The Shotgun Blog
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Saturday, December 12, 2009
I'll keep wearing my tinfoil hat
There's really no avoiding my slide into the tinfoil hat brigade. I say that in jest, but I fully expect most of the people reading this to come away with that conclusion. It's hard to put it any other way: the collapse of the United States is coming, it's real, and the chances to avoid the worst case scenarios from playing out are lessening by the day.
The problems are as clear as day. But most people don't consider them problems, insofar as they believe these problems have any real consequences.
The American consumer's saving rate is about -0.06%. Effectively it's zero; on average Americans have no savings. If you remove the upper 20% of income earners from the statistics, you start seeing scary figures of consumer debts averaging above $20,000--hundreds of thousands on average if you include mortgage debt, and about $180,000 more if you include public debt. The people at the midway point of the bell curve essentially have no capital, and their rate of indebtedness is increasing faster than their wage growth or prospects for wage growth. It's hard to imagine these people will die with anything but debt to their name.
Modern economic pundits, like those who grace Fox Business, CNBC and such, do not view these statistics as problems. Rather, they view these statistics, and I quote as "signs of America's credit worthiness".
These are the same people who also told us that there was no housing bubble back in 2006-2007, and that housing prices could rise forever. Their economic leader, Alan Greenspan, told us that we were in a new "goldilocks economy" and that the old rules of macroeconomics no longer applied.
While everyone now seems to agree that Alan Greenspan was wrong, they also still continue to think he was right at the same time. This is evidenced by the fact that economic and political pundits--save for whack-jobs like myself--are still selling the myth that the economic fundamentals are sound, that government deficits don't matter, consumer debt is a minor concern, and that hyperinflation ins't a risk.
When you cut through all the bad logic that underpins these assertions, they will ultimately fall back on this favourite cliché: "America has always pulled through in the past, so they'll pull through this" -- or the more ridiculous: "The world needs the US consumer, so the world won't let the US fail."
Neither of these arguments are logical and both of them are strong denials of reality. America has neither pulled through it's economic turmoil of the past (it's in the same bubble economy it's been in for over a decade), and the world actually doesn't need the US consumer.
The fallacy that only the US consumer is adequate to fuel global capital expansion is one of the biggest lies that politicians, business folk, and economists have sold to themselves and others. Rather, the US consumer is costing the rest of the world money. China isn't making money off the US anymore.
To draw an analogy: Say you walk into Best Buy and want to buy a new big screen LCD TV. But you have no money. So the store manager says, that's no problem: we'll advance you as much credit as you need to buy it. So they lend you the money to buy the TV. But then you come back and buy tons of other stuff. You tell the manager you don't really have any way of paying him back, but since you're such a big customer, he needs your business. So he just keeps lending you money, so he can keep selling you stuff.
This situation makes no sense. But modern economists tell us that it makes perfect sense when it comes to China; if China stops lending us money, we won't be able to buy their imports. So we're taking China's money and their goods. It stands to reason that China might ask itself at some point how this is beneficial to them.
People ask: who will China make all those high quality electronic goods for, if not the US consumer? Nobody ever stops to think that maybe the Chinese consumer serves as an adequate replacement.
The argument is that Chinese consumers cannot afford to buy their own goods, because they can not afford to pay hundreds of dollars for iPhone's and iPod's and big screen TVs. That might be partly true. But there's room for those prices to come down. Without the need to transport the goods across an ocean, and the fact that many of those products have ridiculous mark-ups. The iPhone is estimated to have mark-ups as high as 40-60%. There's plenty of room for those prices to come down and be sold to a relatively poorer Chinese citizen, who actually has savings to spend--relative to the American.
The world does not need the US consumer. The US consumer is a liability for the world. And every US dollar that goes to China, is more and more, getting trapped in China's ever-expanding currency reserves. They have nothing to buy from America.
The theory that America will simply export "high-value services" to China is not exactly panning out, the last time I checked the trade balance.
I may be wearing a tinfoil hat. But at least I do not practice economic voodoo, where the forces of supply and demand don't matter, consumer debt doesn't matter, trade deficits don't matter, and that the US consumer is a gift to the world. You go on believing that. I hope it works out for you.
Posted by Mike Brock on December 12, 2009 | Permalink
Comments
"People ask: who will China make all those high quality electronic goods for, if not the US consumer?"
What high quality electronic goods? Surely you (and other people such as P. J. O'Rourke) are joking. Most of the stuff that I've seen that's manufactured in China is cheap junk that breaks down not long after it's purchased.
Now, that's not to say that Canada, the U.S. and Mexico never made any trash, but at least you would get your stuff fixed at the local repair shop for a price that was cheaper than purchasing a replacement item. Also, you didn't have to talk to tech support in India and have the item shipped somewhere else.
I would rather spend more money once on "high quality" audio and video equipment that's made in Japan, Germany or Switzerland than less money several times on Chinese goods. Am I crazy?
Posted by: Cory D. Schreyer | 2009-12-12 4:52:46 PM
Cory,
Yes, you're crazy. China exports plenty of quality goods these days. The last time I checked, Apple manufacturers their computers, iPhones and iPods in China, and consistently wins JD Power and Associates awards for quality.
Most of the Japanese electronics companies these days, actually manufacture goods in China now.
You need to start taking a careful look at where electronics are being made. China is no longer just a maker of cheap goods. It's a maker of high quality goods, as well as a lot of cheap goods.
Posted by: Mike Brock | 2009-12-12 5:13:29 PM
The world does not need the US consumer. The US consumer is a liability for the world. And every US dollar that goes to China, is more and more, getting trapped in China's ever-expanding currency reserves.
Posted by Mike Brock on December 12, 2009
China's large foreign reserves allow it to manipulate exchange rates and keep the yuan low. If the Chinese were really interested in improving the lives of their own citizens they would allow the yuan to float rather than keeping it artificially low. The only conclusion one can draw from the actions of the Chinese is their attempt to effectively destroy manufacturing outside of China.
Most of the Japanese electronics companies these days, actually manufacture goods in China now.
Posted by: Mike Brock | 2009-12-12 5:13:29 PM
Actually most of the work is assembly but with the Chinese demand for technology transfers it's only a matter of time before they start designing and building the main components.
I go out of my way not to buy anything from China unless I have to.
Posted by: The Stig | 2009-12-12 5:58:14 PM
"China's large foreign reserves allow it to manipulate exchange rates and keep the yuan low. If the Chinese were really interested in improving the lives of their own citizens they would allow the yuan to float rather than keeping it artificially low."
China is motivated out of fear of political instability, as the US is a recent former enemy and nuclear armed state. Put yourself in their shoes.
The US would have bailed out the USSR too, in the middle of the Cold War (and they did give aid, actually), because a nuclear-armed enemy is far more dangerous when they're unstable.
China feels they have to prop up the US economy by keeping the Yuan low for that reason, and that reason alone. But the artificially low RMB is starting to put serious domestic pressures on the economy, and they cannot continue to do it for long.
America's economic instability is pushing China to it's limit in terms of being able to keep propping them up, and soon that bubble will soon burst.
China has been showing signs for quite some time that they are frustrated by the fact they are getting a shitty deal. They know damn well those trillions of USD are going to be worth only a fraction of what they traded them for when they actually try to spend them. It's why China is beginning to push for a move away from the USD as the world's reserve currency.
Posted by: Mike Brock | 2009-12-12 6:10:57 PM
Mike: "China feels they have to prop up the US economy by keeping the Yuan low for that reason, and that reason alone."
Not so. By keeping the undervalued yuan pegged low to the U.S. dollar, China is making it impossible for the U.S. to cut its $600 billion balance-of-payments deficit and is forcing other nations to intervene in their currencies. In other words, manufacturers in other countries cannot compete.
Mike: "But the artificially low RMB is starting to put serious domestic pressures on the economy, and they cannot continue to do it for long."
Because the low yuan in increasing China's foreign reserves at an incredible rate, those reserves must be disbursed from the central bank to domestic banks which is fueling a boom that cannot be contained much longer.
Posted by: Ed Ellison | 2009-12-12 6:31:28 PM
"Not so. By keeping the undervalued yuan pegged low to the U.S. dollar, China is making it impossible for the U.S. to cut its $600 billion balance-of-payments deficit and is forcing other nations to intervene in their currencies. In other words, manufacturers in other countries cannot compete."
You're only paying attention to half of the story. If China floats the Yuan, it will lead to massive inflation in the US as Chinese consumers flex their buying power, and Americans find sudden jolts in import costs.
It will likely set off hyperinflation in the US, while the value of the US dollar tumbles to insane lows against other currencies.
America has no way of repaying it's debts at this point, and China knows this.
Also, the trade deficit was only able to get so large, mainly because of US monetary policy that provided all the cheap dollars that fuelled the financialization of the US economy, the increase of consumer debt, and so on.
Without all that leverage, enabled through monetary policy, it is unlikely that the service sector could have grown to the size it did, fuelled largely by speculative pricing of residential and commercial real estate, consumer debt, and so on.
China can hardly be blamed from trying to take advantage of the situation--although they're only hurting themselves at this point. The US has been trying to take advantage of China's cheap labour, and it's money, so American's can keep reaching for the Mastercard to pay for another round of gold, while some guy in China is busy making all the golf balls.
Posted by: Mike Brock | 2009-12-12 6:57:11 PM
Mike: "You're only paying attention to half of the story."
You only presented half the story, and I was responding to that.
Mike: "America has no way of repaying it's debts at this point, and China knows this."
This is why the Chinese are using US debt instruments and cash to buy massive amounts of commodities everywhere they can, while they can. They have agents scouring the globe at this very moment, looking for things to buy.
Obviously that includes Canadian tarsands oil.
It is not to the Chinese advantage to instantly tip the balance, as you point out. They need to move quite slowly to move their currency towards a fair market value.
China has everyone by the short and curlies at the moment, but that could be an illusion if they make the wrong move, or move too soon.
Posted by: Ed Ellison | 2009-12-12 7:39:53 PM
"It's hard to put it any other way: the collapse of the United States is coming, it's real, and the chances to avoid the worst case scenarios from playing out are lessening by the day."
Could you elaborate on what you mean exactly? I'm pretty sure the geographic location commonly recognized as the United States will still exist - along with its reasonably well educated population, incredibly valuable infrastructure and extremely resilient political institutions. In what future does all of that just go away?
Posted by: Ben Hicks | 2009-12-12 10:30:38 PM
"along with its reasonably well educated population , incredibly valuable infratructure and extremely resilient political institutions"
Posted by: Ben Hicks | 2009-12-12 10:30:38 PM
"well educated poulation"
The American public at large are brainwashed stupid. The fact Ben that you could write something so delusional would have to reflect on how well educated you are.
"incredibly value infrastructure"
How do you sell infrastructure? Infrastructure requires constant infusion of cash.
" extremely resilient political institutions"
Resilient how so? Resilient was probably the wrong word to use, but lets shape it into what works for your analogy.Are you saying that American politics are flexible, understanding of what is best for its nation? Are you relaying that The US government in its resilliency honors the wishes of what the American people want?
The fabric which currently holds everything together there is in disrepair. It is a nation that lies to itself, and to everybody else, and lies cannot be sustained forever. The US is no where near being finished in afghanistan, so there is still time for Afghanistan to finish them, and their culture of war. Cultures that constantly war like the USA does, deserve nothing less than to fail miserably.
Posted by: Ken Barlow | 2009-12-13 8:47:08 AM
If America was in fact well educated, the case for Iraq and afghanistan could not be made.
If America was educated at all and not just indoctrinated by text books full of slanted lies, pentagon budgets the size they are would never be approved.
Nasa would never be approved.
Constantly warring around the world would not be allowed from an educated public.
A prison industry for profit would not be the largest new growth industry in the US if a the American public actually educated themselves with information other than agenda drvien propaganda the is fed to them.
An educated public would not believe that fossil fuel is the only way to move forward, and would look to replicate nature than destroying it beyond what is an alarming rate.
An educated Public would let failing business's like banks fail, so they would have to rely on themselves as to whether or not they will be successful. Everybody wins means in the long run everbody loses, because losers are allowed to make critical decsions. An educated public knows these losers have to be weeded out.
America loses money each and every day because of how it consumes, an educated public with intelligent government would realize the business model will fail if the expenditures are not managed.
Americans for the most part are as stupid as the people on this blog site because most of what is believed, and is considered intelligent knowledge, amounts to what some unreliable source relayed.
Posted by: Ken Barlow | 2009-12-13 9:10:31 AM
Ken says,
"An educated public would not believe that fossil fuel is the only way to move forward, and would look to replicate nature than destroying it beyond what is an alarming rate."
The world is swimming in oil. Shortages only happen because the US refuses to mine their own reserves, and therefore import all of their oil from wartorn countries. The fact that we're swimming in oil after the last inflation-fueled boom should tell you that the "alarming rate" we're using our resources up is just that: alarmism.
And besides, North American oil demand has peaked. Gas prices spiked too much and people started buying efficient cars and sealing their windows.
Having said that, anyone claiming that fossil fuels are the "only" way forward is clearly uneducated. But I haven't heard anybody say that; only that oil is the most economical way forward or that it is the cheapest and most energy-dense source of power we know of.
Cheap solar would make anyone who implemented it filthy rich. That's as true today as it always was, no environmental laws or educated public necessary.
All of your other points are excellent, though.
Posted by: Andrew P | 2009-12-13 11:28:50 AM
Andrew: "Gas prices spiked too much and people started buying efficient cars and sealing their windows."
You have conflated two different things here.
Gas, which is short for natural gas, heats our homes, as in your above example. It is often found in conjunction with oil.
Gas, which is short for gasoline, supplies the motive force for our automobiles. Gasoline is a product of the distillation of oil.
Posted by: Ed Ellison | 2009-12-13 11:49:27 AM
You'd have to say that Ken Barlow that really really smart guy, probably the only smart guy here, hates Americans very much.
Wonder where he gets his IV drip brainwashing.
Posted by: Janice | 2009-12-13 11:58:00 AM
"Wonder where he gets his IV drip brainwashing."
Posted by: Janice | 2009-12-13 11:58:00 AM
From questioning and pondering ALL sources of information, not by repeatedly swallowing implausible misinformation hook, line and sinker, and then pretending to know reality.
Posted by: Ken Barlow | 2009-12-13 12:08:57 PM
There is a reckoning for America coming, a take down of considerable societal impact, but it will take literally decades for China to fully usurp America's standing and prowess, if ever. The US economy still very significantly dwarfs China's. China's middle class is still very small and growth in that strata seems to have largely stalled for some reasons you've already stated.
China, the US's banker now, holds some $2.3 Trillion of American debt, bonds and currency, and is adding to the rate at $100 Billion each month. It would get very ugly but the scenario of deflating away the dollar scares the hell out of the Chinese and there is only so much they can do about it. Biding time is necessary and your point about scouring the globe for commodities to cement the value of the dollars held is a good one. To float the yuan at this time would be to unwise given the US holdings value and the ramifications to that. To do so out of a nationalistic arm flex would be regressive and unlikely.
PS Mike I've read that one particular product, the iphone only has 4% of its value imparted in China. The rest of it is done in neighbouring SE Asian countries.
Posted by: Janice | 2009-12-13 12:30:00 PM
Janice,
You're right. This isn't just about the US vs. China. It's really the US vs. the rest of the world. All of Asia is going to benefit from the coming US economic implosion. Even Europe is going to significantly benefit.
I sort of agree that it's not necessarily the case that China will replace the US as the worlds superpower. There's a part of me that thinks it's more likely that the new world order will be a conglomerate of smaller, rich nations.
Posted by: Mike Brock | 2009-12-13 12:43:02 PM
The fact that we're swimming in oil after the last inflation-fueled boom should tell you that the "alarming rate" we're using our resources up is just that: alarmism.
Posted by: Andrew P | 2009-12-13 11:28:50 AM
Dear Andrew,
America gets very little oil from war torn countries? 40% comes from texas and 60 percent from a variety of countries, you tell us how many are war torn Canada, Saudi Arabia, Colombia, Nigeria, Angola, Iraq,Venezuela, Equatorial Guinea, Algeria, UK and few other countries that supply refined product. Does Iraq count as a war torn country?
You have never heard anybody say oil is the only way, just get in the way of big oil or challenge our government on it ( Dr. John Oconnor). The 500 year supply is why the oil lobby is ingrained our Government corruption that dictates our direction.
You say we are swimming in oil? Before man harnessed some uses of oil we had steam, before that surface coal, wood, etc. and we have Always been swimming in water. why not energy from rare earth magnets machines, or something that reacts with oxygen, or spectrums of light not effected by cloud cover? Why not natural chemical reaction from garbage used to created energy? Why limit innovation to what someone tells you the limits are?
It is common knowlwdge that the oil companies buy up technology in order to quash or bury the science. Battery technology that powered the the early gen GM electric cars, was bought up by Chevron and destroyed so please no more naivete about oil not controling destiny. The supply and those who control oil also control what the market see's in the way of innovations. Entrepeneurs can only work with what is avaialble to them.
My argument about oil being the only way has to do real competition not existing because theorectically too many obstacles exist. Finding ways to work with Petro chemical "because you say we are swimming in them is not fighting the current and will have more success in a world controled by them.
We are also swimming in water and Hydrogen for instance is in abundance, even in poluted form , it can be used to produce far better energy alternatives regarding ommissions, but that is not may argument either. It is about about the next untapped resource, undiscovered as of yet.
To comment that oil is in abundance and therefore we should use it is pure fallacy. To actually believe that Americas oil consumption could be cured with domestic drilling is not even close to the truth. Our destiny is controlled by business and busines is never about propelling human kind forward, moving forward is just a fortunate incidental effect sometimes by what is forced on us to consume. Imagine a world where only the best ideas and innovations are what we have to choose from.
Posted by: Ken Barlow | 2009-12-13 1:11:59 PM
t is common knowlwdge that the oil companies buy up technology in order to quash or bury the science.
Posted by: Ken Barlow | 2009-12-13 1:11:59 PM
Yeah like the 500 MPG carburettor or the engine that runs on water. Bwahahahahahahahaha
Posted by: The Stig | 2009-12-13 1:15:34 PM
Yeah like the 500 MPG carburettor or the engine that runs on water. Bwahahahahahahahaha
Posted by: The Stig | 2009-12-13 1:15:34 PM
So by your own admission fossil fuel is in-efficient, and is in total control of our lives going forward.
Posted by: Ken Barlow | 2009-12-13 3:01:27 PM
So by your own admission fossil fuel is in-efficient , and is in total control of our lives going forward.
Posted by: Ken Barlow | 2009-12-13 3:01:27 PM
There's no hyphen in inefficient Kenny. Fossil fuel is certainly much less efficient than nitrogen tetroxide / hydrazine rocket fuel but much more efficient than hydrogen. And I quite honestly couldn't care less whether we use fossil fuel, wind, nuclear etc to generate power.
Posted by: The Stig | 2009-12-13 4:16:00 PM
During the winter months, excess heat from the engine is blown off the radiator through the heating core and is used to heat the cab. So when it's cold outside (which is quite a bit in Canada), gasoline's efficiency goes from ~85% being wasted on heat, to maybe 20%, since most of the heat is used.
In an electric car a separate heating element needs to be powered - ditto for power steering, power brakes and air conditioning.
I'm not wearing blinders and saying "oil is the only way" as Ken seems to believe. I've tried working with alternative energy sources and these are real barriers that I've run into as a hobbyist. The energy density of fossil fuels is simply unparalleled, and the energy is more cheaply (and widely) accessible than any other source. That's all there is to it.
There is no conspiracy by Big Oil, no magic batteries and no starlight solar panels.
Posted by: Andrew P | 2009-12-13 10:30:11 PM
Another great post Mike.
China's actions recently indicate that it cannot simply let the Yuan float and the U.S. implode. Don't get me wrong, I have a very bad feeling it will happen (probably in the next downturn), but it's the last thing China wants. China has a whole bunch of bad debts within its banking system, and yet has increased lending substantially by simply inflating the money supply. They're also keeping a whole bunch of money losing industries afloat.
The problem is property rights. The Chinese will not start spending and investing without them (savings rate is over 30% and most of it is not invested). Would you? If the Chinese don't spend, someone else has to buy what they produce. When the Americans stopped buying, unemployment started spiking. The only thing keeping the Chinese economy from experiencing massive unemployment is the stimulus from the gov't (which is unsustainable).
Since the Chinese gov't forced countless Chinese farmers off of their farms in promise of jobs, they'd have a potential revolution on their hands, which they will do anything to avoid. So they'll print as much money as they can, keep as many unprofitable industries alive as they can (aluminum, cement, steel, etc.), and the last thing they will do is let the Yuan float.
So get ready for a boatload of inflating, bad debts, and political instability over the next decade or so ;)
Who will replace the U.S.? My guess is no one really ... All I know is I don't have a penny invested in the U.S. and it's going to stay that way for quite a while.
Posted by: Charles | 2009-12-14 6:58:04 AM
"The American consumer's saving rate is about -0.06%."
Just curious, where did you find that number?
Posted by: Charles | 2009-12-14 7:32:15 AM
Mike: "The American consumer's saving rate is about -0.06%."
The information below is for October 2009 from the BEA (Bureau of Economic Analysis) web site:
Personal saving -- DPI less personal outlays -- was $490.3 billion in October, compared with $510.4 billion in September. Personal saving as a percentage of disposable personal income was 4.4 percent in October, compared with 4.6 percent in September. For a comparison of personal saving in BEA’s national income and product accounts with personal saving in the Federal Reserve Board’s flow of funds accounts and data on changes in net worth, go to http://www.bea.gov/national/nipaweb/Nipa-Frb.asp.
Posted by: Ed Ellison | 2009-12-14 7:57:27 AM
BTW Mike, excellent topic. Please keep them coming.
Posted by: Ed Ellison | 2009-12-14 9:00:04 AM
Just one last note: China's so-called manufacturing advantage is entirely the U.S.'s fault.
1. The central bank's monetary policy has allowed the average American to buy more than he can afford. If the increase in the money supply had come from savings (and not created out of thin air), then it would be virtually impossible for Americans to be overlevered as a whole (and China would not have been able to sell as many goods as it did).
2. The Chinese selling cheap goods to America is not a bad thing, as long as you have free markets (which America does not). Cheap goods would normally allow Americans to save more money and invest to make their industries more productive. Because of the thousands of regulations in America, however, no amount of capital will make American industry competitive in order to compete with the Chinese.
America did this to itself. I am convinced that unless both America and China alter their current behaviour, both will experience significant difficulties down the road.
Posted by: Charles | 2009-12-14 9:07:33 AM
Yes Cory if you buy your stuff from Walmart you will be getting cheap Chinese junk ; that brand name stuff has been specifically cheapened down by Walmart so as to undercut the slightly better quality junk made elsewhere so as to sell to the knuckleheaded American consumer .
Posted by: daveh | 2009-12-14 9:53:29 AM
I think the biggest problem is that fiat currencies are influenced by confidence and faith, and the Chinese should not be rationally expected to remain confident in a currency that has considerably less value over time. We can look at the problem now while we still have room to breathe, or we can wait until it's necessary. There is one man who has had his eye on this problem for more than 25 years.
"December 9, 2009
Madame Speaker, I rise to introduce the Free Competition in Currency Act of 2009 (HR 4248). Currency, or money, is what allows civilization to flourish. In the absence of money, barter is the name of the game; if the farmer needs shoes, he must trade his eggs and milk to the cobbler and hope that the cobbler needs eggs and milk. Money makes the transaction process far easier. Rather than having to search for someone with reciprocal wants, the farmer can exchange his milk and eggs for an agreed-upon medium of exchange with which he can then purchase shoes."
- Dr. Ron Paul
The rest of his speech can be found on www.ronpaul.com.
Legislation like this and his Audit the Fed bill are the first steps in returning the US to it's former glory. It is important for the public of the US, or any nation, to understand issues such as these. An aware public is able to safeguard against tyranny. If you truly listen to Ron Paul and give his messege a chance, you would be surprised how often you find yourself in agreement with the crystal clear logic he presents. How many politicians offer freedom?
Canada can learn from the mistakes of the US. Afterall, it is said by economists that when the economy of the US catches a cold, Canada gets pnuemonia.
Posted by: EndtheFed | 2009-12-14 11:07:25 AM
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