Month: December 2006

The New York Times, here via the International Herald Tribune, declares that we have achieved a remarkable anti-Goldilocks economy. Housing has cooled, manufacturing is too cold, inflation is too high, and Fannie Mae (of all places) is forcasting a 35% chance of recession.

Hold that thought.

Poverty might not be a new thing in New Orleans, where poor residents are having to fight for a simple roof-over-head, but now the suburban poor outnumber the urban poor. And more’s the pity, because the “good jobs” are all out in the suburbs now, and services designed to help the poor are all in town. As if that isn’t bad enough, in some states health insurance costs went up 89.2% in the last 6 years compared to a full-time pay increase of only 11%. And remember, this is in a state where the minimum wage goes up every year.

No wonder Joe and Jane Average think the economy sucks: their house value isn’t going up the way it used to, their health care expenses are going up, their wages aren’t going up nearly as fast as their expenses, gas is back up now that the elections are over, and there are a lot more people living in quiet poverty in their neighborhood than they imagined.

As if that isn’t enough, the local school has their hand out again, because that’s the only way to pay for field trips and orchestra programs and library books. I consider this an unfair burden upon parents, who are already expected to help with homework and school projects and transportation and volunteer work. It is even an unfair burden on teachers and administrators, who have to manage these fundraisers and account for the money at the end instead of actually teaching kids. I furthermore think this sort of thing widens the gap between “wealthy” schools and “poor” schools; parents in the wealthy neighborhood can afford to donate hundreds of thousands of dollars in aggregate but parents in the poor neighborhood cannot.

Nevertheless, having said all this about how bad the economy is when seen from the bottom, smart guys like Jim Cramer think it’s looking great from the top. Mr. Cramer predicts a 17% rise in the Dow, based on price targets of each of the 30 Dow Components. That’s a lot lower than GDP and higher than inflation. It’s higher than both combined. Higher than the two multiplied. By the way, that Bloomberg link points out “Even as the U.S. economy added 132,000 workers in November, more than economists had forecast, wages increased by only 0.2 percent. The average weekly paycheck of $574.27 last month was a modest gain from $573.25 in October.” First, it still takes 150,000-200,000 new jobs a month to absorb new entries to the workforce (stuff that in your “but we need undocumented workers” and smoke it) and second, I don’t know how people can support a family on $574.27 a week.

Sooner or later, Anti-Goldilocks needs to expect the Bears to come home.

In closing: How to hold corporations accountable; Best Wishes to Mr. Barrowman and Mr. Gill; homemade peppermint patties; and Child’s Play.

According to the Shaolin Warrior-Monks, the Dragon is a mythical animal able to fight on land, in the air, and in the sea. By turning its long body, it is able to move smoothly and fight multiple enemies approaching from several directions. This long body, however, is a large target.

Likewise, according to the Shaolin Warrior-Monks, the Tiger is an all-too-real animal known for its strength and ferocity. However, a Tiger has limited stamina, and must count on overcoming enemies quickly.

Today’s financial news is dominated by the new record high set by the Dow, and the 6 year high set by the S&P 500. Apparently Wall Street is in deep denial about what is happening half a world away. In China, American Secretary of the Treasury Henry Paulson and Chinese Vice Premier Wu Yi began a “strategic economic dialog. They were joined on the American side by 4 other members of the President’s Cabinet, the Chairman of the Fed, and our trade representative to China. On the Chinese side were ten senior ministers and their Ambassador to the United States.

If the size of the delegations alone indicate the importance of this meeting.

And to be honest, things are not going well. Mr. Paulson apparenty began the dialog by telling the Chinese their currency would have to float freely, and they needed to maintain economic growth without a trade surplus, and furthermore they’d better open their markets and crack down on piracy. The L.A. Times is under the delusion that these last two points are the important ones. Oh, and Paulson added “[T]hey have just got to move quicker.” Do everything I want and make it snappy? If this is how he thinks, I wonder how long until he is divorced.

Not too surprisingly, China [is] unwilling to budge. More specifically, Ms. Wu says “We have had the genuine feeling that some American friends are not only having limited knowledge of, but harboring much misunderstanding about, the reality in China.” In other words, respectfully, you don’t know what you’re talking about. She went on: “Wu said Beijing would ‘actively push forward trade and investment liberalization.’ But she stressed that changing China’s economy is a ‘long-term and arduous’ task.” Or, we will do it our way and we will do it in our timing.

Meanwhile, the Yuan is at record highs and Chinese banking IPOs are hot, hot, hot.

So Mr. Paulson has rushed in, hoping to get everything he wanted before anybody noticed he was attacking. Meanwhile, Ms. Wu has deftly turned and left the Tiger’s claws empty, knowing she will have time to turn and attack at will.

Why does this matter? Because China has the ability to bankrupt the United States at least 3 different ways.

First, they can continue to be our largest trade partner, draining off American money each month as the trade deficit increases and we buy more and more Chinese manufactured goods. Remember, that’s the reason the Bush Administration wants the Yuan to float freely. Currently it is pegged to the dollar, which keeps the cost of Chinese imports low in the United States. This would be the slow way to do the job. But Asian philosophy allows for the idea that a good plan well implemented might take generations to come to fruition. Look at Hong Kong: the Chinese managed to get the British to build the place and create its economy before taking it back over a century later.

The second way China could send the American economy into a terrible place is they could sell their dollar reserves. A source no less authoritative than the Wall Street Journal warns us “If the Chinese government reduces the amount of dollars it holds in reserve — or slows the pace at which it buys dollars — the revaluation could put upward pressure on U.S. interest rates.” Higher American interest rates means disaster in the housing sector and severe contraction of businesses financing new equipment. Just selling the dollars would severely devalue it, meaning deflation. Higher interest rates would probably exacerbate the effect.

The nice folks at the WSJ are kind enough to bring us way three that China could destroy our economy and send us into a great depression in the very next paragraph. They could sell the very large piece of the United States National Debt that they own. “China’s position in U.S. bonds is huge. China is the second-largest holder of Treasury securities (after Japan), with $243.5 billion of U.S. government securities as of May 2005.” Now granted, the National Debt currently stands over $8 Trillion, or $8 Million Million. Even so, over $200 Thousand Million of bonds hitting the market is going to make a big, big mess. And the thing that many people don’t realize is that “When interest rates go up, bond prices go down and when interest rates go down, bond prices go up.” So if China were to sell a bunch of bonds, interest rates would inevitably rise. Furthermore, this would be seen as a no-confidence vote on the ability of the United States Government to pay back its debts. Just like when Joe Average has lousy credit he has to pay higher rates, the same thing would apply to his Uncle Sam. This would in all likelihood drive up general interest rates, with the same effects listed in the previous paragraph.

Maybe Mr. Paulson should stop treating China like a small child and start treating them like a sovereign nation.