On the radio...

These items have hit NPR. Most notably, the UN is warning the U.S. that we need to do something about the evil twins.

http://www.npr.org/templates/story/story.php?storyId=4467938

http://marketplace.publicradio.org/shows/2005/01/26/PM200501264.html

Robert Reich writes on the same issue...

A giant in decline: geopolitical ramifications of a U.S. financial collapse.

I guess I don't have much to say about this article, other than "right on". This is the sort of thing that keeps me up at night.

Some choice bits:

"The result of this reluctance to confront the consequences of America's credit excesses -- a federal government debt level that is now at $7.5 trillion. Of this, $1 trillion is ancient history; the other $6.5 trillion has built up over the past three decades; the last $2 trillion in the past eight years; and the last $1 trillion in the past two years alone. According to the economist Andre Gunder Frank, "All Uncle Sam's debt, including private household consumer credit-card, mortgage etc. debt of about $10 trillion, plus corporate and financial, with options, derivatives and the like, and state and local government debt comes to an unvisualizable, indeed unimaginable, $37 trillion, which is nearly four times Uncle Sam's GDP [gross domestic product]." This rising level of indebtedness will become a huge deflationary weight on economic activity if debt growth should seriously slow – which is the economic equivalent of a Catch-22."

"Even if China, Japan, and other East Asian nations continue to accommodate American financial profligacy, a major economic "adjustment" in the U.S. could still be triggered simply by the sheer financial exhaustion of its overextended consumers. After all, the country already has a recession-sized fiscal deficit and zero household savings. That's a combination that's never been seen before. In the early 1980's, when the federal deficit was this size, the household savings rate was 9%. This base of savings enabled the government to finance its vast deficits for a time through a huge one-time fall in net savings, the scale of which was historically unprecedented and not repeatable today in a savings-less America."


"...many Americans would likely experience a major decline in their living standards -- a gradual grinding-down process that could continue for years, as has occurred in Japan since the collapse of its credit bubble in the early 1990s."


"The CFR report made another salient point clear: "Oil price spikes since the 1940s have always been followed by recession." In its current debt-riddled condition, further such price spikes could bring on something more than a garden-variety economic downturn for the U.S., especially if some of the major oil-producing nations, such as Russia, follow through on recent threats to denominate their petroleum exports in euros, rather than dollars...."

"Venezuelan President Hugo Chavez, for instance, returned from a Christmas trip to China where he apparently sold America's historic Venezuelan oil supplies to the Chinese together with future prospecting rights. Even Canada (in the words of President Bush, "our most important neighbors to the north") is negotiating to sell up to one-third of its oil reserves to China. CNOOC, China's third largest oil and gas group, is actually considering a bid of more that $13 billion for its American rival, Unocal. The real significance of the deal (which, given the size, could not have been contemplated in the absence of Chinese state support) is that it illustrates the emerging competition between China and the U.S. for global influence -- and resources."

Admiting when I'm wrong...

Turns out Mr. Crook has written a good piece on the yuang-dollar balance. So apologies are in order, even if I don't necessarily agree with his conclusion. It also doesn't change the fact he is out of touch at least as far as the previous article is concerned. As Berkeley's DeLong points out in his article in the Atlantic Monthly it's not likely that boomers or many other American's are going to tolerate a drop in their standard of living. (More on that article later.)

Someone should give me this guy's job...

http://www.forextv.com/FT/Text/ShowStory.jsp?id=2169

...because not only can he not add, he's futher out of touch with the economic situation than I am with a 23 yo coed.

Really, I gave this article a chance. My little confidence puppy, currently battered and untrusting, raised his head at the thought that things may really not be that bad...until I read this:

"Rising rates will reduce US consumers import appetite, according to Mr. Roach. How? US consumers will need to save more money to pay off their rising debt burden because they won’t be squeezing much wealth from their individual asset bubbles in a rising rate environment. Thus, instead of shopping 24/7, US consumers may spend some of that time at the bank making savings deposits."

....nope that's not it. Have you been outside of New York...or wherever you reside Mr. Crook? People are in debt "up to their eyeballs " to sustain their spending habits. Many of them have taken out home equity loans to the extent they are upside down in their mortgages. A rise in interest rates would further exacerbate the situation by pushing down already inflated home values. Further, most if not all of these loans have variable interest rates, this will not only reduce consumer spending, it will also force many people (unable to sell their homes to cover their loans) into bankruptcy.
I assert that this is no small group of people. If Dave Ramsey can support a national call-in show with every other person calling in claiming tens of thousands of dollars in the credit card debt...yeah...consumer spending is not going to be reduced...it's going to be non-existant.


Consumers won't be squeezed by their rising debt burden they will be crushed and the world economy along with it.

I'll be darned....

Seems that Sony is courting Transmeta, possibly the first step in liscensing it's x86 emulation layer?

The evil you know vs. the evil you don't

FCC Chairman Michael Powell announced today that he will step down. I'm not sure if I should jump for joy or cower in fear concerning a possible replacement.

Sony Cell to challenge wintel?

Slashdot points to an in-depth article on Cell processor expected to be in the PS3. The article is based almost exclusively off analysis from the patent filing.

http://www.blachford.info/computer/Cells/Cell0.html

The author speculates that the cell will become the general purpose computer of the future, replacing the Intel/AMD/Microsoft status quo with a new one that may include Apple. I certainly agree with author that Apple has an opportunity here. What is not certain is whether Jobs and Co. will seize the moment. If history is any indication, they probably won't.

Does Bush's Social Security Plan amount to public governance of the top 100 publicly held companies?

This article got me thinking about a possible unintended consequence of Social Security privitization. The article explains the meddling of state pension funds in corporate governance.

Let's imagine for a second that Bush pushes through his Social Security refrom and that trillions of dollars over time get poured into the stock market. The speculation is you'll have a scant few options to choose from. More than likely, these options are going to be blended bond (as in Fannie Mae type bonds I'd think) and stock index funds. It also seems that the Social Security Fund managers will have just as much power as these state pension funds. This would in fact create a system where the largest corporations are state controlled. This may create a atmosphere of refreshing accountability, but let's be realistic. Corporations will bribe lawmakers to run rivals into the ground. There will be threats that if "so-and-so" legislation is not passed/tanked then profits will suffer. Large corporations will have an even larger seat at the table, blending the "third-rail" of politics with the corporate lobbyist. If Johny congressman doesn't tow the line, Aunt Ethel is going to vote him out of office when her private account doesn't perform up to par...this is a bad idea.

You know....in a round about way Bush is adopting a key plank in Ralph Nader's platform. At one point Nader was calling for the top 100 publically traded companies to have it's officers elected by the public. Who knew Bush was so progressive...

Too late now...

If you're out there thinking you might hedge yourself against a fall in the dollar, I am here to say it is too late. The story has hit the front page of the Wall Street Journal, so it seems to me the cat is out of the bag. Any move made now would only be following a herd of lemmings running into the sea.

Brad DeLong points to this article pointing out the debagging of the cat.

From the article:

"...massive Fed easing (6.5% to 1%), massive and reckless fiscal easing (from 2.5% of GDP surplus to 4% deficit) and sharp dollar fall (15% trade weighted so far and still going) gave us the best recovery that money can buy; but it also gave us the most drugged and artificial recovery that money can but leaving the US imbalalances worse than before: twin deficit, short-term financing of these deficits with increasing rollover risk, sloshing liquidity, housing and risky assets bubbles, low savings and high leverage in households and among highly-leveraged agents, carry-trades and chasing for yield."

Claiming the recovery was/is artificial is a good point, one that hit home for those of us in the rustbelt where the recovery has been anything but. Unemployment in Michigan is still hovering around 7%. One might also point to the automotive industry where massive incentive offers should have cleared the lots of excess inventory. Instead, the lots sit full and evidence is mounting that incentives are no longer working.
A natural recovery would have brought with it job and income growth which would have spurned demand. Part of the problem, I'm sure, is that our purchases, and the jobs created weren't in the U.S., The jobs being created are outsourced jobs in Asia and the products we're buying are from China. This only serves to exacerbate the problems of trade and budget deficits.
This certainly explains the jobs/retail numbers. My understanding is that most of the job creation is in the retail/service sector. Wealthy individuals, and middle class people in lots of debt continue to buy ( high-end retail is up ) and workers dislocated from the manufacturing sector ( or their wives, I don't see many 45 yo men working at the mall). Who apparently spend all their money paying down debt ( note the flurry of good numbers from banks yesterday) or paying for health insurance (a sector also experiencing record growth). So, the people doing the outsourcing are doing OK, the outsourced or about to be outsourced are in trouble.
Anyway, here's the issue. If indeed there is a housing bubble as the article suggests, then some untold number of families (millions?) are going to find themselves in houses they can't sell (overvalued). It has been suggested previously that politicians may choose to deflate the dollar (it may not have a choice). The danger with currency devaluation is inflation. Normally, inflation would help all those people upside down in their houses. The assumption is their income will adjust with the rate of inflation. I can't speak for anyone else, but even in this low inflationary period, my wages do not keep up with inflation, I don't think that wages will change just because prices go up. Instead, I think this will lead to even more outsourcing, more demand for low cost items from China, etc. So, while the common sense notion may be that deflating the dollar will prevent massive defaults, it seems more likely that it will precipitate forclosures.
Of course, rising interest rates to prevent a decline in the dollar might very well cause the same scenario. In this instance, wages remain steady while disposable income gets dumped in to interest paid on variable rate mortgage. This will also contract consumer spending which may cause higher unemployment. It certainly won't do anything to curb outsourcing.

My major disapointment in the reporting of this phenomenon is the focus on the markets. I'd like to hear some advice on how to insulate myself from the possible "hard-landing". I'm ready to commit to a course of action, but what action is there to take? Economic theory tells us that the price takes into account all information available. With that in mind, it is too late to try to hedge against a decline in the dollar and get any real benefit from the move.

..anyway, to summarize: hard landing ahead, please return your seatbacks and traytables to the upright position, grab a beer and some cable TV, sit back and enjoy the show.

All aboard!!:The decline of the dollar.

Investor Warren Buffet has apparently been "bearish" on the dollar for the better part of a year.

Says Buffett: "The rest of the world owns $10 trillion of us, or $3 trillion net." That is, U.S. claims on foreign assets run to only $7 trillion. "If lots of people try to leave the market, we'll have chaos because they won't get through the door." In a nutshell, the trade deficit is forcing foreign central banks to ingest U.S. currency at a rate approaching $2 billion a day. Buffett continues: "If we have the same policies, the dollar will go down."

Thanks to Mr.Buffet for providing actual numbers that seem to mean something in terms of exactly how much trouble is ahead.

Is this groundswell of media attention the people starting to get up out of their seats to head for the door of the burning hall? If this thinking catches on 2005 (and 2006, 2007, 2030) is going to royally suck. The kicker is that if this notion does take off, it's probably too late to do anything. That is, moving dollars overseas will not help.

What's a guy to do? Buffet doesn't say, he does say that if you're not inflation protected ( and that does not mean US Treasuries) you're screwed:

"But here's a long-term perspective. He says he may hold foreign currencies "for years and years." And he says that the electorate of the U.S. may be strongly tempted to get out of hock by inflating away the country's dollar debts."

...it just keeps getting better....

At this time I am reminded of the ancient Chinese proverb/curse:
"May you live in interesting times"

A Twofer..

The second part on dollar naysaying from Forbes:

http://www.forbes.com/home/free_forbes/2004/1213/198.html

Their suggestion: foreign bond funds. I've been saying that since August. ( Lot of good it's done me). One thing I did learn from the article, foreign equity and bond funds are often hedged to prevent currency fluctuations from effecting the value of the fund. That's bad. Especially if you assume the dollar will continue to slide. They suggests some funds that are no doubt not in many people's 401(k) options.

Choice bits:

"He argues that the U.S. has been living beyond its means and that current fiscal strategy--running big deficits to finance a war and tax cuts while also amassing big trade deficits--has stretched the economy to the breaking point. "It's the U.S. dollar that's at risk," Schiff says. "Very few people understand that.""

...well thanks, now (thanks to Forbes) everyone else does know. Generally, I'm not one for jumping on the investment bandwagon in this fashion. Maybe raw materials would be a better bet? My big concern there is prices may have already peaked going into 2005 and economic slowdowns in the U.S. and China may very well cool off prices in these markets. That leaves us with what in the way of unexplored investment avenues? Maybe it's time to start stockpiling gasoline, motor oil, kerosene, crop seeds and the like.

"....countries as Australia and Singapore with supersafe AAA bond ratings"

OK. The problem with this line of thinking is economic growth in these countries depends largely on the U.S. and China.....yeah...right...who isn't. That leaves me feeling like:
"I look at myself as if I'm on a lifeboat and I'm floating around trying to get as many people on board as I can before the ship sinks,"

"I look at myself as if I'm on a lifeboat and I'm floating around trying to get as many people on board as I can before the ship sinks," (Lewis Black had a similar rant a few years ago).
Except I'm not really trying to save anyone. Trying to save everyone would rock the boat and lose all hands.

I have no problem investing in Australia,but Singapore is a scary place. like Farmington Hills but with less middle-class and more with physical punishment for violating social taboos. My money isn't going to support a government like that....how's Finland doing these days..

Old school naysaying

Forbes is running a series of interviews/articles by economic doomsayers. I'll be the first to admit I'm in this group until I see evidence to the contrary for just the reasons highlightened in this first article.
Yup.To paraphrase Dr. Dre : "Been there. Done that."

I'm all for giving credit where credit is due and this has been on the horizon for the better part of a year.

Angel of the North

My "365 Bottles of Beer for the Year" (a gift from the Angry Engineer) today features the "Federation Angel Ale". The label features a picture of the Angel of the North:

.

No doubt this is a gorgeous statue, but the engineer in me cringes at the sight. Of all the configurations for a structure, this one does not seem wise. Luckily the engineers on the project designed it to withstand 100 mph winds.
I also initially assumed it was near the English Channel or maybe meant to greet aviators making the Atlantic crossing. Nope, it's somewhere in the middle of England; it was a nice thought.
Anyway, here's a fact sheet. I had no idea this momument existed, I'll make sure to see it if I ever get to England...and then I'll stop by for a pint in Dunstan, Gateshead.