The China Syndrome

The China Syndrome– The name given to a nuclear meltdown that reached critical temperature and mass and burns through the Earth to China.  In reality, it burns until it his the water table, at which time it explodes in rapid steam generation.

We’re facing a similar syndrome.  In this case, it’s the Chinese Yuan melting down.  The alarms are going off. But the Chinese Economic Reactor is producing so much power that nobody wants to be the one to SCRAM the reactor.

A recent article in the Wall Street Journal attempts to shed light on the issue of underlying problems with the economies of Europe, China and the US.  It’s well worth the read, and I’d like to expand on what they have to say. (And I’m glad this is not behind a paywall, because getting people to read articles like this explains just how dire the world economy is!)

1)  Europe.

In Europe, the tough decisions have been put off because the principal players don’t agree on how or why the trouble began. Germany and the other better-off countries blame the profligacy of Greece, Portugal and Italy and fear that an early bailout would relieve pressure on them to mend their ways. For their part, the debtor nations believe that the entire euro zone is out of balance and that more prosperous countries like Germany should export less and consume more to set things right.

Other Europeans say that a shared currency cannot survive indefinitely when monetary policy is centrally managed but each government decides how much to tax and spend. Still others warn that access to market capital requires a form of collective insurance, preferably in the form of a euro bond. Not surprisingly, Germany resists this solution because it implies a gradual transfer of wealth from the core economies to the periphery, a “transfer union” from rich to poorer states.

Europe is in serious trouble.  The authors have the beginning of their troubles correct, but they recently were bailed out by China.  China is floating their own market on currency manipulation.  If Europe slips into recession, and it’s likely, the Chinese market will suffer from the decreased purchasing power of Europe.  Europe’s lack of purchasing power will devalue the Chinese Yuan, which means….

2)  China’s currency manipulation’s chickens will come home to roost.

To ensure long-term economic expansion (and political stability), Beijing must figure out a way to encourage Chinese consumers to buy more of the products that local manufacturers make. This will demand a massive transfer of wealth from the state and China’s state-owned companies to Chinese households.

But Beijing is moving in the opposite direction. The leadership responded to Western market turmoil not by boosting consumption but by increasing state and private spending on fixed investment, which now accounts for nearly half of China’s growth. The result has been an explosion in residential and commercial real estate, more state spending on infrastructure and more cheap loans from state-owned banks to state-owned enterprises.

The strategy of currency manipulation has tied to the yuan to the dollar and euro.  As the euro’s star rose, so did the yuan.  Unfortunately, the primary reason why the Chinese economy exploded was it had focused on imports and not on a sustainable Chinese economy.  When Europe crashes, and when the Dollar inevitably crashes, the yuan will “crash” as well.  And by crash, the Chinese will no longer be able to keep the currency artificially low.  As the yuan gains strength, the export market will tank, and in doing so, they will not be able to sustain the 70% of their manufacturing and exporting economy.  As a result, almost all consumer goods are going to cost more coming out of China.  Which leads us to…

3)  The US.  First, the bad news.  When the Yuan dies thanks to Europe finally suffering the effects of the 2008 recession, the Dollar is going to sink.  It no longer has the Yuan to artificially inflate it, so the Dollar will fall.  Of course, this will be met by the Media with wailing and gnashing of teeth.  The purchasing power of the US will drop– the Dollar will be worth less.  The good news?  As imports decline, exports will increase.  China will have to pay the piper of Market Forces when their manufacturing sector crumbles.  It will actually be cheaper for the US to start manufacturing its own goods again!  That’s right, the Made in the USA label will actually be making a comeback.  Manufacturing jobs will increase, unemployment will decrease, the USA will regain its footing as a world economic power.

Now, should the Republicans control the House, Senate and White House, an enormous opportunity will present itself.  The GDP will recover, and, if Paul Ryan gets his way (and he should), the US should start paying off its debt.

That’s a huge problem for China.  With a weaker dollar and stronger Yuan, the US Bonds they will have purchased will be worth less than they purchased them for because the Yuan will be stronger.  The Chinese will take another hit– possibly the hit that will send them into an economic depression.

So, there’s the real flaw with paying off our bills– we could do great harm to Europe and China.  As odd as it sounds, maintaining a ridiculous $15 Trillion Dollar Debt may be the only way the US keeps China and Europe from years of depression and subsequent political upheaval.

The US is poised to see a booming economy.  The manufacturing and house-building bubbles have largely run their course (and it would have taken a shorted time had government not interfered).  If Obamacare, regulation, and horrible energy policy is changed, we can see a rapid shift to 4% unemployment by 2014.

But I’m just a chemist.  I could be wrong.  (And if Romney or Obama are President in 2013, we’re going to see a much slower recovery.)

The Definition of Insanity

I’ve heard insanity can be defined as doing the same thing repeatedly while expecting different results each time.

It seems our President is “insane”.  Stimulus I hasn’t produced any jobs, and as my analysis and the analysis at HotAir has proven, the stimulus jobs are mostly VaporLabor (defined as jobs that can’t be proven as created or saved, or jobs that were “saved” that were never in jeopardy to begin with).  But now Obama is out talking about another round of government spending to try and stimulate more job growth.

I think the last thing we need is more government assistance in this matter.  Just ask this chart from innocentbystanders.net:

Throwing the Money Around

Unbelievable. President Obama is going to hand $250 to seniors to make up for a lack of a boost in Social Security payouts. I guess that money tree behind the White House just won’t stop producing fruit! And by fruit, I mean gold bars, because the dollar is quickly losing its stature. Social Security payments are supposed to increase with inflation, but last year, there was no inflation, so the payments are going to remain constant.

Here’s the money quote of the story:

“Even as we seek to bring about recovery, we must act on behalf of those hardest hit by this recession,” Obama said in a statement. “This additional assistance will be especially important in the coming months, as countless seniors and others have seen their retirement accounts and home values decline as a result of this economic crisis.”

Huh? The people hardest hit by the recession are people with houses they already own and retirement savings that have slowly been recovering? Plus, he’s going to give them a whole $250? For what? To buy a couple of Snuggies?

President Obama, the people hardest hit by your recession are the folks who lost their jobs (not that $250 would really help there). But he’s willing to spend $12.5 billion dollars to do.. what? Try to quell the backlash against the AARP?

So far, Obama’s shown he doesn’t know much about economics, or history. I don’t see what throwing $250 at a person over 65 is going to do to stimulate the economy. If anything, it’ll stimulate the Matlock Memorabilia market.

Stimulus saves or creates 8,284 jobs in Wisconsin!

According to a report submitted by Gov. Jim Doyle to the Feds, the Stimulus money has saved or created 8,284 jobs in Wisconsin. (Of course, that’s BS. If you have to say things have been “created or saved”, you’re painting with a big brush. The job has either been created or it’s been saved. You don’t get to say it’s both without giving specifics.)

So far Wisconsin has received $1.9 billion dollars in aid from the Feds.

And if you get out a calculator, you’ll discover that’s just shy of $230,000 a job. According to the report, most of those jobs are fireman, policemen, and teachers (and I guarantee they don’t get paid more than $200,000 a year.)

Where did the rest of the money go? And why did it take $230,000 / job to save it?

And let’s be honest, this is a little bit of legerdemain. Do you think Wisconsin would really lay off 6100 firefighters, policemen and teachers? Of course not. That would be political suicide for Democrats as each is unionized. (I’m a teacher in a public school, and I’ve lost 5% of my income.) So did the stimulus really “save” those jobs? No. What it did was allow the state to say they would have cut those jobs had there been no stimulus.

As an analogy, suppose I get $100,000 from a benefactor, then say, “Thank goodness I got the money, or I would have had to sell my kids for medical experiments!” Would I really sell my kids? Of course not. But that’s the impression I’m giving by saying they were “saved” by the $100,000 donation.

The Wisconsin Office of Recovery can be found here.

If you really want to look at what the stimulus has done for Wisconsin, you can look here. At least it’s less than 9.7%.

UPDATE:  Looks as though this “education jobs are threatened” BS has been exposed in Ohio.  I wonder how many other states this is prominent in?

Unemployment at 9.8%

Now, if you know anything about recessions, you know the last thing to recover is jobs.  Here’s a very simplified time-line of a recession:

• Capital is lost
• Companies lose operational budget
• Costs are cut
• Which usually means layoffs
• Purchasing declines
• Manufacturing jobs are lost
• The market stabilizes
• Companies experience capital growth
• Jobs increase
• Purchasing increases
• Manufacturing jobs increase

I also don’t fault Presidents that much over economic news.  They can only raise taxes or cut taxes, which ultimately has an effect on the economy.  The exception was TARP, which was supposed to rescue a banking industry that took a bat to the knees.

So I’d be more than willing to let Obama off the hook here, had he not been sending Biden out to gloat about how wonderful the stimulus has been working! But, the morons in the Obama administration seem to be pushing for clear skies in the middle of a hurricane, so they deserve to be punished on this issue.

In addition, the Stimulus Package (Porkulus) was supossed to save millions of jobs with the $700 billion doled out.  Did it?  So far, the indicators say no.  Where did this money go?  Nobody seems to know, but Biden thinks it’s going to create jobs merely by mentioning Stimulus.

As an aside, if you have 7 million unemployed, you could take the $700 billion and just give it to those people in $100,000 chunks.  That’s two times my current salary!

But Stimulus hasn’t been effective at all because it had nothing to do with steps 6 or 7.  The market hadn’t stabilized, and there hadn’t been any capital growth. In fact, the stimulus will end up being absorbed by bureaucracy– hardly and effective use of money.  Since it’s not stimulating any capital growth, it can’t stimulate the overall economy, which is why most of it is a waste.

But I’m sure the Democratic special interests enjoyed the influx of taxpayer money.

The Completely Believable Unbelievable Post

Time magazine’s Kevin O’Leary places the blame of the California budget crises squarely at the feet of… the overtaxed citizens of 1978 and their evil Republican overlords!

They begin with the 1978 property tax revolt and the victory of Proposition 13. As California experienced a dramatic escalation in home values, property tax assessments skyrocketed. Especially vulnerable were seniors on fixed incomes. When then Gov. Jerry Brown and the legislature dithered, conservative activists led by Howard Jarvis put a seductively simple sounding proposition on the ballot. Under Proposition 13, the annual real estate tax on a parcel of property would be limited to 1% of its assessed value and this assessed value would only increase by a maximum of 2% per year, until a change in ownership. Voters responded and Proposition 13 scored a dramatic victory with 65% of the vote. Property tax rates dropped an average of 57%.

Seriously, no blame goes to a government that has been wasting money and failing to balance budgets, and instead blames the people who foolishly limited the rate at which property taxes could increase.  The proposition O’Leary blames, Prop 13, was the last big act of fiscal conservatism seen by the state of California, limiting the increase in property taxes to 1% a year, unless the property is sold.

More from O’Leary:

“In the first years after Proposition 13 passed, the state was able to get by because it had a surplus,” says David Menefee-Libey, a political scientist at Pomona College. “But because the state is now responsible for funding local government and school districts the demands on state resources became too great. The second strategy followed by [Governors Gray] Davis and [Arnold] Schwarzenegger has been to finesse the fiscal crisis by using budget gimmicks and by borrowing to bridge the yearly budget shortfall. Now both options are exhausted.”

California has been pretty much controlled by the legislature for years.  The governors have fought as best as they could, but the spending has been out of control.  (Remember the shut down threatened by Schwartzenegger when he first took office?  He was vilified by the press.) The state has had budget surpluses, and the increase in demands for left-leaning special projects has been increasing faster than the GDP increase in the state.

More:

Proposition 13 further altered California politics by requiring a two-thirds majority for tax increases either at the state or local level. This requirement along with a constitutional provision requiring a two-thirds majority to pass a budget – the result of a proposition passed in 1933 – means it is far more difficult to raise taxes or pass a budget in California than in other states. For more than 30 years California has been living with a system of minority rule in which 34% of the legislature or a local community can stonewall the majority. Facing this post-Proposition 13 system, California’s various interest groups have increasingly used the ballot box to protect themselves – but by so doing have mandated budgetary havoc.

But O’Leary carries water for the Left, blaming the state’s troubles on the unwillingness of the people to be taxed more.  With the state income tax of California is 9.3%, the sales taxes are 8.25% (often above 10% when including local taxes) combined with a cost of living that puts any earners above the $50,000 Federal/State Tax threshold, it’s absolutely ludicrous to blame Prop 13 on the state’s budget woes.  So the heroes are the 60% majority Democrats who want to increase the tax burden on the people and business, not those who are fighting the overtaxing, a state that already hoists a 19.3% tax burden upon people who already pay 30% income tax to the Feds.

Of course, the problem is the property tax and the fact that taxes are just so gosh-darn hard to raise in California, and the evil conservatives who have an objection to handing over more than 50% of their paycheck to the government.

The Depressed Doc

Sorry folks.  The world’s been upside-down here, just from being so busy.  Also, I’ve been rather depressed about the whole Obama-Geithner wreckage of the economy, and I don’t want to make flippiant comments when people are watching their retirement funds dramatically shrink.

All I have to say is that Obama’s a disaster, as well as Congress, and the GOP leadership is too busy sniping at each other to form a coherent front.  The Heritage Foundation (h/t Instapundit) has this informative graph:

As you can see, the deficits and subsequent debt generation is completely mad.  If we pay 5% interest on the national debt, which will be approximately $12-15 trillion by 2012, we’re looking at paying $600 Billion a year in interest payments alone.

It’s the worst policy ever.  The Democrats and their Republican enablers need to be removed from office, and the government needs to be shrunk dramatically.  We’re talking an emergency hatchet job, otherwise we’re entering a death spiral of debt.

My recommendation:  completely retool government and streamline.  My ideas:

• Flat tax of 20% after $20,000 for single income filers, $30,000 for head of household, and $35,000 for married, filing jointly.  Deduction of $3500 per dependent, and deduct interest on residence household.  Outside of that, no other deductions.
• 20% capital gains flat tax.
• Cut the IRS payroll by 2/3 (taxes should be much easier to calculate with the flat tax).
• Disband the Department of Education.
• Gradually reduce entitlements except Social Security.  Start new SS accounts that invest in the economy through either CD ladders, mutual funds, or both.
• Take 1/3 of the accountants from the IRS and apply them as government auditors to police government waste.
• Put a moratorium on all earmarks.  Quickly reduce government spending over 4 years to focus on infrastructure, defense & homeland security, research and foreign policy.
• The goal is to implement policies that will reduce the government budget far below revenue, and start paying off the national debt.

I know, it’s a pipe dream.  But we’re getting to a point where only drastic measures will keep us from economic disaster.

The Sub-Prime Crash

It was inevitable. People are flipping out. They’re begging for a rate-cut, but truth be told, we’re in a damned-if-you-do, damned-if-you-don’t situation. Things are going to get worse before they get better, but take heart, they will get better.

1) The housing market crash is going to pull the rug out from under many lenders. The ARM has jumped and the number of foreclosures has increased. The recent half-point interest rate cut will save some people from going belly-up, but the trade-off is a weakening dollar. The current instability has foreign investors in the currency worried, and there’s fears of a sell-off of currency, which will drive down the value of the dollar.

2) We’re already seeing the result of the half-point cut in the fact the value of the dollar is tumbling. As it stands, Bernake is trying to minimize the damage of the poor business practices of the past 6 years. The good news is that the damage from those practices will seem severe in the short-term, but the economy will be able to recover after a recession. It’s my recommendation that the economy be allowed to slow down and suffer the negative effects of this downturn to rebound faster and stronger. Cutting the interest rates is only going to prolong the inevitable and hurt the dollar.

3) I’ve never been worried about a “strong dollar” or a “weak dollar” until now, simply because the dollar looks to be in a freefall. The Canadian dollar is now trading nearly equal to the American dollar, which just shows how far the dollar has gone. This will help American exports and hurt the import markets, and we should see a spike in inflation, but again, it’s short term. The markets need to restabilize after this housing problem, and once it does, we can begin rebuilding.

Don’t fight the future. Let it happen, but plan on how to come out of the recession stronger. And don’t blame Bush for this, whatever you do. The President has little to do with the economy, and the economy has been doing well under Bush. The fact that one market will depress the economy for the short-term is nothing that you can fault Bush for. Heck, we’ve been fighting a war overseas and in the meantime the deficit of 2003 has nearly been eliminated. That’s a remarkable achievement.

In your face, U.S.!

Looks as though the US economy is not growing as fast as the economies in Europe or Japan, the UN is prepared to say.

I’m not sure why this is such big news, as it happened in 2001 as well, and happens from time to time, usually when the US is in a recession. But right now it’s a mix of housing market troubles and a booming world economy which is propping up everyone who isn’t the US.

The fact the UN is making a big hub-bub about it is rather odd. I guess it’s their way of saying, “Socialism rules, Bushitler!”

And don’t be surprised if housing drags the US into a mini-recession. Combined with a Fed that’s not really paying attention to indicator markets, I’m sure we’ll see the US economic growth stagnate in 2008-2009 (bad news for whoever gets elected President, I’m sure). But once the housing market hits equilibrium again and the Fed cuts interest rates, we’ll see the economy pick up steam.

And mark my words– $3.00 gas is here to stay, but unless we have another Katrina-like storm wreck output and refining capabilities along the gulf coast, don’t expect to see any major gas price jumps this winter, but don’t expect a major decline in prices. I’ll go out on a limb and say that the mean price of gas will hover around $2.70-2.80 a gallon, about where it is now, through the winter, and we can expect heating oil prices to remain steady.

If you want to see a decrease in the price, get a local refinery built, as that’s one of the reasons prices have been so high lately.

From the "What the Hell Were You Thinking" Files…

Amazon.com’s CEO Jeff Bezos told some stockholders that even though they have 1 million orders of the latest Harry Potter book, they aren’t going to make a profit.

Amazon.com Inc. has taken more than a million pre-orders for the final “Harry Potter” book due out in July, but the world’s largest Web retailer won’t make a profit, Chief Executive Officer Jeff Bezos told shareholders at the company’s annual meeting Thursday.

Amazon’s handling of the “Harry Potter and the Deathly Hallows” release – a $17 discount off cover price, a free shipping offer and guaranteed on-time delivery – showed yet again that the company is willing to take a hit to cement customer loyalty.

Customer loyalty?! It’s the biggest selling book this year, if not possible this decade. In an era where someone who moves 30,000 books in a week is doing well, Harry Potter is doing far better. And considering the success of the previous books, this was not a surprise.

But Bezos seems to think that customer loyalty is more important than making a profit on the biggest bestseller of the decade.

Had they offered a $10 discount price, I’m sure they would have moved a million books still, and that would have made a difference of $7 million dollars. The pricing in this case is amazingly silly and foolish. If 1 million people are buying books from your site, you don’t have to worry about customer loyalty. You just need to worry about the happiness of your shareholders.