Wednesday, March 23, 2005

Excessive Spending - What goes around

I've gotten a number of emails about my post of March 18. My position was that certain types of trade are not necessarily beneficial to the U.S.... but the debate seemed to get sidetracked around Canadians mowing lawns versus countries 8,000 miles away.

One gentleman, Roland Patrick, suggested that there was no trade problem and that could be explained by a simple example: we buy from wine and cheese from France, they buy electronic products from Japan, and Japan buys apples and Jack Daniels from us... and we all get along fine and prosper.

My position is that it isn't quite working that way. The current account deficit of $0.6 trillion... or $600 billion... or $600,000 million... means that the product we seem to trade best to the world is currency... not manufactured goods or services or intellectual property. The government prints them and we spend them. And the world continues to accumulate them. Then what?

  1. they buy U.S. government backed notes and convert currency into U.S. debt which becomes a tax burden... or we simply increase our national debt to an even larger, staggering amount to continue spending more than we earn.
  2. they don't like U.S. government backed notes (maybe getting too risky), but find that U.S. land is a great bargain so they buy land and property... which is okay because now they are taxpayers... while driving up the cost of property so that U.S. citizens have a harder time owning property (talk to New Yorkers)... renting is good.
  3. they don't like the either U.S. government backed notes (too much national debt?) and they don't find the U.S. a great place to start a business (labor costs too high), so they try to exchange their dollars for Euros... driving down the value of the dollar... making U.S. products more attractive versus some imports... but still not competitive with the cheap-labor producers... and making heavily imported items such as oil more expensive resulting in higher inflation, higher interest rates by the Fed, and greater costs to businesses which must be covered by raising prices... keeping the U.S. products non-competitve... and U.S. citizens relatively worse off (fewer high paying jobs and increasing cost of goods... remember all of those U.S. industries that have gone under or are struggling to compete with the cheap labor countries).
Okay, the sky isn't falling... yet. The negative current account is still only 5% of the GNP. But the dollar has fallen quite a bit in the past 2 years. Oil has risen (and, yes, a lot of that has to do with China who is now becoming our chief competitor by undercutting domestic producers by refusing to let their currency float) and is spurring inflation (despite government insistence that it isn't) and is sure to affect the vast travel and tourist business segments negatively. And unemployment still remains way too high in traditional manufacturing areas... but is not too bad in the fast food sector with so many more available workers.

Oh, it's all supposed to work out. GM will be rich because of what they make in China. Maybe. But GM is not doing all that well financially despite dreams of glory in the Chinese marketplace. And then there is the Chery... go ahead and Google that one.

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There is always an easy solution to every human problem—neat, plausible, and wrong.
Henry Louis Mencken (1880–1956)
“The Divine Afflatus,” A Mencken Chrestomathy, chapter 25, p. 443 (1949)
... and one could add "not all human problems really are."
It was beautiful and simple, as truly great swindles are.
- O. Henry
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Tracking Interest Rates

Tracking Interest Rates


SEARCH BLOG: FEDERAL RESERVE for full versions... or use the Blog Archive pulldown menu.

February 3, 2006
Go back to 1999-2000 and see what the Fed did. They are following the same pattern for 2005-06. If it ain't broke, the Fed will fix it... and good!
August 29, 2006 The Federal Reserve always acts on old information... and is the only cause of U.S. recessions.
December 5, 2006 Last spring I wrote about what I saw to be a sharp downturn in the economy in the "rustbelt" states, particularly Michigan.
March 28, 2007
The Federal Reserve sees no need to cut interest rates in the light of adverse recent economic data, Ben Bernanke said on Wednesday.
The Fed chairman said ”to date, the incoming data have supported the view that the current stance of policy is likely to foster sustainable economic growth and a gradual ebbing in core inflation”.

July 21, 2007 My guess is that if there is an interest rate change, a cut is more likely than an increase. The key variables to be watching at this point are real estate prices and the inventory of unsold homes.
August 11, 2007 I suspect that within 6 months the Federal Reserve will be forced to lower interest rates before housing becomes a black hole.
September 11, 2007 It only means that the overall process has flaws guaranteeing it will be slow in responding to changes in the economy... and tend to over-react as a result.
September 18, 2007 I think a 4% rate is really what is needed to turn the economy back on the right course. The rate may not get there, but more cuts will be needed with employment rates down and foreclosure rates up.
October 25, 2007 How long will it be before I will be able to write: "The Federal Reserve lowered its lending rate to 4% in response to the collapse of the U.S. housing market and massive numbers of foreclosures that threaten the banking and mortgage sectors."
"Should the elevated turbulence persist, it would increase the possibility of further tightening in financial conditions for households and businesses," he said.

"Uncertainties about the economic outlook are unusually high right now," he said. "These uncertainties require flexible and pragmatic policymaking -- nimble is the adjective I used a few weeks ago."

December 11, 2007 Somehow the Fed misses the obvious.
[Image from:]
December 13, 2007 [from The Christian Science Monitor]
"The odds of a recession are now above 50 percent," says Mark Zandi, chief economist at Moody's "We are right on the edge of a recession in part because of the Fed's reluctance to reduce interest rates more aggressively." [see my comments of September 11]
January 7, 2008 The real problem now is that consumers can't rescue the economy and manufacturing, which is already weakening, will continue to weaken. We've gutted the forces that could avoid a downturn. The question is not whether there will be a recession, but can it be dampened sufficiently so that it is very short.
January 11, 2008 This is death by a thousand cuts.
January 13, 2008 [N.Y. Times]
“The question is not whether we will have a recession, but how deep and prolonged it will be,” said David Rosenberg, the chief North American economist at Merrill Lynch. “Even if the Fed’s moves are going to work, it will not show up until the later part of 2008 or 2009.
January 17, 2008 A few days ago, Anna Schwartz, nonagenarian economist, implicated the Federal Reserve as the cause of the present lending crisis [from the Telegraph - UK]:
The high priestess of US monetarism - a revered figure at the Fed - says the central bank is itself the chief cause of the credit bubble, and now seems stunned as the consequences of its own actions engulf the financial system. "The new group at the Fed is not equal to the problem that faces it," she says, daring to utter a thought that fellow critics mostly utter sotto voce.
January 22, 2008 The cut has become infected and a limb is in danger. Ben Bernanke is panicking and the Fed has its emergency triage team cutting rates... this time by 3/4%. ...

What should the Federal Reserve do now? Step back... and don't be so anxious to raise rates at the first sign of economic improvement.
Individuals and businesses need stability in their financial cost structures so that they can plan effectively and keep their ships afloat. Wildly fluctuating rates... regardless of what the absolute levels are... create problems. Either too much spending or too much fear. It's just not that difficult to comprehend. Why has it been so difficult for the Fed?

About Me

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Michigan, United States
Air Force (SAC) captain 1968-72. Retired after 35 years of business and logistical planning, including running a small business. Two sons with advanced degrees; one with a business and pre-law degree. Beautiful wife who has put up with me for 4 decades. Education: B.A. (Sociology major; minors in philosopy, English literature, and German) M.S. Operations Management (like a mixture of an MBA with logistical planning)