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Obama Strikes Out Twice At G-20
This article originally appeared in The Daily Capitalist.
In a follow-up to yesterday's post on foreign exchange ("Hot Money, Gold, Foreign Exchange And The Fallout From QE"), the G-20 meeting in Seoul was not a good one for the Obama Administration and President Obama in particular. Mr. Obama was unable to conclude a free trade agreement with South Korea, and China told him to stop meddling in their internal affairs and put his own house in order first. Of course China's President Hu said that in polite, diplomatic language.
The whole controversy is about international "imbalances" which is a deceptive diplomatic code word. To everyone but China, Germany, Brazil, South Korea, and Taiwan, all successful exporters, it means that these exporters have to shoot themselves in the leg to give everyone else a "fair" chance in the foreign marketplace. To do that it means that China has to allow the yuan to rise in value (which it would if it was unpegged) and to open up their markets wide to imports from less successful countries. China isn't going to do that for obvious reasons:
"The major reserve-currency issuers, while implementing their monetary policies, should not only take into account their national circumstances but should also bear in mind the possible impacts on the global economy," Zheng Xiaosong, director general of the Ministry of Finance's International Department, reiterated at a press briefing.
What he is saying is that the U.S. (the dollar being the major reserve-currency) is being reckless by pursuing QE2, and that the resulting devaluation of the dollar will make Chinese goods more expensive and therefore will hit their main industry (exports) hard which will harm their economy. If, as they would privately argue, you guys can't compete because you have harmed your industrial base from past reckless monetary and fiscal policies, don't expect us to take the hit for you to recover.
Another Chinese minister put it more bluntly:
“Don’t make other people take the medicine for your disease,” Yu Jianhua, a director general at China’s Ministry of Commerce, told reporters in Seoul late yesterday. “Quantitative easing will have a very big impact on developing countries including China.”
They are absolutely right for the most part. The part where they are wrong is the pact they made with the devil by pegging the yuan to the currency of their biggest buyer--the U.S. dollar. In a system of freely floating exchange rates, China's yuan, off-peg, would have been revalued long ago to the rate which the FX markets determined was correct based on the supply and demand for yuan and dollars. That would have made Chinese goods more expensive, U.S. exports to China would be more attractive, and the trade balances would be distorted far less. What the Chinese didn't foresee or chose to ignore was that our profligate government would use monetary policy as a mercantilistic tool to make U.S. goods more competitive.
This G-20 meeting has been a disaster for President Obama and his Administration. It shows you how great countries decline. By pursuing reckless fiscal and monetary policies, the dollar has been substantially devalued, our citizens will be burden for generations by high debt and high taxes, our ability to compete on world markets is weakened, and we lose our status and influence. I can't blame this on Obama alone. He was preceded by a hundred years of politicians who have chipped away at our freedoms and the free market. They have spent and promised more than they can deliver and we will have to pay for it through the destruction of our capital and/or high taxes.
There is a solution to all this foreign exchange mess and that is for nations to adopt the gold standard. In my studies of it I believe it would act to reign in the destruction of currencies and act to fairly balance foreign trade and foreign exchange. I am aware of all the claims of how it failed during the 1920s and that FDR abandoned it as a "barbaric metal" in place of "modern money." These views are incorrect and reflect a statist Keynesian approach to political economy.
Interestingly, Robert Zoellick, former U.S. Treasury official and now president of The World Bank, has floated the idea that gold should be used in foreign exchange as a "reference point." As he said in the Financial Times, "Although textbooks may view gold as the old money, markets are using gold as an alternative monetary asset today.” What he means is that in real terms gold has not increased so much as that currencies, especially the dollar, have devalued, and that is why people are buying it.
The FT sneered at this suggestion saying that "most economists" believe it would lead to tight monetary policies [true] which restrict growth [false]. In fact Martin Wolf came out with an article examining the possibility of returning to the gold standard. In his inimitable way, he appears to give it a serious analysis and then dismisses it as an impossible return to the 19th Century. Mr. Wolf's "inimitability" is to set up a straw man and then demolish it. Don't take him seriously.
Tight money (read "real money") would actually lead to growth. If we could print our way to riches, then we'd all have been rich long ago. That would be another article. But I think we can all agree that the post-Bretton Woods systems haven't worked and the solutions proposed on all sides will make things worse.
I don't see any realistic solution to come out of any G-20 meeting on the topic of "global imbalances." There are no such imbalances; it is just an invention of countries like the U.S. to pin the blame for their policy mistakes on the Chinese. If I were China, I wouldn't worry about the long-term because the result of QE will be to weaken our economy by destroying capital which will lead to sluggish growth and be less of a threat to them despite a "cheap" dollar.
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"The Chinese have raised the standard of living of more people that the entire rest of the world."
Considering the population of China that is a given. Further more, considering where they started from, a small increase in the standard of living vs. said population translates into large gains. Beyond this, the increased standard of living is not balanced equally through the entire population as the State would have us believe. A benefit of state run media.
I will be impressed if they can maintain or surpass their current developmental achievements when they begin to imposing the same environmental constraints on their expanded population, and businesses as the rest of the "civilized" world. If they ever do. Unless you do not believe in imposing environmental regulations? I will be further impressed when they address their human rights abuses? Unless these do not apply since they are Communists?
As far as your other statements in regards to Bush and Nixon. Spot on. I don't know about pumping weapons into China so I will accept what you say at face value.
Everyone was more than happy to buy into our toxic debt, as long as, the money was rolling in. I have little pity for the governments you list because their economic practices are just as abysmal as the U.S.. India in particular, in an article I was reading the other day, has bankers and economists preaching the dire necessity of a central banking system, which can extend credit in the same fashion as the U.S. is currently doing. People do not learn from current events let alone history.
I don't believe anymore that the U.S. has room to be telling others what they should or should not be doing, even if we hold the worlds reserve currency. I believe we need to clean up our own house, reorganize with less government and an emphasis on personal restraint and accountability.
The "Chinese" haven't raised their standard of living. Chinese entrepreneurs and capitalists have raised the standard of living. The Party doesn't have a very good record on bettering people's lives.
No, not exactly. Only those entrepreneurs with relationship to the Party have raised the standard of living. For ordinary entrepreneurs, it is hard to earn money because of too much taxation and lack of access to cheap bank loans. It is the Party that has earned the most.
What business school? Wharton and yours? U of Phoenix?
"China also has been funding the US budget deficit for the last few years thus paying for the illegal wars against Iraq and Afghanistan."
Don’t forget the F-22, F-35s, P-8, C-17s, not to mention the 12 Aircraft Carrier Battle Groups and many secret weapons programs. Yes, because they are stupid Communists.
“After the US lost 4 proxy wars against China and was on the edge of bankruptcy, Nixon cut a deal with the Chinese.”
What history books are you reading? We kicked their ass in Korea and only the President holding Mac Arthur back or he would have gone to Beijing. In Vietnam, I guess it was those Chinese firecrackers that took our jets down not Soviet built MIGs and SAMs. You are a moron.
“It has built out it's infrastructure and is the fastest growing economy in the world.”
Yes, they are Communists. They have built empty apartments by the 100,000s, empty malls, empty cities! Read Jim Chanos (he has made a fortune shorting your Alma Mater)
“The attempt by the US to screw all it's foreign bond holders as well as all the toxic debt sold by US financial institutions is a declaration of war against Europe, China, India, Russia..etc.”
While they are taking our worthless paper, we have built the biggest, baddest, most high tech Military in the world. Bigger then all the rest COMBINED. We own the game. Study history – turn off Beck.
The uninvited guest: Chinese sub pops up in middle of U.S. Navy exercise, leaving military chiefs red-faced
When the U.S. Navy deploys a battle fleet on exercises, it takes the security of its aircraft carriers very seriously indeed.
At least a dozen warships provide a physical guard while the technical wizardry of the world's only military superpower offers an invisible shield to detect and deter any intruders.
That is the theory. Or, rather, was the theory.
American military chiefs have been left dumbstruck by an undetected Chinese submarine popping up at the heart of a recent Pacific exercise and close to the vast U.S.S. Kitty Hawk - a 1,000ft supercarrier with 4,500 personnel on board.
By the time it surfaced the 160ft Song Class diesel-electric attack submarine is understood to have sailed within viable range for launching torpedoes or missiles at the carrier.
According to senior NATO officials the incident caused consternation in the U.S. Navy.
The Americans had no idea China's fast-growing submarine fleet had reached such a level of sophistication, or that it posed such a threat.
One NATO figure said the effect was "as big a shock as the Russians launching Sputnik" - a reference to the Soviet Union's first orbiting satellite in 1957 which marked the start of the space age.
The incident, which took place in the ocean between southern Japan and Taiwan, is a major embarrassment for the Pentagon.
Battle stations: The Kitty Hawk carries 4,500 personnel
The lone Chinese vessel slipped past at least a dozen other American warships which were supposed to protect the carrier from hostile aircraft or submarines.
And the rest of the costly defensive screen, which usually includes at least two U.S. submarines, was also apparently unable to detect it.
According to the NATO source, the encounter has forced a serious re-think of American and NATO naval strategy as commanders reconsider the level of threat from potentially hostile Chinese submarines.
It also led to tense diplomatic exchanges, with shaken American diplomats demanding to know why the submarine was "shadowing" the U.S. fleet while Beijing pleaded ignorance and dismissed the affair as coincidence.
Analysts believe Beijing was sending a message to America and the West demonstrating its rapidly-growing military capability to threaten foreign powers which try to interfere in its "backyard".
The People's Liberation Army Navy's submarine fleet includes at least two nuclear-missile launching vessels.
Its 13 Song Class submarines are extremely quiet and difficult to detect when running on electric motors.
Commodore Stephen Saunders, editor of Jane's Fighting Ships, and a former Royal Navy anti-submarine specialist, said the U.S. had paid relatively little attention to this form of warfare since the end of the Cold War.
He said: "It was certainly a wake-up call for the Americans.”
"It would tie in with what we see the Chinese trying to do, which appears to be to deter the Americans from interfering or operating in their backyard, particularly in relation to Taiwan."
In January China carried a successful missile test, shooting down a satellite in orbit for the first time.
Some STUPER POWER the USA, LMAO
Not to mention project Thor, HAARP and PGS.
http://en.wikipedia.org/wiki/Kinetic_bombardment
http://en.wikipedia.org/wiki/Haarp
http://en.wikipedia.org/wiki/Prompt_Global_Strike
"Prompt Global Strike (PGS)[1] is a United States military initiative to develop a system capable of a precision conventional weapon strike anywhere in the world in 1 hour[2] just as a nuclear attack can currently be carried with intercontinental ballistic missiles.
The PGS system will be designed to complement Forward Deployed Forces, Air Expeditionary Forces (which can deploy within 48 hours) and Carrier battle groups (which can respond within 96 hours).[3] As stated by General James Cartwright, "Today, unless you want to go nuclear, it's measured in days, maybe weeks" until the military can launch an attack with regular forces.[4"
All of these wonderful new technologies as weapons need one VERY important componant: $$$$$$$$$ FRNs, say bye, bye now. Not a single bullet fired.
i would rather have honesty than war. banksters will be the only winners.
Look up the X37 - bet you it ain't just taking pictures.
Oh a few Diesel powered subs - so scared. A dozen F-22s with a half dozen B2 "Missile Trucks" can take out their Whole Airforce.
Oh yeah I know about their ASBM - so don't bother.
Here is one for you:
Air Force pursuing antimatter weaponshttp://articles.sfgate.com/2004-10-04/news/17447495_1_antimatter-physici...
Anti-matter weapon systems million times more powerful than nukes
"If electrons or protons collide with their antimatter counterparts, they annihilate each other. In so doing, they unleash more energy than any other known energy source, even thermonuclear bombs.
Unlike regular nuclear bombs, positron bombs wouldn''t eject plumes of radioactive debris. When large numbers of positrons and antielectrons collide, the primary product is an invisible but extremely dangerous burst of gamma radiation. This can kill a large number of soldiers without touching the civilian population."
A spot so small it can't be seen by the eye equals a 1 kiloton nuke.
Let's see Anti-matter weapons versus a dozen Diesel Subs? I'll take our chances.
The USA will be a footnote in history long before any anti-matter weapon is developed and deployed, your war with the Chinese will be lost without China firing a single bullet. Still pretty funny 1960s tech gets through 21st century tech, UN-detected, LMAO.
bring the pie in the sky to warp six! fly her apart!
Empty rhetoric.
Economic warfare is far more effective in the long run, as the U.S. is now learning, being the economic underdog for the first time in a very long time. It's a new game.
Another fine article Jeff.
"This G-20 meeting has been a disaster for President Obama and his Administration. It shows you how great countries decline. By pursuing reckless fiscal and monetary policies, the dollar has been substantially devalued, our citizens will be burden for generations by high debt and high taxes, our ability to compete on world markets is weakened, and we lose our status and influence. I can't blame this on Obama alone. He was preceded by a hundred years of politicians who have chipped away at our freedoms and the free market. They have spent and promised more than they can deliver and we will have to pay for it through the destruction of our capital and/or high taxes."
Truer words were never spoken...though my idea of what I'm expected to pay for the folly of others may differ somewhat from others ;-)
Related...leaving aside a return to the gold/silver/commodity standard (which I agree with)...to have capital...real capital...there must be savings first.
To that end, the income tax on wage earners needs to be scrapped IMHO. Replaced by a consumption tax or the Fair Tax which I have supported for some time.
For the left/right political divide we find ourselves in these days such an an idea deserves closer scrutiny.
The left will find that "the rich" would actually pay more as a percent of their earnings. Whether through bling, Mercedes Benz's or yachts. They derive most of their earnings from capital gains, div's etc...not "wages". Their lifestyle, whatever it is, would need to be maintained...this means them spending.
The right will find that everyone pulls their weight, the statist concept of politicians conferring favorable tax treatment on one group over another would be neutered.
Worth a thought or two.
Regards.
Very good, nicely written reply on what we need to do: have a friendly country to capital formation! The key to wealth.
I would rather have a consumption tax rather than the Fair Tax. The latter needs the loathsome IRS to enforce. Although there would be enforcement issues with a consumption tax, it would at least keep nosy bureaucrats from knowing how much money we make, have in our accounts, etc.
nmewn, a fine thought or two, well done!
Thanks D.
And I share your sentiments regarding the IRS...at least we (as a nation) have finally gotten past that ridiculous "it's a voluntary system" argument...LOL.
Corporate taxation is always rolled down hill to the consumer...consumers (salaried/hourly wage earners) pay these too with their "after taxed" dollars...so in my view...any federal tax/fee/license/permit etc. is double taxation of their labor.
I tend think that it (the IRS) would shrink as their focus would shift from 300 million plus "targets" to a considerably smaller number of "targets"...and I'm certainly not going to engage in semantics about the IRS "going away"...the name might, but the enforcement mechanism, perhaps, never will...it would just be named something else by the Treasury.
Now that I've put, what I believe is the related matter of labor savings (capital formation) & taxation forward...here's a critique of it from Rothbard;
http://mises.org/daily/1768
I particulairly enjoyed his referencing Colbert and the goose analogy...because that is what it is.
In the end...we, as a society, have come to the conclusion that we will not have beggars in the streets...we prefer them behind closed doors ;-)
Now it's just a question of how to pay for them to stay inside and I don't think standing on principle vs. pragmatism is going move us forward to a more equitable arrangement...maybe at some future point when Keynesianism is completely destroyed...but for now something must be done to lift the burden off the taxpayers in society.
I've beared my breast to the arrows that will follow my disagreeing with Rothbard here (the principle of a consumption tax/Fair Tax)...but they should know every journey starts by taking that first step and it's where we end up that counts most.
The Chinese are very worried because the inflation received from QE2 may bring down their system unless they can parry the blows, and in the end they can not.
To say that there are no imbalances is to say that there is no labor arbitrage. That is simply foolish. When you speak of policy, are you pining for the control exerted by the CCP here in the US ? US fascism, with Chinese characteristics ...
I do not understand why the US does not pursue a strong dollar and higher tarrifs on Chinese imports. What do I not get? The cheaper dollar is threatening the entire global economic system and if Obama is not smart enough to figure this out I would be surprised. Maybe I have given this guy too much credit.
Why would you want to pay more for products? Looking at it another way, the Chinese are subsidizing our purchase of cheaper products.
1. Ben says we need inflation, ergo dump China, employ Americans.
2. Quality is not being measured in pricing. China makes short term crap, paid for with long term debt. Not a good idea.
3. China is a military competitor. For national security reasons alone, China must be stopped.
1. How many unemployed Americans with college degrees will be taking up the jobs in American factories doing what the Chinese are doing now by the millions ... stitching shirts and jeans, assembling printed circuit boards and plasma screens, making and stacking plasterboard???
2. Which American products had a reputation for superior quality (when compared with similar products from Germany, Japan, HK and Taiwan) before the jobs were shifted to China?
3. You are a typical schoolyard bully. If you can't compete, then destroy! FYI, China has never been an expansionist imperial power in its 5,000-year history ... while America has been fighting expansionary imperialist wars ever since the first 13 states declared independence from Britain.
Yes, while our government parasitizes our middle class and manufacturing base.
The US is seeking for a third time in 30 years to get multiple parties to agree to devalue the dollar. The goal is always the same, improve US competitiveness and screw the holders of US debt.
The problem is it causes commodity inflation in goods priced in dollars like oil, copper..etc. The Brits, Japanese and Germans were able to buy raw materials much cheaper and thus were able to hold the line on cost increases. For example the Yen was 240/$ in 1985. Now that the Yen is 85/$ the Japanese can buy the raw materials to produce cars for less money. The net result is that the trade deficit only got worse.
The real goal of this devaluation is to screw all the holders of US debt. This will trigger retaliation by those holding the debt. It also means commodity producers like Venezuela, Iran, Sauudi Arabia..etc will demand more dollars for their products. The US will not be able to increase exports on products that rely on oil, copper, steel, coaltan ..etc.
The reason this gambit has worked in the past is that other countries really had no better options. The U. S. held all the cards (military and industrial might). Today is a different story! The U. S. has a stretched military, no money, no manufacturing base, is fat and lazy. The rest of the world knows and will do what any cornered animal will do. When the pack is coordinated they will go for the throat. Fair warning has been given...
Obamatron: "Hey, you got trade imbalance all over my FRNs!"
China: "Well, you got inflation all over my commodities!"
Idjuts, you're both right -- Ya can't have your cake and eat it too!
Well, decouple then.