Friday, January 28, 2005

The #1 Law of Economics

The #1 law of economics is; You can only free-trade until cheaper labor out-trades you!

Mercantilism is a great way to advance statecrafted wealth!:-) It's how the U.S. started out in 1791. Alexander Hamilton was a genius at setting up our first great mercantilist system to counter England's Hegemony and real financial suzerainty. Well, 200 yrs. later and the table's been reversed. Now, we face China with her powerful statecrafted mercantilist system attacking America's statecrafted hegemony, and our actual financial suzerainty. How long can America survive supporting the rest of the world? Good question, I can't answer that, but I do know unless our hegemonic law structures are changed back toward real world balances, we will face financial destruction by, not only China, but all her mercantilist minions all over the globe.

It's really a sad state of affairs when the greatest economists and nation on earth can't figure out the simplicity of the above. The battles of hegemony, mercantilism and the cheapest labor have been going on since the beginning of organized economic societies, whether Egyptian, Greek, Roman, Myan, Hapsburg, Spanish, or English and American. What's it take to see logical common sense? Does everyone think China will go the way of Japan's mercantilism? They should think again because either way China goes, success or collapse, collapses the entire system this time. There won't be a second chance. So, I would suggest we start looking seriously at a little repair work here at home. There are many solutions. The one I would suggest is a sliding scale law structure of say 10% per year change, toward rebalancing the global economies through the anti-hegemonist anti-mercantilist policies of J.M. Keynes' full and fair balance of payments system, that was never enacted in the `40's.

More On Mercantilism.

Wednesday, January 26, 2005

Davos - US Consumer - Weakest Link In World Economy

DAVOS US consumer ´weakest link´ in world economy - Morgan Stanley UDPATE
Wednesday, January 26, 2005 11:24:51 AM

In a bearish assessment of global economic prospects for 2005, Roach told an introductory meeting of the World Economic Forum that rampant US consumption had been the main driver of the spectacular rates of growth achieved in 2004

However, with economies all around the world increasingly reliant on exporting their goods to the US, a moderation in US spending could have serious repercussions for the global economy

"For me, something just doesn't add up. The self indulgent American consumer ... is an accident waiting to happen," said Roach, a long-time pessimistic on the US economy

Rather than using the fruits of the increased economic activity, US consumers are funding their massive spending spree through borrowing against the inflated values of their homes. "We are in the early stages of a residential property price bubble in the US. Consumers know this and that is why they are turning their homes into a massive ATM machine," explained Roach

US consumers "suck money" out of their properties to fuel imports from Asia. In turn Asian countries buy US dollars, keeping interest rates low and allowing US householders to borrow even more, according to Roach

"This is an utterly insane way to run the world economy. You know that, we know that, but the Federal Reserve is in denial about that," he said

Roach suggested that the Federal Reserve had engineered the boom in the US property market as a means of bolstering the US economy. By stoking house prices through low borrowing costs, the Fed ensured that US consumption and, by extension economic growth, remained robust, he said. "The Fed knows it is culpable as the bubbleblowers in keeping this asset-driven US economy alive," he said. With US rates rising from the "unconscionably" levels of recent years, there will inevitably be a fall back in US property price inflation and hence consumer spending, explained Roach. "When the music stops ... and US rates go up we'll see how asset-dependent the US consumer has become," warned Roach

Jacob Frenkel, vice chairman of US insurance giant American International Group, said rampant US consumption was just one of the economic imbalances capable of wreaking havoc on the world economy. The massive trade deficit the world's largest economy is running could also stop global economic growth in its tracks

"The US current account is not a a problem for the US. It brings about risks for the world economy," he said. "I'm not concerned not because of the fact that there is no way to deal with it (the current account deficit) but because of the way it is not being dealt with," he said. He called on the newly elected US government to face up to the soaring budget and account deficits by introducing measures to encourage saving and discourage consumption

Frenkel, a former head of the Israeli Central Bank, urged representatives at a forthcoming G7 Meeting of Finance Ministers to address profligate US fiscal spending. "There must be debates on US policy measures. They must not just a focus on the dollar," as a remedy for the US trade deficit, said Frenkel

Wednesday, January 12, 2005

Auerback - A Rude Awakening

What Could Go Wrong In 2005?

...And then there is the problem of crude: The one thing Mr Bush has never mentioned in Iraq is oil, but as former Secretary of State James Baker presciently indicated years ago in a Council on Foreign Relations study of world energy problems, oil can never lurk far from the forefront of American policy objectives:

“Strong economic growth across the globe and new global demands for more energy, have meant the end of sustained surplus capacity in hydrocarbon fuels and the beginning of capacity limitations. In fact, the world is currently precariously close to utilizing all of its available global oil production capacity, raising the chances of an oil supply crisis with more substantial consequences than seen in three decades. These choices will affect other US policy objectives: US policy toward the Middle East; US policy toward the former Soviet Union and China; the fight against international terrorism.”

The CFR report made clear another salient point: “Oil price spikes since the 1940s have always been followed by recession.” In its current debt-riddled condition, this could bring on something far worse than a garden-variety economic downturn for the US.

The most recent spike in the price of oil was not simply a reflection of rising political uncertainty in the Middle East. There are reasons to expect higher levels over the next two to three decades than over the past two: strong demand from emerging economies, notably China and India, being the most important.

The parallel drive for energy security on the part of both the US and China has makings of a major war over oil being precipitated at some point in the future. Yukon Huang, a senior advisor at the World Bank recently noted that China's reliance on oil imports, plus problems with environmental protection, including serious water shortages, pose significant threats to the country's economic development over the next three to five years. The World Bank official said sustainability issues were a much greater threat to China's development than political or economic risks, such as the massive quantity of bad loans held by the nation's state-owned banks or a potential conflict over Taiwan.

China’s response to this challenge is likely to bring them increasingly into conflict with the US. Venezuelan President Hugo Chavez has recently returned from a Christmas trip to China where he apparently sold America's historic oil supply to the Chinese together with prospecting rights. Even Canada (in the words of President Bush, “our most important neighbors to the north”) is negotiating to sell up to 1/3 of its oil reserves to China. CNOOC, China’s third largest oil and gas group, is actually considering a bid of more that $13bn for its American rival, Unocal. The real significance of the deal (which, given the size, could not have been contemplated in the absence of Chinese state support) is that it illustrates an emerging competition between China and the US for global influence – and resources.

The drive for resources is occurring within the context of a world in which alliances are being formed amongst major oil producing and consuming nations (outside the US) as a kind of post-Cold War global lineup against perceived American hegemony: Brazil, China, India, Iran, Russia and Venezuela. Russian President Putin’s riposte to the US strategy of increasing its military presence in some of the nations of the old Soviet Union (and thereby ensure that they cut all links with Moscow) has been to ally the Russian and Iranian oil industries, and open up the shortest, cheapest and most lucrative oil route of all, southwards out of the Caspian to Iran. Russia and China have recently announced large joint military exercises and the EU is negotiating to drop its ban on arms shipments to China (much to the publicly expressed chagrin of the Pentagon). Russia has also offered a stake in nationalized Yukos to China.

This is pretty brazen behavior by all concerned, but is symptomatic of the growing perception of the US as a declining giant, albeit one with the capacity to strike out lethally when wounded. American military and economic dominance may still be the central fact of world affairs today, but the limits of this primacy (which dates back to the fall of the Berlin Wall) are becoming increasingly evident, just as dollar’s fall reflects this in economic terms. It all makes for a very challenging backdrop in 2005. This could therefore be the year when longstanding problems for the US finally do matter. Do not expect Washington to accept the dispersal of its economic and military power lightly... What Could Go Wrong In 2005? - Link