The Economic Storm and the Silver Lining
My personal opinion on the current economic situation ...
There is a massive transfer of wealth from baby boomers holding stock and interest bearing accounts, from banks and brokers, and from foreign nations holding dollars that have been our main suppliers of oil and other imports. It is also a transfer from people who have been living it up on credit such as mortgages for larger houses than they could afford.
The result has been and will continue to be awful for consumers as food and energy prices have risen, but in due time will be terrific for producers such as manufacturers and exporters. It will take a while for things to sort themselves out but in the end there are some good things that will happen.
Living Proof that $40 million doesn't buy happy.
Written by Dagny D'Anconia
Monday 15 Apr. 2008
For decades the US policies shifted the balance of economic power in favor of consumers and against producers. Trade agreements were one sided and unfair to American producers. The high dollar was like a massive hidden tax on all producers and exporters. Monetary policy encouraged other nations to hoard dollars in exchange for their production which was exported to America thus ensuring a load of consumer goods from places like China. With the drop in the dollar came the sub-prime mortgage crisis and now there is a vast rebalancing of economic forces at work.
Why was this policy maintained for decades? There are several reasons:
1) Happy consumers win elections for incompetent incumbents. Happy consumers with appreciating houses, cheap food and gas, and all the gadgets they could ask for are fat, dumb, and happy. They don't think much about politics because they are too busy having a good time. Naturally this works to the benefit of Leftists who are more interested in keeping people in the dark and content.
2) Trade negotiators are more like diplomats than businessmen. Our foreign opponents in the negotiation have been deadly serious and hungry. They have been seeking advantage for power over the US. Our negotiators look at the underdeveloped countries, feel sorry for them and act mild mannered at the negotiating table.
3) Democrat and Republican administrations thought that strategically, it was a good thing to boost the economies of developing nations so they would be more Capitalist and less likely to ally with our enemies. Thus the trade negotiators were also likely to be hamstrung by foreign policy and the State Department.
4) There was also probably out and out bribery - especially recently as the developing nations gained economic muscle and could entice negotiators to see things their way with a little personal economic incentives and effective lobbyists. The Iraqi Food for Oil program is just one example of this.
5) Encouraging foreign nations to produce and then hold dollars was a way to finance ever increasing American government deficits - thus ensuring a spending boom by the bureaucrats and politicians.
Shifting policies in favor of our consumers and against our producers created an opposite effect in our trading partners: Their consumers were somewhat harmed and their producers were helped. Since most were coming up from a very low standard of living, their standard of living still improved, but not as fast as it would have. Foreign consumers couldn't know that they were shortchanged on quality of life and thus were content with their modestly rising standards. China is a prime example of this.
Considering the above, it was inevitable that there would be an imbalance in favor of American consumers and against American producers. It was also inevitable that sooner or later the imbalance would become unsustainable. With the Russian and Middle East's orchestration of oil price increases, and a little help from Hillary for political advantage, the teetering situation finally fell apart - and resulted in the sub prime crisis. (See Cow in the China Shop for more details.)
In effect, there is a massive transfer of wealth from baby boomers holding stock and interest bearing accounts, from banks and brokers, and from foreign nations holding dollars that have been our main suppliers of oil and other imports. It is also a transfer from people who have been living it up on credit such as mortgages for larger houses than they could afford.
The result has been and will continue to be awful for consumers as food and energy prices have risen, but in due time will be terrific for producers such as manufacturers and exporters. It will take a while for things to sort themselves out but in the end there are some good things that will happen:
Manufacturers in the US will be able to sell products overseas with the advantage of a weaker dollar. Duncan Hunter seeks to bring industries back into the US, and more power to him, but this inevitable drop in the dollar will do more for that than any political action could muster.
The government will have to make due with less whether they like it or not. Crats will provide even less services for their taxed dollars, which will infuriate their spoiled constituents. Government will look less and less like a good idea and more and more like a vile parasite.
Liberals are already finding their holidays in Europe are more expensive. This will be true for not only Europhiles, but American tourists and businessmen who travel anywhere else in the world. The American tourist industry will have a resurgence as both Americans and foreigners seek holidays and business here.
Crass American hedonism will be less financially supportable and there will probably be a return to more spiritual/family values as a result. The cult of materialism will take a hit and people will get real, as materialist manufactured fantasies will become more and more unaffordable. America may also become a less attractive target for illegal drugs since most are manufactured overseas and the dollar buys less in drugs as well.
The mainstream media-ocracy has been running the country and turning it into a mediocrity. How else do you explain that McCain is our nominee? Yet this media-ocracy is now taking it in the shorts with record drops in advertising revenue and decreasing readership. It will only get worse for them, providing a more even playing field for the other forms of efficient media such as radio and the internet.
In a sense, whenever something is energetically out of balance, it is just a matter of time before something comes along to set it right. Consider the foolhardiness of corrupt bureaucrats and warlords around the world hoarding US dollars while at the same time sabotaging the US. Things have a way of working out in the end.
Take note of just how quickly Hugo Chavez is running Venezuela into the ground in spite of high oil prices. Remember how Arafat destroyed much of his ill gotten fortune by investing in the US stock market near the 2000 top. Remember just how much the vast hoard of dollars held by the Chinese have lost value over the last year:
Foreign dollar reserves total about $5.7 trillion, and 65% of all foreign reserves are in dollars. China holds about $1.4 trillion, or 25% of the total. [34] Thus as China precipitated a crisis, and the dollar fell from mid August to early December [35], China lost 21.4% of the value of their dollars (in euro terms) or about 300 billion dollars!
China's other investments had been damaged around the globe. Japan had $1 trillion in dollar reserves and they were also hit by the drop in the dollar. China's customers in America had become less able to buy things from China, and the volatile Chinese stock market had been hit as well.
According to an Asia Times article dated December 5 entitled The Coming China Crash, "About $3 billion of the [Chinese government] fund was invested in the private equity manager Blackstone in May - that may have bought China useful political contacts, but it is now [as of Dec 5th] worth $2 billion. And the remainder is being invested very carefully, primarily in US Treasury securities - which are also losing money steadily in yuan terms."
From The Chinese RevengeThere is the downside that foreign nationals are more able to buy American assets (including lobbyists and politicians). However when they do, the asset usually turns to garbage in their hands pretty quickly. In the current and changing political climate, a politician keeps about as well as a globally warmed greasy fish.
Dr. Jerome Corsi noted recently that the first Great Depression created people who were serious people - and these same serious people are the ones who made it possible to win the second World War. He has dire predictions for the economy and suggests that this could result in public rage to throw the bums out of office.
People seem slow to realize that oil is food. Energy is involved in every step in the agribusiness process. The miracle of modern agriculture is in essence, a conversion of energy to food. The rise in oil prices has caused everything to go up, including food. As my spouse says, "When rice bowls become empty, people tend to revolt." In America, one might say "When the gas tanks become empty, people tend to revolt." The independent truckers are carried out just such a strike April 1st.
While I do not necessarily see as dire a future as Dr. Corsi, thanks to the expected resurgence of the manufacturing and exporting sectors, Dr. Corsi is probably right that this could work to our political advantage. Regardless of the upheaval, it is still a return to a healthy balance that was warped against American producers and exporters for decades.
This current situation in the American economy is just the rebalancing in our favor. By "our" I am assuming that you are not a hedonistic, Chinese goods craving, unproductive Leftist - because they are going to suffer the most. Since the mainstream media is all that and more, we can expect unprecedented wailing and gnashing of teeth from them.
Nevertheless you can benefit financially and help America adjust by helping yourself adjust. For one thing, you can create or invest in companies that export from the US, or invest in US companies that fill the niche that Chinese exporters used to fill. Chinese and other imports are getting more expensive and a domestic producer may be able to undercut his foreign competition.
It may however take awhile for companies to gear up, and for customer relationships to adjust to the new reality. The presence of labor laws, worker's compensation, and capital gains taxes are still issues that hold back the development of new manufacturing. Economic strife may help changes occur there as well. Regulation and other government interference may also delay the adjustment. The economic downturn will only be as long as it takes for that adjustment to occur.
Of course if Barack Obama or Hillary are elected President, the adjustment may be prolonged indefinitely. Socialism is, in its purest sense, an intentional delay in adjustment which locks the nation into a time warp of recession it never exits from. That is why Cuba and the old Soviet Union seem locked in a time warp - economically it is frozen in time. Communism and socialism seeks to freeze the economic relationships - the adjustment never occurs, and the country is forever imbalanced and locked there by the force of political power.
I have been sending out DDI alerts to those subscribers on the distribution list. In the last six months the DDI has appreciated 24.27 % while the Nasdaq has dropped 15.22% and the DJIA has dropped 13.47%. Thus the DDI beat the Nasdaq index by 39.50% for the last 6 months. Annualized that would be an improvement of 78.99% over the Nasdaq. (See appendix below.) This is an economic tidal wave we can probably ride.
(If you decide that you want to short and don't know how, take a look at QID which makes it as easy as buying a stock. However, note that conditions can change and past performance may not be an indicator of future performance. The link for QID is http://www.proshares.com/funds/qid.html For less risk and upside, the similar PSQ is also good: http://www.proshares.com/funds/psq.html)
Calling the market direction has been complicated by the surprises the Fed keeps throwing at it. The Fed has been throwing everything it has against the downturn - taking drastic and repeated actions, changing interest rates on a Sunday, breaking precedents and now demanding more power for their bag of tricks, because they have run out of things they could legally do that might work.
Each dose of Fed economic steroids has had a diminishing effect, and for a shorter amount of time. Furthermore, there are unwanted side effects like inflation, impoverishing interest bearing accounts, putting taxpayers at risk of paying for wealthy investors mistakes, and inducing investors to take yet more risks because they are expecting a bailout. Like steroids, the Fed's market interventions have lost their effectiveness and they are asking for new stronger economic drugs from the Bush Administration and the Congress. It is like an addiction, and the addict is hitting bottom.
Today Bernanke passed the buck to the Congress to solve the housing crisis which he says remains the "center of the problem". The Fed actually has little power against the vast economic forces at work. Bernanke is playing his very lousy hand with impressive skill. Still, when testifying he sometimes looks like an animal trapped in the headlights - you can see the fear in his eyes. I for one do not believe the Fed has evil intent. In the economic world the Fed is not God or Satan - although some seem to expect miracles from it as if it were.
Dr. Corsi says that the Fed is just trying to prop the economy up until after the election. That may be what they are shooting for, but they will be lucky if they can come up with enough economic drugs to last until Independence Day, let alone the election.
Storm clouds are all about movement of energy and matter from unstable positions to stable ones. It is the same with the economy. It may be quite a storm, but in the end there is a silver lining and the release from an economic burden that has been with American producers for decades.
I regret that folks will have to pay more for food, and some will lose their homes and safety cushion of retirement savings. As consumers we have had it very soft for decades - so soft that we forgot how well we had it as consumers, and we forgot how bad we had it as producers. But I look forward to a rise in productive well-paying manufacturing jobs and a genuinely stronger America than we have ever known. We look forward to rebirth of the lean mean producing machines that are the Real America! Its about time.
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