Author: raymondusa

Beijing's leverage over Taiwan [Copy link] 中文

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Post time 2006-1-27 07:46:57 |Display all floors
LG Kim:

When you wonder why England could let go America, it implies England had better choices.  Perhaps the answer is the same as why England let HK go.  

Some human nature characteristics, like ego and pride, fuels Jingoism.  As long as there are humans, there will be human nature, and all the things that come with it, like Jingoism.  We have it here in the USA, and you have there in Singapore.  

Some hawkish people wrote that China and or USA could use its military as hard power to achieve their goals.  This is not the best path since no one wins.  Look at the current problems USA face in Iraq, with increased deaths, military cost, occupation cost, and diminished moral authority around the world.  That’s not something China should copy, and it should be wise enough to learn from USA’s mistake.  

As far as moving operations to India, USA and Japan are two large economies, largely unhealthy economies.   They depend on China’s domestic economic consumption to buttress their own economy.  If they could move to India, don’t you think they would have already?  The reason why USA, Japan, and other countries are investing in China is to capture part of the domestic consumption.  China has a domestic savings rate of about 40% of GDP.  India doesn’t have that.  In order to get into the Chinese market, you must first invest into it!  

USA has the worst aggregated debt ratio by absolute dollars, and Japan is second worst.  The IMF warned, USA is careening towards insolvency.  John Snow asked Congress to raise the national debt ceiling, which was set at 8.1 trillion dollars.  Ben Bernanke will become the Federal Reserve Chairman in a few days, and his solution, print more money.  Notice that Central Bankers around the world are moving more to gold, and away from the dollar.  The days of cheap foreign financing for US debts are going away too!   Bernanke’s idea to handle the largest debt in history is to devalue the dollar to devalue the debts.  A good first year economics student understands this will increase the cost of future borrowings, and increase interest rates, and interest sensitive industries like real estate will suffer.  

The Fed also stopped printing the M3 report, which was a way for investors to know the amount of money supply.  Smart investors should know this move means the Fed is getting ready to dump a huge amount of printed dollars onto the market when Bernanke takes over.  Interest rate will go up because of this, and USA will need cheap foreign financing to keep interest rates manageable.  
Congress loves to bash China because of the trade imbalance but it doesn’t credit China for providing cheap financing to keep our interest rates low.  As the debt problems get larger because of systemic long-term budget deficits, USA becomes more and more dependent on China’s financing, so it is in USA’s best interest to keep China as a friend.  Bernanke may not have a better choice since he cannot depend on Americans to save and self-finance the US debts and deficits.  Pay attention to the markets, and I think you will find out what I’m predicting here, will come true in the months ahead!  

Since you are in Singapore, I don’t expect you to fully understand the real problems the US economy is facing now, and will face ahead.  But if you would like to learn more about the US economy, I recommend “Running on Empty” by Peter Peterson.  BTW, Peterson is a Republican.  Not that it matters, but for some people who use a partisan filter in the USA, it could have some bearing on how they receive this book!   As far as I’m concerned, it does not matter to me if Peterson is a Republican, Democrat, Independent, or whatever.  It does matter to me when he is right!

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Post time 2006-1-27 16:48:16 |Display all floors

queries ?

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Post time 2006-1-28 08:27:29 |Display all floors

Quoting the annual GDP figure is really misleading.  It’s like telling someone only your income and assets, without telling them your expenses and liabilities.  GDP is just one figure, and given the various problems with calculating it (deflator used, included activities, excluded non-market activities, reporting delays, non-finished goods, uncalculated private sector transactions, etc.) it is not the best indicator of a country’s true economic health.  

GDP also doesn’t take into account currency differences, and cost and price differences in different countries.   That’s one reason economist developed the Purchasing Power Parity (PPP) to at least try to improve the economic calculation to more realistically reflect the true economic health of a country.  Even PPP has its own problems like it can vary based on the specific goods used for calculation, preferences from country to country, quality of goods, barriers to trade like sanctions, tariffs, duties, etc.  But in the absence of anything better, if you must use GDP, at least use the GDP (PPP) figures, as it is closer to reality.

The 2005 numbers are not yet available.  But here are the 2004 numbers GDP (PPP).  

International Monetary Fund calculations

1        European Union         11.72 trillion
2        USA                        11.60 trillion
3        China                          7.33 trillion
4        Japan                           3.81 trillion
5        India                          3.29 trillion

World Bank calculations

1        European Union         12.02 trillion
2        USA                        11.62 trillion
3        China                          7.12 trillion
4        Japan                           3.77 trillion
5        India                          3.36 trillion

Let me give you a quick example using my relative.  I send my relative in rural China $1000USD every year.  That works out to over 8000 RMB and she tells me it is enough to pay for all her living expenses for the year.  In contrast, that same 1000USD pays for one week of my home mortgage.  There is a big difference in cost of living, price of goods and services, and currency exchange as illustrated by my example.   Therefore, the more accurate number to use is GDP (PPP).   

Deficits are Income Statement related.  Debts are Balance Sheet related.  Some people unknowingly use Deficits and Debts interchangeably thinking it’s the same thing.  Deficits can measure daily, quarterly, and or annual shortages where expenses are greater than the revenues generated.  According to our National Debt Clock, we  are currently running a 2.18 billion dollar deficit, EVERY DAY!   Our expenses exceed our revenues every day, creating daily deficits.  The National Debts are an accumulation of those daily deficits.  We now have a National Debt at 8.1 trillion dollars and growing.  Just to give you some perspective, the interest cost alone on our National Debt (and I’m not even talking about being able to repay the debt itself) is more than the annual cost of the entire USA educational system.  This fiscal mismanagement is just the tip of the iceberg.  

The Baby Boom generation, which is the largest generation at 72 million people, are beginning to retire.  The projected Social Security and Medicare cost if all the Baby Boomers just live to their actuarial age is about 40 trillion.  As medical care improve longevity and people live even longer, those actuarial projections take it up to 70 trillion dollars.  If I just take Social Security and Medicare, that cost makes the 12 trillion GDP look like nothing.  We also have unfunded and or under funded pension plans in USA.  If someone is thinking they will retire happily on their pension, they may have a rude awakening too!  The PBGC (established by ERISA to insure the US private and public pension plans) may collapse by under funding.   

It’s already bad enough when I only talked about the unhealthy state of Social Security, Medicare, and Pensions, and I didn’t even get to the rest of the problems. Just understanding these numbers should help give you a better idea of the economic troubles ahead!  Read Peterson’s book if you are interested in more details and a more eloquent explanation!  
As far as the domestic savings rate, China varies from 40-45% depending on which numbers you are using.  USA varies from 1-5%.  Another words, there isn’t really enough domestic savings in USA to offset the financing needs of the country.  That’s why USA is becoming more and more dependent on foreign financing, and as such, its leverage around the world is decreasing.  Central Bankers around the world not only hold huge amounts of currency (over 1.6 trillion dollars with Japan and China alone), it also holds the liquidity that is much needed since US is running deficits daily, and adding to its existing debts.  This leverage that world Central Bankers have over the US is one reason, geopolitical issues around the world will increasingly be influenced by financial leverage, instead of military prowess.  

History is filled with omnipotent Empires that imploded and is no longer around, because they overreached, overextended their influence, overtaxed their own economies seeking world hegemony, and made the mistake thinking human conquest could conquer human nature!  Hopefully, all countries today will be smart enough to learn from these historical failures, and not need to repeat these failures by personal experience!

[ Last edited by raymondusa at 2006-1-27 05:24 PM ]

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Post time 2006-1-29 11:49:26 |Display all floors

devaluing dollar?

Since U.S. is running such high a deficit each day, and it is more and more relying on foreign financing, why cannot the Federal Reserve print more greenbacks:  (1) to let dollar devalued to make U.S. made goods more competitive on the world market, (2) to dilute the value in the hands of China & Japan, which hold trillion dollar paper bills?   do you mean the Federal will fear the rise of Inflation in the united states? But two merits are bigger than one shortcoming, right?

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Post time 2006-1-31 09:17:44 |Display all floors

It's a myth that devaluing the dollar is a way to deal with the deficits and debts.  There are many historical examples showing how disastrous it can be to print money as a way to deal with deficits and debts.  I use history to share relevant examples and to learn from history, so hopefully US do not make the same mistakes.  That is certainly better than speculating about US economic future with no supporting historical foundation.  

Let me give you some historical examples, as you can study these historical examples of hyperinflation and the events leading up to it.  You will find there are some scary similarities between these examples, and what USA is currently facing.  Example of hyperinflation include France 1789-1795, US Civil War 1861-1865, Germany 1920-1923, Russia 1921-1924, Austria 1921-1922, Poland 1922-1924, Hungary 1922-1924, Greece 1943-1944, Hungary 1945-1946, Argentina (Austral Plan 1985), Brazil (Cruzado Plan 1986), Yugoslavia 1993-1994 (Tito).  Tito felt the answer to his country’s problems was just print money.  We know what happen to Tito and Yugoslavia, right?

Ben Bernanke will be the new Federal Reserve Chairman soon.  When a new Fed Chairman takes over, the market will usually test him, and I expect he will be test quickly.  Will he sacrifice the purchasing power of the dollar?  Will he fail to learn from these historical examples and be a historical disaster like the examples above?  

Here are some reasons not to devalue the dollar:

1.        More expensive future borrowing on existing debts and deficits.

2.        Reduced purchasing power of the dollar means US Americans will suffer more as the dollar buys less.

3.        Hyperinflation can ensue just like historical examples above.

4.        Decrease demand for the dollar as Central Bankers look to other stronger currencies, and alternatives for their reserve portfolio.

5.        Decrease the good faith and credit of the US as a world reserve currency, and hasten Central Bankers to rebalance away from it.  

6.        A myopic scheme that will hurt the US economy long term, when it doesn’t deal with the real problem.

7.        Doesn’t address the real problem of lack of savings, and the ability of Americans to self-finance and not rely so much on foreign financing, thereby losing more leverage daily.

8.        Doesn’t address the real problem that American goods may not generate enough demand for the dollar worldwide, thereby weakening it further.

9.        Doesn’t address the real problem of systemic long-term financial problems within the US.  When Social Security, Medicare, and Pensions are in deep trouble, devaluing the dollar will reduce American purchasing power and make a bad situation, worse.

10.        Interesting sensitive industries like real estate and all the allied industries like building, construction, suppliers, etc. that depends on a robust real estate economy will also suffer as interest rates goes up.

11.        Suppliers of goods and services will need to increase prices just to stay even with inflation and not allow it to eat away their profits.  This is a double strike as consumers will have less purchasing power from a devalued dollar, and face higher prices for goods.     

12.        Consumers will also feel the pinch of a devalued dollar as they increasingly look to price leaders like Wal-Mart to buy what they need.  This in turn will further erode demand for the more costly US produced goods, and further erode what is already a sick manufacturing base.  

13.        Countries like Japan and China provide cheap financing to the US because it also gets some great benefits like trade surpluses.  If US were devaluing the dollar, it will reduce the incentive for Japan and China and all the other Central Bankers around the world, to continue providing cheap financing since the dollar cannot maintain its strength and purchasing power.  

14.        Since the Euro is a viable currency alternative, if the dollar is devalued long term, don’t be surprised that Central Bankers around the world move permanently to stronger currency alternatives.  

15.        As Iran implement its bourse, and others will either do something similar or use Iran’s bourse, there will be a greater need to use a stronger currency like the Euro as the instrument of trade, since the currency risk of a weaken dollar is just poor business.

16.        In the horizon, I can even see a potential AU, with China and other Asian countries getting together like Europe to create a united block of economies based on one currency, and this AU currency can be a third world reserve currency.  Therefore, it is more important for US to maintain the strength of its currency and retain the faith of world Central Bankers so US it can still be a world reserve currency.      

17.        Oil transactions are in US dollars for now, because of the perceived strength of the dollar backed by the full faith and credit of the USA.  If US are going to devalue its dollar long-term and continue increasing its deficits and debts, it will destroy its credit, and undermine the world’s faith in the dollar.  Therefore, that will hasten the world to find, use, and adopt viable alternatives like a bourse, barter agreements, and other market mechanisms that eliminate and or mitigate dollar currency risk.  This would be a major reason not to devalue the dollar as US doesn’t need to give the world more reasons to dump existing dollar holdings and stop buying new dollars denominated assets.

[ Last edited by raymondusa at 2006-1-30 09:48 PM ]

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Post time 2006-2-5 11:48:07 |Display all floors

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Post time 2006-2-7 09:43:25 |Display all floors

We will have a mid-term election at the end of this year, so it would not surprise me if you see some Congressman and or Senator, trying to impose tariffs as a way to appease its electorate, so they can be re-elected.  This is pretty much election politics as some politicians may be driven to do whatever they think will help their careers.  Election politics is active in other countries too!  

I feel protectionism using tariffs can be more harmful and helpful.  When this tariff idea was first proposed, there were some discussions that China may just adjust the price of goods to mitigate the tariffs, and then turn around and impose tariffs on US goods to China.  Because China already has lower costs to produce goods and some services, it has enough margins from which to reduce prices to mitigate tariffs.  But since US is already starting with usually higher cost to begin with, it would be much harder for US to reduce prices and margins even more, to mitigate China’s tariffs.  Therefore, China has the cost advantage in this potential tariff war.  Hopefully, the US politicians will see the wisdom of not using tariffs to buy votes.  But it would not surprise me if we see some US politicians pushing for tariffs, even when it is bad for the US in the long run.

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