is running about 40 or 50 billion dollars a month in 2010. That means that by the end of the year approximately half a trillion dollars (or more) will have left the United States for good.
19- Between 2000 and 2009, America's trade deficit with China increased nearly 300 percent.
20- Today, the United States spends approximately $3.90 on Chinese goods for every $1 that China spends on goods from the United States.
21- According to a new study conducted by the Economic Policy Institute, if the U.S. trade deficit with China continues to increase at its current rate, the U.S. economy will lose over half a million jobs this year alone.
22- If our trade deficit with China increases at its current rate, the U.S. economy will lose over half a million jobs this year alone. Source: Economic Policy Institute [PDF]
23- As of the end of July, the trade deficit with China had risen 18 percent compared to the same time period a year ago. Source: Economic Policy Institute [PDF]
24- The United States spends approximately $3.90 on Chinese goods for every $1 that the Chinese spend on goods from the United States. Source: The Economic Collapse
25- One prominent economist is projecting that the Chinese economy will be three times larger than the U.S. economy by the year 2040. Source: MarketWatch
26- In the 2009 "prosperity index" published by the Legatum Institute, the United States was ranked as just the ninth most prosperous country in the world. That was down five places from 2008.
27- The economy of India is projected to become larger than the U.S. economy by the year 2050.
28- From 1999 to 2008, employment at the foreign affiliates of US parent companies increased an astounding thirty percent to 10.1 million. During that exact same time period, U.S. employment at American multinational corporations declined 8 percent to 21.1 million.  Source: Tax Analysts [PDF]

International Job Growth = 30% to  10.1 = 233K Jobs
Domestic Job Cuts =  8% decline from 21.1M = 184K Cuts
Net Growth =  233K – 184K = 49K
Net Percentage Growth = 49 / (10.1M + 21.1M) = 0.16% Employment Growth.

Multinationals show paltry hiring growth and are moving the existing work force steadily offshore.


29- The Census Bureau says 43.6 million Americans are now living in poverty, which is the highest number of poor Americans in the 51 years that records have been kept. Source: Washington Post
30- Approximately 750 good paying middle class jobs are going to be lost because making Ford Rangers in Minnesota does not fit in with Ford's new "global" manufacturing strategy. Source: Economy In Crisis
31- Dell Inc. has announced plans to dramatically expand its operations in China with an investment of over $100 billion over the next decade.  Dell has announced that it will be closing its last large U.S. manufacturing facility in Winston-Salem, North Carolina. Approximately 900 jobs will be lost.
Median household income in the U.S. declined from $51,726 in 2008 to $50,221 in 2009. That was the second yearly decline in a row.
32-The United States has the third worst poverty rate among the advanced nations tracked by the Organization for Economic Cooperation and Development.
33- Since the Federal Reserve was created in 1913, the U.S. dollar has lost over 95 percent of its purchasing power.
34- U.S. government spending as a percentage of GDP is now up to approximately 36 percent.
35- The Congressional Budget Office is projecting that U.S. government public debt will hit 716 percent of GDP by the year 2080.
36- Do you know what our biggest export is today? Waste paper.  Yes, trash is the number one thing that we ship out to the rest of the world as we voraciously blow our money on whatever the rest of the world wants to sell to us.
 
Has anyone been telling you this and have any of your politicians raised this in the current election campaigning?


Forgetting for the moment that failed US public policy is at the root of the financial crisis, the above chart shows that even the US’s recovery has been noticeably and significantly worse than other developed nations.  The US policy approach to the solution to the financial crisis has been the least effective according to these figures just released by the Organization for Economic Co-operation and Development (OECD).

THE GUILTY PARTIES ARE FLEEING LIKE RATS FROM A SINKING SHIP

We have witnessed defections in the last month of three of the top four architects of Obama’s economic policy team. Plus the hidden fifth, Rahm Emanuel announced his departure October 1st. Rumors are now swirling that Tim Geithner will leave after the election and rumors grow that Michael Bloomberg is going to be the next Treasury Secretary (for a presidential run in 2012 or 2016, (another recent rumor)). They all know their policies failed, the public knows it, the media does but is afraid to say it and President Obama knows his administration is facing being a lame duck Presidency for the last two years of his term because of it.



Recovery Is Stuck in Neutral  WSJ   - “The economic recovery is largely stuck in neutral, reports on manufacturing, construction and spending show, and the president of the Federal Reserve Bank of New York gave the clearest signal yet that the Fed was preparing new actions aimed at boosting growth. In a speech Friday (Oct 1st) before the Society of American Business Editors and Writers, New York Fed President William Dudley indicated that the Fed, confronted with "unacceptable" conditions of high unemployment and low inflation, is likely to take new action to support the economy.  Mr. Dudley said $500 billion in additional asset purchases would provide stimulus equivalent to a reduction of 0.5 to 0.75 percentage point in the federal funds rate, the Fed's typical lever for stimulating the economy - The current situation is wholly unsatisfactory” and “both the current levels of unemployment and inflation and the timeframe over which they are likely to return to levels consistent with our mandate are unacceptable,” Federal Reserve Bank of New York President William Dudley said in a prepared text.

The chart above was updated in the fall of 2009 in my thesis paper: Extend & Pretend. It was pointed out that the public policy decisions taken by the administration would be the deciding factor on where the market headed after a 2008 market sell-off counter rally was completed, a subsequent consolidation down leg took place and the effects of the policies were evident. We are now entering the latter period. It doesn’t look pretty.             

FLAWED POLICY THINKING:

Housing Prices – Let prices fall and allow the system to clear.
- We keep trying to hold housing prices up to protect bad banking decisions and reward bad homeownership decisions.
- Why isn’t lower housing prices and more affordable housing good for Americans?

Commercial Real Estate (CRE) is Out of Time – Let prices fall and allow the system to clear.
- Extend & Pretend accounting games have run out of time.
- Occupancy rates of offices, hotels and retail shows us massive overbuilding took place and must now be re-priced. Instead we are trying to hold them up artificially.
- Why are cheaper rents not good for America?

Too Big To Fail – Let major players fail and let M & A and the bankruptcy process work.
              - The Frank-Dodd Legislation is a 
             complete legislature failure
- Regulators are now in control and are in turn effectively controlled by the lobbyists and major private player interests.
- Less than 9 Congressmen / Senators claimed to have read the full ~2400 page Frank-Dodd Bill
   
Obamacare- A Hidden Tax Code in disguise
              - Few elected officials claim to have read the full approximate bill ~2000 pages.

The obvious cause of these failed public policy approaches are the following:

  • A Washington Political System of lobbyist, electioneering costs, legislative/regulatory complexity and lack of accountability which is no longer serving the public.
  • The concept of a “Federal Reserve”  and US Money Centered Banking is unstable long term under a fiat currency regime.
  • The media is no longer effectively serving the democratic system. It must be broken up.

Stop interfering and let capitalism work its proven magic!

We are locked into Crony Capitalism, Socializing Losses, Political Pandering
and never ending Campaigning versus Governing

The following chart shows that money has become a commodity. It can’t command any return for holding it (interest coupon) similar to any commodity where there is excess supply. The unique structure of notes and bonds are generating paper capital gains due to falling rates. Remember, these gains are not realized until the ‘paper’ is actually sold or expires and the issuer is capable of paying the surrender value.

Soon Someone Is Going To Get Crushed By The Quantitative Easing Trade  Business Insider 

“Goldman observed today that QE is priced into the bond market, and well, duh! Your grandmother knows QE is coming, and that more and more of every currency is being manufactured right now. That doesn't mean it can't go on for awhile, but it does mean that there's nobody not aware of this trade. When will it end? Not clear, but come November 2-3, if people are still long the QE trade, and the Fed actually does deliver, we could be due for a huge sell-the news event. Combine that with whatever happens during the election, and it certainly seems like a heck of a lot is building up to that day.”

CAVEAT EMPTOR!

Sign Up for the next release in the Currency Wars series:  Tipping Points

Gordon T Long   gtlong@comcast.net   Web: Tipping Points
Mr. Long is a former executive with IBM & Motorola, a principle in a high tech start-up and founder of a private Venture Capital fund. He is presently involved in Private Equity Placements Internationally in addition to proprietary trading that involves the development & application of Chaos Theory and Mandelbrot Generator algorithms.

Gordon T Long is not a registered advisor and does not give investment advice. His comments are an expression of opinion only and should not be construed in any manner whatsoever as recommendations to buy or sell a stock, option, future, bond, commodity or any other financial instrument at any time. While he believes his statements to be true, they always depend on the reliability of his own credible sources. Of course, he recommends that you consult with a qualified investment advisor, one licensed by appropriate regulatory agencies in your legal jurisdiction, before making any investment decisions, and barring that, we encourage you confirm the facts on your own before making important investment commitments.

© Copyright 2010 Gordon T Long. The information herein was obtained from sources which Mr. Long believes reliable, but he does not guarantee its accuracy. None of the information, advertisements, website links, or any opinions expressed constitutes a solicitation of the purchase or sale of any securities or commodities. Please note that Mr. Long may already have invested or may from time to time invest in securities that are recommended or otherwise covered on this website. Mr. Long does not intend to disclose the extent of any current holdings or future transactions with respect to any particular security. You should consider this possibility before investing in any security based upon statements and information contained in any report, post, comment or recommendation you receive from him.


© 2005-2014 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Comments

christian pickett
17 Oct 10, 18:11
doesn't matter if hedgies sell the news...(40 billion levered pomo's will soon bring em up)

even if the hedge funds decide to sell the news .....this doesn't mean QE won't work.

here's why.....POMO'S levitate the market....primary dealers get fresh cash...many billions on pomo day..lever it up and buy stuff like equties....then they soar.

So sell the news all you like.....bring the dow from ....say ....11200 down to 10,900. Doesn't matter because after a month of pomo's (50 billion monthly) the market will be near 11,500-12,000 on hot air i.e fed QE.


Shelby Moore
18 Oct 10, 06:21
manufacturing & China

Mr. Gordon Long,

I usually have great respect for your articles, as you approach from an engineering factual analysis, and also I do understand you come from the generation of US engineers that watched our technology be outsourced. I knew the (now deceased after his car spun out of control in 1992) guy who developed the computer modeling of the N-P-N transistor and he had lamented how the US engineers were told to give away the technology to the Japanese.

However, you are chasing shadows if you think outsourcing of manufacturing is the cause of current USA problems, and even worse if you think re-gaining manufacturing is a solution. Don't buy into that protectionist lie and myopia:

http://www.marketoracle.co.uk/Article23142.html#comment95152

Manufacturing is being increasingly automated, and with 7 billion people on earth for the remaining mundane repetitive jobs, the profit margins are being driven to near 0. Manufacturing and the industrial age epoch is dying. Humans are too intelligent to spend their lives employed doing repetitive motions. That is what robots can do better.

The future of technology is software, even the natural sciences are being reduced to computer logic (e.g. nanotech, biotech, etc.):

http://goldwetrust.up-with.com/knowledge-f9/book-ultimate-truth-chapter-6-math-proves-go-forth-multiply-t159-15.htm#3748

Westerners have to move up on the economic food chain, not regress backwards on the evolutionary economic epochs. Here is a specific idea of how to do so, which I am working on implementing now:

http://goldwetrust.up-with.com/knowledge-f9/book-ultimate-truth-chapter-6-math-proves-go-forth-multiply-t159-15.htm#3640

What is causing the world's problems is mankind's love of debt and pooling decisions and resources, and promising the future (which causes over-consumption and other forms of mis-allocation of capital), i.e. the fiat system:

http://www.marketoracle.co.uk/Article21650.html

Individual action to come out of the fiat parasite system is the only solution:

http://www.marketoracle.co.uk/Article23382.html#comment95372

And the REAL (true) economy will be much smaller when we do:

http://www.marketoracle.co.uk/Article23546.html#comment95571

If you want to read everything I have written on this site so you can come up to speed on understanding the concept and math:

http://www.google.com/search?q=site:marketoracle.co.uk+Shelby+Moore

Catch my published articles too:

http://www.marketoracle.co.uk/UserInfo-Shelby_H_Moore.html

IMO, you are wrong about the China factor, as it is complicit:

http://www.marketoracle.co.uk/Article23546.html#comment95571

(follow all the sub-links 3 layers deep to read all about west complicit in Yuan peg, etc)

Cheers.


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