EconomicsJunkie

Excellent piece on Mish’s blog:

Collapsing Venezuela

Flashback January 21, 2007: The Washington Times nails it with Collapsing Venezuela.

If Venezuelan President Hugo Chavez President Obama deliberately intended to sabotage his nation’s economy, he would be hard-pressed to do anything different from what he is now doing to his country.

It has been widely reported that Mr. Chavez President Obama has been increasingly taking control of the oil, telecommunications and energy housing, banking, auto, and insurance sectors, as well as the media. What has not been reported is the full extent of the corruption in Venezuela the United States and how this ultimately will destroy the economy.

The financial scandal taking place is far bigger than Enron, and may ultimately even exceed the U.N. “oil-for-food” scandal, the biggest financial disgrace of all time.

Since 2004, the Venezuelan Central Bank Fed has transferred about $22.5 billion untold $billions to accounts abroad by the Chavez government held by foreign governments, and about $12 billion all of that remains unaccounted for. It has also been reported that the gold reserves have been removed from the Central Bank.

While the rest of the world has been moving away from socialism for the last quarter-century for good reason, Venezuela the United States is becoming socialist. We know governmental use of central banks to basically print money to cover expenditures results in rising inflation and eventually monetary meltdown.

And, finally, we know that when a state becomes totally corrupt an economic collapse always follows. Mr. Chavez President Obama and his cronies had already been spending far more than they were taking in and you can bet the blood from the innocent Venezuelan people United States citizens will be drained long before those on the take from Mr. Chavez President Obama agree to have their looting stopped.

The original Washington Times article was extremely good, but a few minor changes would have made it the most prophetically accurate post the world had ever seen.

… it is hard to find a better example of how government spending produces rampant malinvestment. Note that spending on such useless projects is not the only source of “GDP growth” by Chinese measures: Even funds that are only earmarked, not yet spent, are included.

What drives all this madness? It’s simple:

China’s banks extended more loans in November than economists forecast.

New local-currency loans totaled 294.8 billion yuan ($43.2 billion), compared with 253 billion yuan in October, according to data released by the People’s Bank of China on its Web site today. The median forecast of 19 economists in a Bloomberg News survey was 250 billion yuan.

M2, the broadest measure of money supply, rose a record 29.74 percent in November from a year earlier.

This is why I believe that the wide spread notion Free Floating Yuan = Stronger Yuan is a complete and utter fallacy.

China’s growth is a mirage, its bubble a monstrous one, its impending crash completely inevitable.

An interesting assumption in virtually all debates concerning the Yuan is that it would appreciate against the Dollar, once let float freely. A good example is the article below in which this premise is applied, set in stone and unquestioned from start to finish:

A growing number of global leaders are urging China to look to its long-term interests and allow its tightly controlled currency to rise. But they are encountering reluctance from a government still very much worried about the economy in the short term.

President Barack Obama and Dominique Strauss-Kahn, managing director of the International Monetary Fund, in Beijing on separate visits Tuesday, told Chinese officials that yielding to market pressures for a stronger yuan would help the global economy recover.

Nonetheless, Chinese President Hu Jintao didn’t announce any new commitment on currency policy to Mr. Obama. Other Chinese officials and economists continue to defend China’s policy of keeping the yuan steady against the dollar to aid Chinese exports, which are still vital in sustaining the nation’s economic recovery despite growing domestic consumption.
[Geithner] Reuters

Treasury Secretary Timothy Geithner took a softer tone on China’s currency at a Senate Foreign Relations Committee hearing on Tuesday.

At a congressional hearing Tuesday, Treasury Secretary Timothy Geithner sounded a much softer tone than in the past on China’s currency, saying it’s “very important” that the Chinese government pursue “broader reforms to their exchange system over time.”

“China has to take steps to move away from excessive reliance on exports” and find ways to stimulate domestic consumption, Mr. Geithner said at the hearing before the Senate Foreign Relations Committee, refraining from harsh rhetoric toward the Asian giant. He said that China is already making progress on rebalancing its economy and that “we’re seeing very promising, early signs” of a shift toward growth that relies on “domestic consumption and investment.”

The discussions highlight how China’s heavily managed currency is once again at the center of debates over global economic policy, after being pushed to the background by the financial crisis.

Though Mr. Hu, Mr. Obama and other world leaders have promised to cooperate in pulling the world economy out of its deepest slump in a generation, coordinating economic policies across very different countries remains difficult.

High unemployment makes trade with China a volatile political issue in the U.S., but similar pressures make it difficult for China to yield to U.S. pressure on the currency. A stronger yuan would make Chinese exports less competitive, which is unappealing for China in a year when exports are down about 20% and many manufacturers have closed.

Chinese leaders who have criticized the West’s economic management may also find it politically difficult to yield to demands on the currency.

On the other hand, China’s economy has recovered faster than most. Because the yuan has weakened sharply against other currencies, European and Asian competitors complain that China has an unfair advantage.

Meanwhile, some economists worry the extra juice to the economy from the cheap yuan, in addition to huge government stimulus, risks new bubbles in real estate and stocks.

Mr. Strauss-Kahn said keeping the currency down may help exports in the short term, but it imposes other costs. “You have to balance your needs in the short term with the long term,” he said. For instance, an undervalued currency encourages companies to invest in ways that may not be viable once the currency rises.

“If you have wrong prices, you make wrong decisions, especially concerning investment in the long run,” he said, adding that it is time for China to look more toward long-term stability now that it has accumulated advantages from an undervalued currency.

A stronger currency also would boost the purchasing power of Chinese households, which would support the Chinese government’s drive to make economic growth less dependent on exports, Mr. Strauss-Kahn said.

Chinese officials frequently counter that big swings in the exchange rate can harm companies and disrupt the economy, which is of particular concern at a time when confidence is fragile. They sometimes contrast the stability of the yuan’s exchange rate — which makes it easier for firms to plan ahead — with the wild swings in the dollar’s value.

“China keeping a basically stable exchange-rate policy is, in reality, good for the global economic recovery,” Yao Jian, spokesman for China’s Ministry of Commerce, told reporters Monday. “If the request is to strengthen other currencies, while allowing the dollar to keep weakening, that’s not very fair.”

Chinese officials aren’t totally closed to arguments for a stronger yuan. In a statement many interpreted as a gesture to the growing concerns about the currency, the People’s Bank of China last week said exchange-rate policy would take into account “changes in international capital flows and the trends of major currencies.”

Still, many private analysts don’t think a move on the yuan is imminent.

Authorities may feel freer to shift once exports are growing again and inflation has turned positive, which could happen early next year. In coming months, China will have to tell other members of the Group of 20 leading economies how it plans to boost consumer spending.

Although China’s government publicly has grown more confident about the strength of its recovery, growth still remains heavily dependent on government stimulus programs.

“China needs the U.S. economy to recover strongly and renew its import growth. Otherwise, China will have a tough time sustaining its recovery,” said Eswar Prasad, an economist at Cornell University.

That is one of the key reasons China is reluctant to lift its currency now. World Bank chief economist Justin Yifu Lin, a former Chinese government adviser, has argued that if a stronger yuan snuffs out a recovery in China’s export sector, it could weaken China’s entire economy and have negative consequences for global growth.

As I noted before on this matter (and so far I see no reason to change my mind on that):

Some points fundamentally support the thesis that the dollar should gain in value against the major currencies:

- Global deleveraging is driving investors from other currencies back to the Dollar
- Deflation hitting the US first, and other countries only later
- Imports into the US are falling rapidly
- Significant domestic spending sprees by the Chinese government

All this may indicate that if the Chinese government were to let the Yuan float freely at some point, it may actually drop significantly against the US Dollar. Such an event could possibly be the ignition for a significant Dollar rally in the years to come.

We will see how things develop over time. I am not saying that my scenario HAS to occur. But I think it certainly is a possibility over the next 2 years or so. What I reject is a completely one-sided approach to this question. As Ayn Rand always used to say: Whenever you encounter contradiction in your thinking, check your premise. I will surely check mine if I turn out to be wrong.

The elections in Germany are over and the political landscape is changing drastically. Personally, I am excited about the results. After 11 years of absence the Free Democratic Party (FDP) is returning to government with 14.6% of the votes. Their main agenda in a nutshell:

• more net income from gross income for more growth, more jobs and more prosperity
• more freedom through stronger civil rights
• more education for better prospects for the future
• more competition and lesser ideology in environmental policy for more energy
• more confidence built through international dialogue

Back in May I wrote:

A strong FDP (Free Democratic Party) in the next German coalition would be the best thing that could happen to Germany. No change will emanate from SPD or CDU, just as in the US no change can emerge from Democrats or Republicans in their current state.

The FDP will have to govern in a coalition with the CDU/CSU, the conservative party. Economically, CDU and FDP have more overlaps than on civil policies. The FDP will attempt a reversal of the excessive intrusions into the privacy of Germans commited by SPD and CDU governments over the past years. It will be interesting to see whether the FDP will be able to push through their point of abolishing compulsory conscription into the German military.

The most important push will be on tax policy. The FDP aims at drastic tax cuts, with tax brackets at 10%, 25%, and 35%. How close the conservatives will be willing to move to these demands remains to be seen.

There is a danger that looms for the freedom movement in Europe: If no drastic and real changes are made to the status quo, Germany’s economy will continue to ail and unemployment will not improve. People will then falsely conclude that a pro-freedom party’s program has failed, that more freedom does not bring more prosperity, and once again cast the majority of votes for the big government parties, be they socialist or conservative.

So far, the US government has been diligently repeating each and every mistake committed during The Great Depression. The only thing they had left undone so far was to match the Smoot-Hawley Tarriff Act from 1930, widely recognized as the worst decision during that period:

In mid 1930 the Smoot-Hawley Tariff is signed into law, raising import tariffs to record highs, and spreading protectionism all over the world – consumers and exporters suffer from the ensuing decline of international trade

Now, president Obama is rushing in to fill that void:

In a break with the trade policies of his predecessor, President Obama announced on Friday night that he would impose a 35 percent tariff on automobile and light-truck tires imported from China.

The decision is a major victory for the United Steelworkers, the union that represents American tire workers. And Mr. Obama cannot afford to jeopardize his relationship with major unions as he pushes Congress to overhaul the nation’s health care system.

But China is certain to be antagonized by the decision, made less than two weeks before Mr. Obama will come face to face with Chinese leaders at a summit meeting in Pittsburgh for the Group of 20 industrialized and fast-growing emerging nations.

The decision signals the first time that the United States has invoked a special safeguard provision that was part of its agreement to support China’s entry into the World Trade Organization in 2001.

Under that safeguard provision, American companies or workers harmed by imports from China can ask the government for protection simply by demonstrating that American producers have suffered a “market disruption” or a “surge” in imports from China.

Unlike more traditional anti-dumping cases, the government does not need to determine that a country is competing unfairly or selling its products at less than their true cost.

The International Trade Commission had already determined that Chinese tire imports were disrupting the $1.7 billion market and recommended that the president impose the new tariffs. Members of the commission, an independent government agency, voted 4-2 on June 29 to recommend that President Obama impose tariffs on Chinese tires for three years. Mr. Obama had until this coming Thursday to make a decision.

American imports of Chinese tires tripled between 2004 and 2008, and China’s share of the American market grew to 16.7 percent, from 4.7 percent, according to the United States Trade Representative. Four American tire factories closed in 2006 and 2007, and several more are set to close this year.

The Tire Industry Association has opposed the tariffs, arguing that they will not preserve American jobs but will instead cause manufacturers to relocate plants to other countries where they can produce tires cheaply.

President George W. Bush received four similar recommendations from the trade commission, the most recent one involving steel pipe in December 2005, but he rejected all of those recommendations. Under the law, the president is allowed to accept or reject the commission’s recommendations.

“The president decided to remedy the clear disruption to the U.S. tire industry based on the facts and the law in this case,” the president’s spokesman, Robert Gibbs, said in a statement Friday night.

Mr. Gibbs said the United States, which already imposes a 4 percent tariff on Chinese tires, would impose an additional tariff of 35 percent for one year. The tariff will be reduced to 30 percent in the second year and 25 percent in the third year. The tariff is to take effect on Sept. 26.

The trade commission proposed higher tariffs than the president actually imposed, recommending an initial levy of 55 percent.

The president of United Steelworkers International, Leo W. Gerard, applauded Mr. Obama’s decision, saying, “The president sent the message that we expect others to live by the rules, just as we do.”

Senator Sherrod Brown, an Ohio Democrat who had pressed for the tariffs, also praised the decision.

He said in a statement, “If American workers and manufacturers are going to compete in the global market, they need to have a government that uses trade enforcement tools.”

The stupidity behind those tirades is so rampant and obvious that most people will of course be able see through it easily. If American workers want to be competitive in the global market they need to be productive and their services priced competitively when compared with workers from other countries.

The very reason why higher tariffs are introduced is the fact that they are NOT competitive, and they will stay uncompetitive without the necessity to outstrip competition. We have already seen this with the big auto manufacturers. Now they are moving down the supply chain to wreck yet another industry. This will of course ultimately discourage investment and destroy jobs.

“The president sent the message that we expect others to live by the rules, just as we do.”

What is he talking about? Which rules? The rule that a Chinese entrepreneur should not benefit US importers by offering affordable goods which in turn benefits those consumers who buy end products from them?

Reactions to follow

To every action there will be consequences. China will probably retaliate in kind and impose similar tariffs. On top of that, other labor associations may feel encouraged now and start pushing for more similar tariffs. Up to now, it seemed to be a gentlemen’s agreement among governments not to resort to protectionism because they all claimed to understand the disastrous long term consequences on global trade. Now it seems as though all that is forgotten and all bets are off.

The Chinese stock market has staged a remarkable 100% rally from October 2008 through the end of July 2009. August 09, however, hasn’t been good for Chinese stocks. Since August 4th, Chinese stocks have now fallen by more than 20%.

The Shanghai Composite Index:

Click on image to enlarge.

EWI writes China’s Stocks Crash: Is The United States Next?:

In the past three weeks alone, China’s formerly sizzling stock market has gone from bull market leader to bear market letdown. On August 30, the Shanghai Composite Index plummeted 6.7%, its largest one-day drop of 2009 so far. And, of the 89 global markets tracked by Bloomberg, the Shanghai index came in last place.

As for what caused the freefall, mainstream experts point their collective finger at one main factor: Growing fears that China’s monetary officials will turn off their easy-money spigot. Here, this August 31 BusinessWeek stands in:

“Investors began selling on concerns that banks will cut back on lavish lending that had helped push shares up by more than 80% since that start of the year.”

Here’s the thing: the drunken lending habits of China’s banks have been on the global Concern-O-Meter for quite some time now. And last I checked, its needle reading jumped from “Don’t worry be happy” — to — “Be Afraid, Be Very Afraid” many months ago. To wit:

• May 2009: China’s deputy central bank governor seriously questions the “sustainability of the rapid growth in credit and its possible adverse impact,” and a Wall Street Journal piece warns that China’s stimulus spree is “pillaging bank balance sheets” as the quantity of loans vastly outweighs their quality.
• June 2009: “China’s Banks Are Warned About Loans” (WSJ). China Bank Regulatory Commission issues an internal directive to commercial banks to “tighten supervision of loans” and ensure those loans serve the needs of the “real economy” and not “financial speculation.”
• July 2009:“China Aims To Rein In Lending.” (Associated Press) China’s two largest lenders reveal they will “sharply slow credit growth.”

Yet during that time, the mounting anti-lending rhetoric failed to take the wind out of the Shanghai Composite Index’s sails. Prices rallied without resistance to new yearly highs until early August.

So if the “fundamental” shoe doesn’t fit, what’s the real story here? Well, I’ll make it really simple: the Shanghai Composite Index has plunged more than 20% from its 2009 high on August 4. And, in the days leading up to the market’s reversal, China landed on the radar of several of EWI’s subscription-based publications. For our analysts, the time had come to stage a full frontal attack and warn of a major turn in China’s fortunes.

Here, the following catalogue of previous publications fills in the blanks:

August 2009 Elliott Wave Financial Forecast observes the unsustainable nature of China’s latest stock market rise and writes: “China’s debt bubble will succumb.”

August 14 Asian Short Term Update: “All eyes continue to be on China as we ascertain whther or not an intermediate-term-top is in place.“

August 14 Short Term Update: Presented the following close-up of China’s main stock market and wrote: “A break of the trendline will be the next important tip” that a larger decline is underway.

August 14 European Short Term Update: “Though not under our normal purview for ESTU, China has been the central source of liquidity…China’s sharp decline may be a case of the pin meeting the balloon.”

And how about the fundamentals of the oh so vibrant, dynamic, unbreakable, sound, and decoupling economy? Some facts Mish posted today about China’s unsustainable stimulus and property bubble:

A 4-Minute Tour of the China Property Bubble

What is China doing with all that printing? Please take a A 4-Minute Tour of the China Property Bubble to find out.

World’s Largest Shopping Mall Sits Vacant

The world’s largest shopping mall, South China Mall in Guangzhou, China, is almost entirely empty. Click on the link to see a fascinating video.

If you thought Minnesota’s Mall of America was the world’s biggest shopping center, think again. South China Mall is a Vegas-like spectacle built in 2005 that now sits almost entirely empty. In the current economic climate, could this be a symbol of things to come?

The entire mall sits empty save 10-12 small shops.

Malinvestments and Commodity Prices

Think about all the concrete, steel, copper, and energy it took to build that mall. This is not an isolated case either as the previous 4-minute video shows.

Let’s not confuse a renewed crack-up boom in China with a sustainable recovery. And let’s not pretend much of this building is anything other than malinvestment.

The truth is: There is no decoupling. The Chinese economic miracle is a mirage, a very popular one to be sure. If it is China the world is banking on to lead a recovery, then the world is royally screwed.

Vicente Fox, Mexico’s former president, is an unusually frank and intelligent statesman. The other day I listened to an interesting Q and A session with him on NPR where he talks about everything from Iraq to freedom, immigration, trade, economics, and more. A pleasant radio interview to tune into:

Deflation is and has been a global phenomenon for a while now. Germany, too, is not exempt from it:

Consumer prices in Germany, Europe’s biggest economy, posted their first annual decline in 22 years this month largely as a result of lower oil prices, preliminary government data showed Wednesday.

Prices were down 0.6 percent on the year in July — the first fall since March 1987, when they declined by 0.3 percent, the Federal Statistical Office said.

It said the decline was fueled by sharp year-on-year declines in energy and fuel prices, which peaked in July 2008.

Germany’s inflation rate hit zero in May and edged up to 0.1 percent last month. Several other European Union nations have reported a fall in prices this year.

Contrary to what the article goes on to assert, deflation is of course a desirable phenomenon that restores balance and sanity.

As I explained recently, regarding deflation in Japan:

Two fallacies in common reports in the media:

1. That there is a possibility of an impending deflation. – The truth is: Deflation is here and now, has been for a while, and will be for a while.

2. That we have to “fear” deflation. – The truth is: Deflation is a good thing, as I pointed out a couple of times:

Deflation is in essence a correction of the previous misallocations created by inflation.

What turns deflation into a bad thing? When the government tries to stave it off by spending billions and trillions of dollars, thus prolongs the correction, continues the misallocations, and increases the debt burden on the taxpayers. If you want to get an idea of the long term outlook for the US economy, look at Japan. The credit and stock bubble there burst in 1989, and has been deflating on and off since then.

Today the BEA announced that the US trade deficit declined to $26 billion in May 2009:

Goods and Services

The U.S. Census Bureau and the U.S. Bureau of Economic Analysis, through the Department of Commerce, announced today that total May exports of $123.3 billion and imports of $149.3 billion resulted in a goods and services deficit of $26.0 billion, down from $28.8 billion in April, revised. May exports were $1.9 billon more than April exports of $121.4 billion. May imports were $0.9 billion less than April imports of $150.2 billion.

In May, the goods deficit decreased $2.6 billion from April to $37.3 billion, and the services surplus increased $0.2 billion to $11.4 billion. Exports of goods increased $2.0 billion to $82.1 billion, and imports of goods decreased $0.5 billion to $119.4 billion. Exports of services decreased $0.1 billion to $41.3 billion, and imports of services decreased $0.4 billion to $29.9 billion.

In May, the goods and services deficit decreased $34.6 billion from May 2008. Exports were down $33.3 billion, or 21.3 percent, and imports were down $67.9 billion, or 31.3 percent.

…this is an ongoing and expected continuation of the end of the last Consumption Business Cycle, the End of Consumerism. It is reasonable to assume that Chinese government’s suppressing the value of the Dollar is accelerating this process of declining US trade deficits significantly, as can be seen in this chart:

The AP writes Record fall in Japan prices fuel deflation fears:

Japan’s key consumer price index tumbled at a record pace in May, the government said Friday. The core nationwide CPI, which excludes volatile fresh food prices, fell 1.1 percent from the previous year in the third straight month of decline.
…
With crude oil prices down dramatically from record highs a year earlier, energy and transportation prices fell sharply in May. Fuel, light and water charges were down 3 percent, and private transportation costs tumbled 9.2 percent.
…
Prices for household durables fell 4.9 percent, and those for clothing slipped 0.5 percent.
…
The core CPI for Tokyo dropped 1.3 percent in June, suggesting that prices nationwide are headed further south. Prices in the nation’s capital are considered a leading barometer of price trends across Japan.

“This is consistent with media reports that large supermarkets are marking such goods down as households turn increasingly defensive amid severe employment and income conditions,” said Kyohei Morita, chief economist at Barclays Capital in Tokyo.

Japan’s central bank predicts that prices will keep falling for at least two years. In its latest economic outlook report in May, it forecast core CPI to drop 1.5 percent this fiscal year ending March 2010 and another 1 percent the following year.

Note that in reality the price declines are probably move severe. I am not exactly sure how the numbers are measured in Japan, but in the US for example, real prices are actuall falling at a much faster pace than reported:

When we replace OER with the Case-Shiller home price index, which most recently indicated a year on year drop of 18.7%, prices overall actually fell by 6.3%.

Two fallacies in common reports in the media:

1. That there is a possibility of an impending deflation. – The truth is: Deflation is here and now, has been for a while, and will be for a while.

2. That we have to “fear” deflation. – The truth is: Deflation is a good thing, as I pointed out a couple of times:

Deflation is in essence a correction of the previous misallocations created by inflation.

What turns deflation into a bad thing? When the government tries to stave it off by spending billions and trillions of dollars, thus prolongs the correction, continues the misallocations, and increases the debt burden on the taxpayers. If you want to get an idea of the long term outlook for the US economy, look at Japan. The credit and stock bubble there burst in 1989, and has been deflating on and off since then.

As I referenced in The Long Term Outlook:

How much deleveraging?

Since the start of the U.S. recession in December 2007, household leverage has declined. It currently stands at about 130% of disposable income. How much further will the deleveraging process go? In addition to factors governing the supply and demand for debt, the answer will depend on the future growth trajectory of the U.S. economy. While it’s true that Japanese firms and U.S. households may differ in important ways regarding decisions about paying down debt, the Japanese experience provides a recent example of a significant deleveraging episode that took place in the aftermath of a major real estate bubble and is useful as a benchmark.

The Japanese stock market bubble burst in late 1989, followed soon after by the bursting of the real estate bubble in early 1991. Nearly 20 years later, stock and commercial real estate prices remain more than 70% below their peaks, while residential land prices are more than 40% below their peak.

Figure 3 compares Japan’s nonfinancial corporate sector with the U.S. household sector over 10-year periods before and after the leverage-ratio peaks. In both countries, leverage ratios rose rapidly in the years before the peak.

After Japan’s bubbles burst, private nonfinancial firms undertook a massive deleveraging, reducing their collective debt-to-GDP ratio from 125% in 1991 to 95% in 2001. By reducing spending on investment, the firms changed from being net borrowers to net savers. If U.S. households were to undertake a similar deleveraging, their collective debt-to-income ratio would need to drop to around 100% by year-end 2018, returning to the level that prevailed in 2002.

From 1989 on, the Japanese government has launched one stimulus after another to no avail, leaving Japanese taxpayers with the largest public debt per capita of all industrialized nations.

A burden that the US government seems to be more than willing to have its taxpayers shoulder over the years to come unless someone picks up a history book and tries not to feverishly repeat mistakes others made in the past.

Thus the long term outlook for the US economy is the fate Japan took: A long lasting correction supercycle with one failing “stimulus” program after another, and with on and off periods where the economy slips out of and back into recessions from time to time.