Wednesday, February 25, 2009

America Blew It ... Will Obama?

President Obama's State of the Nation speech said it, true and straight. The US has screwed itself into the ground, and we did it to ourselves:

"Now, if we’re honest with ourselves, we’ll admit that for too long, we have not always met these responsibilities – as a government or as a people."

The President also acknowledged that our decline has been ongoing for some time:

"The fact is, our economy did not fall into decline overnight."

But he didn't say how far the US has fallen. At the end of World War II, we were the only large industrial power in the world. Germany and Japan were in ruins. Britain and the Soviet Union had been bled dry. Europe would struggle for years, and the economic powerhouses of East Asia wouldn't appear for decades. A colonial legacy left much of the rest of the world undeveloped. In contrast, the US was powerful and prosperous.

Yet despite this tremendous head start, the US has let its competitors catch up, no matter how you define the race. Per capita income? Life expectancy? Educational achievement? Investment in renewable energy? Social support systems? We are not number 1 in any of these, and we are falling farther behind. As the President said:

"Our children will compete for jobs in a global economy that too many of our schools do not prepare them for."

Did we invest in our future with better education, research and development, advanced manufacturing processes? We played our superior hand by behaving like spoiled playboys and wasting our wealth on big homes, flashy cars, and immediate consumption. We had a privileged position in the world, and yet we lived beyond our means. We built up a mountain of debt, and now that mountain is suffocating us. As the President said, this country followed totally short-sighted policies:

"In other words, we have lived through an era where too often, short-term gains were prized over long-term prosperity; where we failed to look beyond the next payment, the next quarter, or the next election."

As much as we wasted, maybe we could have muddled through if it hadn't been for the kleptocratic idiocies of the past few years:

"A surplus became an excuse to transfer wealth to the wealthy instead of an opportunity to invest in our future. Regulations were gutted for the sake of a quick profit at the expense of a healthy market. People bought homes they knew they couldn’t afford from banks and lenders who pushed those bad loans anyway."

This President is far too honest and outspoken. No wonder Wall Street hates him. The President also said how difficult the road back to prosperity is:

"The answers to our problems don’t lie beyond our reach. They exist in our laboratories and universities; in our fields and our factories; in the imaginations of our entrepreneurs and the pride of the hardest-working people on Earth."

In other words, the solution is not government policy. We have to pay off our debt and work our way out of this hole. That will take years, so don't look for an immediate fix. Unfortunately, the administration isn't waiting for time to heal the wounds:

"Now is the time to act boldly and wisely . . . "

You mean by encouraging people to take out loans, spend their money, and incur more indebtedness? Isn't that how we got into this mess? This risks more and bigger bubbles.

"You see, the flow of credit is the lifeblood of our economy."

He means it. He's going to push money at the banks, no matter how much debt is piled onto the taxpayers and their children.

"You should also know that the money you’ve deposited in banks across the country is safe; your insurance is secure; and you can rely on the continued operation of our financial system."

On the contrary, the share prices of the big banks indicate indicate anything but trust in their solvency. The only way we can have faith in the security of our bank deposits is if the Federal Government adds to the dwindling reserves of its deposit insurance. How much more government debt will that pile up?

"So I ask this Congress to join me in doing whatever proves necessary."

Whatever proves necessary . . . as if he is backed into a corner, with no plan and ready to do anything, no matter the long term consequences.

Monday, February 9, 2009

Japanese Economy Decelerates

Hakuin Ekaku (1685 to 1768) drawing of Bodidharma, who brought Zen Buddhism to China, with Japanese calligraphy: “Point directly at the human mind, see one's nature, and become Buddha.”

In the aptly-named article Japan faces 'unimaginable' contraction the Financial Times announced several bad items of news about the Japanese economy today.

Kazuo Momma, head of the research and statistics department at the Bank of Japan, gave a speech today in which he provided an advance impression of Japan's fourth quarter 2008 economic product data, which are scheduled to be announced next week. Momma said "From October to December the scale of negative growth may have been unimaginable -- and we have to consider the possibility that there could be even greater decline between January and March."

Polls of economists suggest that the fourth quarter data may indeed be "unimaginable". They predict a fall in GDP of more than 3% from the previous quarter, or a decline of more than 10% at an annualized rate. A separate report by Tokyo Shoko Research said that the number of corporate bankruptcies in Japan rose 16% year-over-year in January, and total debts of failed companies rose 44% year over year.

One of the themes recently espoused in this blog is that many other nations are more vulnerable to the economic slowdown than is the US, and here we have evidence of this thesis from Japan. This is bad news for the US as for the rest of the world, because all economies are simultaneously providing decelerating feedback to each other.
Ito Jakuchu (1716-1800), Chrysanthemums by a Stream with Rocks

Thursday, February 5, 2009

Cheney Threatens America with Nuclear War

Will they stop at nothing? Bush and Cheney have already ruined the US financially with their debt-and-credit crisis. Now Cheney threatens us with nuclear annihilation.

In an interview this week, former Vice President Dick Cheney said that there is a "high probability" of a nuclear attack on the United States by terrorists during Barack Obama's presidency. Mr. Cheney, do you mean that the Bush administration knows of a certain nuclear strike on the US and has done nothing about it?

Implying that such an attack would be due to a weak approach to terrorism by President Obama, Cheney complained that Democrats "are more concerned about reading the rights to an Al Qaeda terrorist" than protecting the U.S. from Osama Bin Laden's gang. Obviously international law means nothing to Bush's former hit man.

Perhaps thinking that a policy of bullying militancy would cow American's terrorist opponents, Cheney referred to people who think "if we just go talk nice to these folks, everything's going to be okay." Cheney denied the value of diplomacy and coalition-building, because instead of discussing the role of our allies and middle-eastern populations in the war on terror, he said "We're not going to win this fight by turning the other cheek."

Cheney is obviously trying to cover up for the lies that he told the American people about weapons of mass destruction in Iraq. Does he think that we haven't noticed the total failure of Bush-Cheney policies, like the interminable occupation of Iraq, the loss of America's position as the moral leader of the world, and the fact that we need to send more troops to Afghanistan? It was under
the Bush and Cheney administration that terrorists already attacked the US and caused mass casualties.
Not satisfied with cheap innuendo, Cheney ghoulishly said that "perhaps hundreds of thousands of people" would perish in such a strike. He could have mentioned the thousands of innocent civilian casualties that have already occurred in Iraq because of the policies that he and Bush pushed on the world.

Bush and Cheney have already ruined the US economically with a financial crisis brought on by their total failure to attend to the nation's monetary, fiscal, and regulatory policies. Now Cheney threatens our lives with nuclear annihilation.

More Bad News as Financial Collapse Continues

Scrooge and Bob Cratchit, from A Christmas Carol by Charles Dickens, illustrated by John Leech in 1843

As in earlier deflationary bear periods, the stock markets react with sporadic rallies every once in a while. Unlike the reformed Scrooge, who shared his good spirits and bounty with those around him, our markets's good spirits are more than a bit premature.

The last two days have brought lots of bad economic and financial news. Some people will this as a contrary indicator of a market rally to come, but when you consider the depth of the debt load to be worked off in the US, however, I think that the negative news is just one more step in a long and bumpy downward slope. The headlines reveal deep underlying problems that will take some time to work out. It seems very unlikely that the downward spiral will end soon.

US credit card delinquencies at record high

Consumers continue to be crushed by high debt and unemployment. For the month of January, US credit card delinquencies hit a record high, payments at least 60 days late rose almost half a percentage point last month to a record 3.75 per cent, and credit card lenders wrote off loans to delinquent borrowers at nearly record levels.

New jobless claims surge to 26-year high

It is highly likely that US consumers will be pinched harder in coming months as unemployment continues to increase. First-time claims for state unemployment insurance rose to 626,000 during the last week in January, which was the highest since October 1982. The number of people remaining on the jobless benefit rolls hit a record high.

Factory orders drop 3.9 percent in December

Economic output continues to decline. U.S. factory orders fell for a record fifth straight month in December. The Commerce Department announced that orders dropped by 3.9 percent during the month, an even bigger decline than the 3 percent that economists had predicted. Not only is domestic demand falling, but exports are falling due to the worldwide downturn.

Russia, East Europe Stocks Face ‘Massive’ Drop, Roubini Says

Stock markets are declining overseas, and the risk of further declines is high. Nouriel Roubini predicted that Russian and eastern European equities may fall further because earnings and other fundamental measures mean little in the current economic turmoil. Russia's RTS index fell 72 percent and the NTX index of central and east European stocks fell 57 percent in 2008. However, during an interview in Moscow, Roubini warned that “In market dynamics, prices can move far below what fundamentals justify.” He also warned: “There is still a massive downside for equities in the region.”

Britain 'headed' for deepest slump in 60 years

The bad news from Britain continues. The National Institute of Economic and Social Research forecasts that the sharpest plunge in consumer spending since the Second World War will drive Britain this year into its deepest economic slump since World War II. Consumer spending this year is set to plummet by 3.8 per cent. This is twice the previous record annual drop of 1.6 per cent in 1991, and is in contrast to an average increase of 3.5 percent annually over the past decade.

Obama hits back at stimulus critics, says failure to approve bill could bring catastrophe

President Obama has attached a great deal of urgency to the economic stimulus legislation that is working through Congress, which seems fitting at a time when the economic downturn is assuming threatening proportions and the news worsens daily. Speaking out in reaction to the Republican opposition that threatens to stall the bill, the President warned that failure to act quickly "will turn crisis into a catastrophe and guarantee a longer recession." Not everyone agrees that a stimulus will reduce the severity of the downturn, but the economic situation is indeed getting bad.

The Collapse Continues

News like this will continue for some months to come. The direction of the markets is probably down too.

Poster for the "War of Wealth" by Charles Turner Dazey, a play inspired by the Panic of 1893, opened February 10, 1896.

Tuesday, February 3, 2009

Chinese Survey of Laborers Returned to Rural Villages

The Spinning Wheel, by Wang Juzheng, Northern Song Dynasty (960–1127)

The Chinese government has presented some revealing statistics concerning the impact of the global economic slowdown on unemployment among migratory workers. Because the Chinese news source is in Chinese (and my Chinese language studies haven't progressed that far), I'll summarize from Victor Shih's posting on RGE Monitor yesterday. Dr. Shih is an Assistant Professor of Political Science at Northwestern University.

His post, Unemployment in China...Oh Boy, comments on a press conference by Chen Xiwen, the vice head of the office of the important Central Finance and Economic Leading Group. Chen's presentation concerned a Ministry of Agriculture survey which drew samples from 150 villages located in 15 provinces which exported more rural labor. The survey concerned the 38.5% of laborers who returned home before the lunar new year.

Chen's presentation interpreted the survey findings as saying that, of the urban workers who had returned to their villages for the holiday:
  • 60.4% still had jobs in the cities, and they will return to their jobs after the holiday.

  • 39.6% had lost their jobs or not found a job.
Chen applied these findings to the population of 130 million rural laborers working elsewhere. He estimated that 15.3% or 20 million have lost their jobs or have not found a job. According to the survey methodology, these 20 million are only the most recent "pulse" of unemployment occurring just before the lunar new year.

Based purely on official government statistics, Dr. Shih estimates in his RGE Monitor post that total unemployment is around 36.8 million, consisting of 20 million rural migrants, 15 million urban unemployed, and 1.8 million recent college graduates. The numbers were not converted to percentage terms, as is usual for US unemployment statistics.

I do not understand Dr. Shih's mathematics. If 20 million is the number of migrant workers who have recently lost their jobs, what about those who had lost their jobs earlier and were still unemployed? It looks as if his estimate follows the usual Chinese government practice of counting rural individuals living at home as employed, because they can be employed in agriculture, even if their contribution is marginal.

Whatever the unemployment numbers now, we will have to keep watch as they develop over the next few months. As average income declines, much about Chinese domestic stimulus programs, foreign exchange, and other policy matters may depend on those numbers.

Sunday, February 1, 2009

Economic Unrest in China Is Much More Common Than Reported

Listening to the Wind by Ma Lin (1127-1279), Southern Song Dynasty

Because news in China is so closely controlled by the government, it is worth paying attention to stories from unmanaged sources. The Sunday Times just published an report on research that it had sponsored on the impact of the worldwide financial crisis on the export-oriented provinces of Guangdong, Zhejiang and Jiangsu.

Violent unrest rocks China as crisis hits confirmed what most outside China already believed -- that bankruptcies, unemployment and social unrest are spreading more widely in China than officially reported, and there have been "dozens of protests that are never mentioned by the state media".

The article provided examples of recent strikes, protests and violence, as well as examples of foreign-owned businesses that have closed and left behind unemployed workers and often unpaid debts. Here are only few of the examples:
  • When unpaid workers demonstrated in one town, officials were so concerned that they ordered the factory owner to pay the wages and sent armed police to accompany the withdrawal from the bank.
  • There were "pitched battles" between striking textile workers and security guards in the city of Dongguan.
  • When teachers in Yangjiang were not paid, they confronted police in a street protest.
  • Police had to stop creditors breaking in to seize equipment in lieu of debts at several factories in southern China.
  • Labor rights groups have long reported owners hiring thugs to threaten workers who demand payment of wages, and this practice is reportedly continuing as owners' purses are pinched in the downturn.
The latest issue of the Far Eastern Economic Review focuses on flaws in China's economic strategy. Emphasizing cheap labor in export-oriented industries has caused income inequality and prevented the development of domestic consumer demand. Now the worldwide economic downturn is stifling income growth.

The Sunday Times warns that problems may intensify after the Chinese New Year, when migrant workers return to their workplaces only to find that they no longer have jobs.