Sunday, July 11, 2010

China May Not Subsidize Us Much Longer


As China becomes an economic giant, the world must consider the cause it is abetting.  This story from The New York Times provides a strong hint:

“This illustrates the extreme importance with which China views its access to natural resources, especially things like steel and oil,” said Joshua Rosenzweig, a Hong Kong-based official with the Dui Hua Foundation, a San Francisco group that monitors human-rights issues in China. “These are things China sees as vital to its economic growth, which in turn is vital to maintaining stability. It’s clear that resource issues are seen as national security issues.” [read more]
The government and corporations of the United States tend to view China as a growing resource and market for the United States.  There is some economic truth to that.  General Motors, a huge corporation with the government as majority owner, has just sold more vehicles in China than the United States.  That's good for General Motors and the United States government.  Is it necessarily good for the United States?

Many economists viewed the relationship of cheap imports and a potential huge market for selling our products as a win-win.  China was "subsidizing" us.  But were they?  Or does China have an agenda that is not necessarily a long-term win for the United States?  As basic and advanced engineering and production has moved from the United States to China, the core of the United States economy... its manufacturing... has be replaced by the so-called "service industry."  For those who were not around in the 1960s and 1970s, service industries were based on the wealth created by manufacturing and before that, agriculture.  Not exactly parasitic; not exactly symbiotic.

Things have changed.  Manufacturing has shriveled.  Manufacturing jobs have evaporated.  The service industry has followed because that which was being serviced is disappearing.  Now the hope is for service sectors such as health care to become the growth engine for our economy?  But who pays for this growth?  Insurance companies? Someone has to pay the premiums.  The government?  Someone has to pay the taxes... or lend the government money.  That seems to leave China... to subsidize us.  But how long will China want to "subsidize" us... or need us for their growth?

In 2007, I wrote this post [and several follow-up posts... see label CHINA] and published this image [click for larger view].

Nearly three years later, the impetus toward these goals is intensifying and becoming apparent to many more around the world.

China has become an immensely important resource and market for the United States corporations and Federal government.  U.S. consumers have benefited from cheaper goods, which is fortunate because more Americans have had to siphon funds from whatever assets they have in the absence of their formerly good paying jobs. The question is whether we can afford the next stage in China's development... the stage when the U.S. becomes an also-ran.  But the real question is whether or not the U.S. will have any say in its long-term economic future.  Our present policies and practices will determine that.



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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."
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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)