99 Weeks

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Beginning this Christmas, inflation is going to become a constant fixture globally. Wage increases in China must translate to higher prices for consumers of Chinese goods because there is simply no way for producers or intermediaries to absorb the costs as margins are already wafer thin. The Yuan appreciated by 23% against the Dollar from 2005 to 2008 and that increase was not entirely passed on American consumers. Chinese producers and distributors were forced to accept lower margins to maintain their business volumes due to the market power of American intermediaries like Walmart. Hence, for the last 5 years, Chinese exporters to the United States have only really been marginally profitable at best. The Chinese government, mostly it was Premier Wen Jiabao, halted the Yuan’s rise after learning of the difficulties that Chinese exporters had in passing on price increases to end customers.

News of Chinese labor unrest have made headlines worldwide. It seems spontaneous but I am guessing that the Chinese government is actively involved in orchestrating this very public call for higher wages. Now that everyone knows that salaries have been hiked by 20-30% in China, distributors of Chinese goods will have no choice but to accept a price increase. Notice how Yuan is allowed to appreciate only after the media hoopla around the strikes in China runs its course? The Yuan can now continue its rise against the Dollar as the Chinese government is now confident of transmitting its effects to American consumers.

Conventional wisdom in the United States generally places the blame on America’s lack of export competitiveness with China on the Yuan-Dollar exchange rate. But in the years that the Yuan appreciated against the Dollar, the trade deficit between China and America actually grew. In other words, based on the evidence, a weak Dollar would actually mean a higher trade deficit. I believe that the reason for this lies in the nature of the trade. China exports mostly manufactured goods to America whereas America exports mostly agricultural produce to China. Agricultural commodities are mostly pegged to the Dollar but manufactured goods have to take into consideration the cost of local inputs like labor costs, which in this case is pegged to the Yuan. As the Dollar weakens against the Yuan, prices of Chinese goods exported to America have to rise to take into account the higher costs whereas the price of the agricultural commodities which America exports to China remains the same. The result is a higher trade deficit.

To a certain extent I do not disagree that tackling the trade deficit is perhaps the best way to tackle the problem of structural unemployment in America. The question is how it should be done. America tends to view exchange rate realignment as all important but it is not clear if a weak Dollar would actually translate into higher exports. A more basic problem is that America simply does not have anything to sell. Go to a Walmart, Costco, Target or even specialty retail outlets like Bed, Bath and Beyond, and count the number of items that are actually made in America. Aside from food, you will be hard pressed to find anything that says “Made in USA”.

Headline news coast to coast, unemployment benefits will no longer be extended. With such extensive coverage, everyone ought to know of it by now. Giving money to people to do nothing was never a sensible decision. In fact, the whole idea of having unemployment insurance is fatally flawed. When people are working and have an income, the only prudent thing to do is save part of your salary as a buffer against unexpected future shocks. Basically, it is important to put aside something extra when times are good to help tide over when times are hard. It is a personal responsibility that should never have become part of the state’s burden.

And now that the gravy train has ended, the people are going to be angry. If it was wrong to have an unemployment insurance scheme, it was even more wrong to have extended it and unforgivable to have people believe that it would go on forever. But unlike before, there is no hue and cry in the media about the stoppage of extended benefits. No moral outrage is thundered through the nation’s newspapers, just a whimper here and there that people need the money. The people’s desperate rage will find no representation. They will have to speak up for themselves.

Everyone knows that you cannot pay people what would be regarded as a good salary anywhere in the world to essentially watch TV. That is just downright wrong. More importantly, America can no longer afford to pamper its citizens with such extravagant and unjustified spending because the Chinese have made it very clear that business will not go on as usual.

Which city will riot first? What will happen to America if videos of American mobs rampaging through Nordstrom’s get plastered on television screens everywhere?

I see, unemployed people should be killed.

[youtube]http://www.youtube.com/watch?v=sdZp5iw-UEo[/youtube]

[youtube]http://www.youtube.com/watch?v=LEWcTEfFurA[/youtube]

Economist Michael Hudson likes to tell people that if in the 1950s someone was to tell the people then of all the advancements we'd have now, all the increases in efficiency and productivity and so forth, that they'd conclude that the average person would be living lives of leisure. They wouldn't believe that people would be drowning in debt and have to take two jobs, have to work extended hours without overtime pay. The financialisation of the economy is a disaster, it's like a parasite destroying the host.

Now that Democratic Senator Robert Byrd has passed away, we can be certain that any bill to extend unemployment benefits will not pass. With a Senate supermajority impossible to achieve, more and more Democrats are going to come out against extending those incredibly generous benefits. What else can you do when there are elections that have to be fought and won? You should all be glad that this nonsense has finally come to an end. Unfortunately it went on too long and the end of the payouts has come as a shock to many people. Their rage is something which Americans will now have to contend with.

What the unemployed need is a job. What I advocate is that those who are unemployed get off their high horse and accept what comes their way, even if it only pays minimum wage. The problem with Obama’s economic policies is that he believes every American deserves to get paid well, regardless of their economic output. I believe that the market should be allowed to set wages without interference from the government. And players in the American market would include workers from emerging economies like China and India. If this means that people can no longer go on cruise holidays or buy second cars, then so be it. It cannot possibly be a basic human right to live lavishly.

It is just too bad that Obama came after Bush. The combination of the two has virtually ensured that America will be in deep guano from here on out.

Currency speculators and hedge fund managers are very well paid and produce no economic output whatsoever. That money has to be taken from some productive activity. This idea that paying people below the cost of living will bring back jobs is idiocy. It's a sure way to crater the domestic market and cause even more factories and workplaces to shut down. NAIRU has been the guiding principle of jobs policies since about 1980 and this is something that is the dirty secret of western governments. Perhaps if people knew the unemployed would be better treated, and I think in the interest of NAIRU they want more pressure to be brought to bear on that reserve army of unemployed that they themselves have created.

As America begins the very painful descent into decline and possibly collapse, there is an increasing shift away from the very ideas of freedom on which the country was founded on. Why is it wrong to allow the market to determine wages freely? Why must someone arbitrarily draw a line and say that the cost of living is so much? It would not matter so grievously if the minimum wage actually represents the minimum needed by people to live on, but in places like California for instance the minimum wage actually translates into a good wage when compared to places like Germany and other parts of Europe. How is that fair?

Unfortunately most Americans would agree that the idea of “paying people below the cost of living will bring back jobs is idiocy”. It has been drilled into the minds of the public that America is a consumer driven economy. Hence, even though they do not support everything that the left wing has to say, they do agree that higher wages is always a good thing. Higher incomes lead to greater consumption and thus a stronger economy. This is the basic thesis of American economic policy thinking. Regardless of whom captures power, the course towards ever higher levels of consumption, or at least making every effort to stoke consumption, will not change.

Higher incomes = Higher deficits

National income is the sum of the incomes of all economic actors in the economy. So as average compensation rises, national income must increase as well. Where income exceeds production, then a deficit necessarily results. Remember that your income level tells you how much economic benefit you have been distributed and not how much economic value you have created. Because America has decided that higher income for all is not only good, it is also virtually a basic right, and real economic production has stagnated or declined, a structural trade deficit is the natural consequence.

We have talked in the past of addressing the trade deficit to cure the unemployment woes. Americans have been led to believe that the collapsing domestic production base is a result of unfair trade practices or exchange rate manipulation by foreign governments with China being the chief culprit. It is thought that if the Yuan were to be “realigned” to its “market level”, American businesses would regain competitiveness. The problem with this argument is that there are almost no American businesses that produce for export. So no matter how far the Yuan gets “realigned”, there will be no change in the flow of goods and services from America to China because America has nothing to offer.

If production cannot be increased, then income and thus consumption levels must be brought down to reflect production realities. As incomes decline, and they are falling as people are forced to accept the jobs which come their way, the trade deficit will close. Thus lower wage demands will also help ensure that America once again enjoys full employment, albeit at much lower income levels. So you see lowering the trade deficit coincides happily with tackling the unemployment problem.

Lower income = Lower deficit
Poorer America = Healthier America

Cutting the budget will cut production. The new slack in the market will cause the producers to cut back on production to reflect the new market. This is why deficit-cutting is a stupid idea. The reason why there's a deficit in a country like the US is tied to the trade deficit. Plutocrats chose to offshore as much as possible. Also many so-called capitalists took over companies only to strip their assets, raid pension funds and shed most of the workers. These corporate raiders were rewarded by the powers that be. The real problem in the USA is the plutocracy and those who make lots of money destroying things.

I alluded to this earlier so here it is from economist Michael Hudson...


A widespread impression had been spreading since the early 20th century that the world would be living in a Utopia by now, thanks to technological progress. Suppose you were told when World War II ended over half a century ago in 1945 about the breakthroughs in medicine, electronics and information processing, computers and telecommunication, atomic power and jet aircraft. Or that agricultural productivity would soar even more than manufacturing productivity in the United States, as would productivity in mining – just the reverse of what Ricardian rent theory forecast.

If you had been told all this in 1945, the natural expectation would have been that we would all be living a life of leisure by now.

So why are employees working longer hours each week and more intensively? Why are entire families – wives as well as elderly men – being forced into the labor force instead of having the carefree life that technology seemed to promise? Why are people being driven deeper and deeper into debt and losing their homes instead of saving more? Why has home ownership, education, medical care and retirement involved a proliferation of debt pollution?

Nobody expected this. People are suffering and see that something is wrong. But nobody has explained why it does not have to be this way. Indeed, to do so is not a path to career advancement in today’s world – certainly not to public policy-making positions or to applause by judges placed in the leading foundations, universities, political and business centers that shape popular economic ideology.

Economic futurists talked about the promise of technology, not about the threat of debt, monopoly power and a resurgence of the old vested interests. They talked about the world becoming more equal. “Diminishing marginal utility” would make the wealthy more relaxed and less acquisitive. There was talk of Madison Avenue using “hidden persuaders” to confuse consumers into buying specific brand names, but not of politicians creating a deceptive populism based on junk economics. And nobody expected the academic curriculum to drop the study of economic history and the history of economic thought to eradicate warnings from the past about the road to debt serfdom along which today’s world is careening.

Everyone should be rich.

If everyone is rich, would it still be a plutocracy? Certainly by Indonesian, Mexican or South African standards, everyone in America is rich. But almost everyone in America would claim to be just getting by. And because some people are much richer than others, it is asserted that America is a plutocracy. Hmm…

The “Plutocrats chose to offshore as much as possible.” You see, just as the people want higher income, business owners and shareholders want higher returns on their capital; at the very least a rate of return that exceeds the rate of inflation. Higher wages meant that the profitability of American businesses was severely impacted. Basically it was a distribution of profits from owners to workers. When returns fall below a certain level, it does not make sense to stay in business. Why go through all the trouble when you cannot make money? The only way for high income and high returns to coexist is to move production to other countries and leverage off the work of low cost labor. By expanding the pool of available labor, average labor costs decreases. But that creates a trade deficit because third world countries cannot afford to buy anything that expensive American workers make. So the whole outsourcing movement is really a very rational and reasonable response to the incessant demand for higher compensation and the trade deficit a natural consequence.

Would America really become that squalid or suffer that much if the adjustments I am talking about are implemented? You need to understand that America still has a choice because the Chinese are still buying dollars. When the Chinese succeed in turning their economic focus towards domestic consumption driven growth, they will no longer rely on the American market. Sadly, America would still be entirely reliant on the Chinese. At that point in time, probably no more than a few years from now, you will know what suffering is as the republic cracks at the very foundations.

http://www.marketwatch.com/story/house- ... =afterbell

Faltered in the Senate, fails in the House. It looks like unemployment benefits will not be extended without some substantial sacrifice by the Democrats. This being an election year, they know that it is suicidal to give up anything.

Only now will America start to adjust to new realities. It is sad that America’s leaders sought to obstruct the adjustment. The longer it is delayed, the more painful it becomes, the greater the risk that the state may actually fail.

http://thecaucus.blogs.nytimes.com/2010 ... da/?ref=us

I was wrong. Harry Reid is still trying to get the extended unemployment benefits bill passed. I wonder if any Democrat will flip this time round.

All Americans should be grateful that Senator Ben Nelson crossed the aisle and voted against the extension of unemployment benefits. Nebraska, as one of the few states with a strong economy, has much to lose from the reckless spending that threatens to upend the financial fabric of the American republic. Unfortunately two Republican Senators from Maine crossed over and voted for the bill. When Senator Byrd’s replacement is named, it looks like an extension will pass. When will this folly end? Extending benefits is just a pretend fix. Borrowing money from foreigners and then giving it to people who do nothing will not mend the economy. It just digs the nation deeper into debt.

what's it like to ramble to yourself for so long??

Why get angry at someone who is just rambling to himself? Emotionally, I am committed to the United States. Hence, watching the mistakes being made by America is distressing. Writing is a tool which I use to aid in thinking through my own position on why things are and what ought to be done. If it offends you, do not read it. I can understand why some people are put off by what I have to say as my views run counter to some of the most deeply cherished beliefs held by the American public. But just because everyone thinks it is so does not make it so. If you think that I am wrong then show why I am mistaken. Shutting other people up because what they say challenges your basic assumptions would be a disservice you do to yourself.

States fail all the time, but large states tend to fail spectacularly. History is replete with examples of large state collapse. The collapse of the Soviet Union is a recent example and the Russians have been through 20 horrible years. Chinese history is basically one of collapse and reconstitution. Rome was never put back together again. The end of an established political order is marked by such suffering that in hindsight it would have been better to endure the pain of restructuring. Unfortunately, most people only understand this when everything has been lost.

All the players on the stage know what is at stake. Why did the Germans announce that they were going to cut fiscal spending? My guess is that the Germans went to the Chinese and begged them to support Europe. The Chinese then politely told the Germans that they will lean towards the Euro provided that Europe ensures its own house is in order. The Germans agreed and when the news of the German reversal reached the economic policy elites of America, it was like a grenade going off in the room. Germany, the enemy turned staunch ally, has moved towards China and away from America. In the German wake follows the rest of Europe. America is becoming isolated as no one wants to be there when the edifice finally cracks.

99 weeks of unemployment insurance. The welfare of the unemployed, many of whom probably deserve to lose their high paying jobs, trumps the welfare of the state. Some people matter, but everyone can be disregarded. That my friend, is the contradiction I am trying to understand.

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