S&P Downgrades US!

nirakar,

China is currently artificially controlling the value of their own currency to promote their own export economy. Their middle class is growing fast and placing greater demands on their own economy and a desire for foreign goods.

China will go the same way as Japan who was at one time the demon some now say China is. Our currency does not need to be devalued to compete. Our policies should be directed toward driving up the value of China's.

The very rich don't care what the value of any one currency is as they have the means and resources to move assets between currencies and asset classes to preserve their own wealth.

Talk of a need to drive down the value of the dollar as a means to make US workers more competitive is "hog wash". It is an idealogical tactic whose only real purpose is to insure a cheap labor force for people who don't have to work for a living.

The very wealthy have become much the same a corporations. Their interests and goals lie with their own pockets rather than any real country of origin. If you have enough money you can live anywhere.

I am getting too tired...

 

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YEsssss.

I really wish people would see this. Countries are simply a masquerade for the true activities of extremely powerful families controlling Banking, Industry and materials all over the world.

 

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I gave you an infraction for this. You were openly warned in the thread about your language, but not officially warned. In part as I don't know exactly how the warning system works. This infraction I think adds one point on you. As you already have some there may be some "time out" for you as result.

I have never "red flagged" anyone before but you have clearly crossed even my lenient lines. That is direct personnel attack, not on his ideas, but on him.

 

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S&P did what it had to do and should have done when GWB was still the POTUS:

I have often explained how GWB made a deep and long lasting depression in US and EU inevitable. – First posting the causes back while GWB still had two years more as POTUS. Below is a recent summary posts, but first note:
If too small to read graph, hit (control +) to blow up graph. - What it shows is that as GWB reduced purchasing power of Joe American's salary, Joe foolishly did not reduce his standard of living. He used his home equity as an ATM machine and maxed out his credit cards. Thus delaying the sharp break in the consumption curve from the trend line until GWB was nearly out of office.

Most of the recent posts in this thread are now lamenting the insoluble US (and European) economic decline I predicted was inevitable four or five years go. According to post 158, even some of GWB’s strongest supporters are now beginning to understand that he destroyed the economies of the west and assured that the future belongs to Asia, especially China.

Many take hope in the idea that China has no other choice but to continue to buy US Treasuries and thus, along with the FED’s buying keep US interest rates low. That is true for a few years more, but not a permanent condition as I discussed here (and plan to discuss more in a later post):

Also whatever country issues the world’s reserve currency, gets to import hundreds of millions of dollars worth of goods and services annually (perhaps half a trillion dollars worth) and pay for them with printed paper. That also will help quickly compensate China for the loss of value of dollars still held in its reserves, when China decides to crash the dollar – trigger the depression in the US and Europe but the lack of large competitors for oil, etc is the greater saving for China, I think.

 

What makes you think China today has much of anything to do with the China which once dominated the East and the trade markets in the middle ages? This present version of China was founded on a regime which attempted to annihilate that past, and has now converted itself into the very social class it exists to oppose. How are they supposed to rise to America's living standards and achieve those standards for a population 4X as large? Where's the energy going to come from, where will the factories dump their pollutants, given how much difficulty these problems already pose for a middle class equivalent in population to the middle class of a country like France? How are they supposed to achieve all this and rise to the top when most of their economic growth continues to be fueled by foreign investment, unless those foreign economies grow at a similar pace?

China still has enormous leaps to take before they even get a sniff at global economic dominance. They are making good progress in creating domestic demand for their own goods (and a population which can afford to buy those goods), but that progress will be all but wiped out if their primary trade partners stagnate. Even in terms of GDP, China will need to more than double its nominal GDP before it can match US output. In terms of purchasing power parity China looks a lot better on paper, but isn't PPP all but useless for predicting a country's growth prospects when economic growth will cause the value of basic goods to skyrocket, due to the inability to increase the supply of basic goods in pace with the general economy?

I just don't see why you're so consistently bullish on China, to the extent that you actually think a fascist dictatorship will overtake the countries that made it rich in the first place. Their economy has grown tremendously since they privatized, but where has most of that money actually come from? How can they possibly hope to maintain a 10% growth rate year after year if foreign demand flatlines- do they have some kind of zombie drug in the works to get their citizens to work even harder for even less pay? I'm sure the country will remain a fantastic place to invest for many years to come as long as the bribes remain affordable and the peasants remain suppressed, but how can you be so confident it'll continue at this pace for the next decade and beyond?

My prediction for the next several decades to come: If China ever reaches the point where their middle class is nearly comparable in size to America's, by that point there will be massive uprisings against their government unless it institutes democratic reforms, which will also undermine the virtual slave labour powering their current growth. The only way they succeed on their present track and outdo the US, IMO, is either by introducing that zombie slave labour drug, or else waiting for America to have another civil war.

 

For one, there is a parabolic arc of investment the Chinese government has to make into its society with each leap in wealth it gains. One of those investments with diminishing returns is policing the state. At each stage, the Chinese government must invest several times in policing (compared to liberal democracies), especially the covert variety, its population in order to maintain power. There are separatist regions chomping at the bit.

I'm bullish on China in the long term (who isn't?), I'm just not bullish given its current political makeup. There will be a point-of-no-return that the Chinese reach where the state must spend so much money on policing its population, feeding its population and securing its neighborhood (they aren't fond of the Japanese or Indians) that it will have to shift how it does business in very big ways.

~String

 

I agree generally with the bulk of your post.

One thing would add it that China's rapidly growing middle class is already putting pressure on the "slave labor low paid jobs model", as the middle class grows it places increased pressure on wage rates. In a few decades wages will have inflated to a point where China will not be able to artificially control either wages rates or currency value. Growth in China is a good thing for the west (US and EU).

Africa may be the next source of cheap labor to be exploited, but there are many social and stability issues to deal with in Africa that hinder investment.

 

I think that's a really interesting idea- tie the high income tax rates to the unemployment rate. If wealthy investors get a tax break and use that money to help generate more jobs, then they won't have to worry about increases and could possibly look forward to further cuts. If they get a tax break and then generate less jobs, the mantra that tax cuts generate economic growth would be falsified, and increases would be justified in line with unemployment.

This part I don't agree with. Employers would merely be encouraged to pass the buck onto other companies, letting others shoulder the burden of stimulating the economy while seeking every possible competitive advantage. I think it would be more reasonable and realistic to give generous tax breaks to employers who invest and generate jobs at home, and to be not nearly so generous with people who just want those extra 5-10% in savings so they can buy more whiskey and hookers.

 

That employment based tax rate could be applied in two parts.

One tied to the overall unemployment, which would generate the revenue the government needs during high unemployment to address the associated general economic problems.

The second applied individually or targeted to an industry or individual business tax return. (given some exemption for true mom and pop small business operations that already generate jobs proportionally to economic conditions).

 

That's not true. The teaparty folks did all those things, and are responsible for everything you listed there. Who do you think elected W? Before him Gingrich and the Contract With America crowd? Who do you think Limbaugh's radio audience has been, these past twenty years?

The teaparty folks didn't just spring out of the ground overnight, when a black man launched seriously for the Presidency. They've been the Republican Party base - the dominant electoral faction in Republican Party politics - since Nixon, and the single most influential political faction in the US since at least '94 if not '80. This mess is their fault, more than any other single faction's. And they are still in motion, with more damage to come.

 

You have many good questions here, but all are based on a false assumption about what I m saying. The thread started by Saint, now called something like "China's emergence as a supper power" originally had a question as its title: "Do you think China will pass the US some day?" As you might guess I said "yes" in my posts there (still available). Most posting there, like you posting here, assumed that the US would continue to prosper and be very difficult for China to ever catch up too.

It should be clear from my many posts about a "run on the dollar" quickly followed by deep, long lasting depression in US and Europe (longer and worse than the one only WWII ended) that my assumption is quite different. I don't think the Chinese will even get to the living standards of the poorest country (per capita) of the EU. You are quite correct the Earth does not have the resources to sustain that for China's population. Not to mention that India's population will be larger than China's and probably enjoy at least as high living standard.

So that is the answer to your false assumption based questions (2) (3) & (4).

On (1) Yes the modern government of China differs in some minor ways from those that dominated the world economies, science etc. for 18 centuries, but not in any important way. All are and were centralized rule by the few of a vast and exploited population for the benefit of the rulers. Information Technology, IT, even suppressed as best as the CCP can is changing the picture - making it possible that this time the suppression /exploitation will turn out differently.

Perhaps the standard of living of the average Chinese will continue get better until Earth's natural limits are reached. The CCP is between a rock and a hard place. The economic model of the last 30 years is broken. They can no longer count on the "financially broke west" to buy the production of their coastal factories (or even on getting about a million workers each month migrating from the interior to exploit in them) The coastal factories have a huge labor shortage now, even with FoxConn granting 30% salary increases last year, etc.

Nor can China compete against half a dozen other Asian nations as world's cheap goods producer. The CCP has no choice but to move into higher value added production and to improve the conditions and education of the masses, risky as that may be for the CCP's continuing tight rule. A few years back businessmen were welcomed into the CCP. I expect more evolution into a much broader based from of government by well educated technocrats will be China's political future, and keep Chairman Mau spinning in his grave.

On (5) Yes the capital that that gave China some of the world's most advanced factories came for the greedy, short sighted investors of the West. As Karl Marx said, by way of definition: "A capitalist is one who will sell you the rope with which to hang him." China is now becoming a self-sustaining capital creation economy - not fully there yet, but for example, Foxconn has just announced, in part to cope with the labor shortage, that it will install one million production robots (has only 10,000 now). China has capital to have twice orbited the moon, build aircraft carries, the world's fastest trains, 400 new nuclear power plants, 100 cities for at least one million former farmers, in each, etc. - all this in the current new and next five year plan.

Not given nearly as much credit in the west as is due is the great improvement in "land capital" the reform of three years ago made. Now farmers can and do lease "their" tiny plots of land to large agra-business for efficient mass farming - These rents are allowing millions to move into the new cities every year - the greatest urbanization in human history! White Horse village, was one of the first of 100 new cites finished about four years go - Read about it. BBC has a multi-year documentary on it development. China now leads the world in wheat production per acre! - modern industrial agriculture has come to China as it did to the US 100+ years ago.

On (6) of course they will not always have double digit GDP growth, and if the west were to cut "cold turkey" buying Chinese products like iPads etc. their GDP would shrink, but China is being rapidly transformed into a more domestic market economy and one that exports mainly to it suppliers of low value added sub-components and the suppliers of its imports, like Brazil and Australia instead of selling to the US and EU, which are still important but now a lesser part of the total.

On (7) Yes by western standard the Chinese are suppressed when it comes to freedom of expression etc. but from their POV, they never had is so good. This difference shows up clearly in what is considered to be "human rights." They believe they have more of them now that starvation has been abolished, good education (often via supplemental internet lectures in rural areas) is nearly universal, everyone has job offers, opportunities for advancement, etc. and never having known freedom of speech etc. place little importance on it compared to these "human rights" the CCP has provided to them. I don't know if still done, but some years ago middle school social studies text books had pictures of people, poor and hungry, sleeping on NYC streets so students understood well that US claims that the Chinese lacked "human rights" were clearly false and hypocritical.

 

Bush campaigned on low taxes, responsible fiscal policy and modest foreign policy.
Then 9-11-01 happened and he failed to deliver on everything but taxes. That's when he lost me.
But if the tea party can butt heads with the establishment and get some spending cuts I'm all for it. It's become obvious at this point that spending to oblivion is not the answer and the dems as well as the FED are at a loss as to what to do anyway.

 

The USA demanded/negotiated that Japan stop manipulating it's currency to the degree that it was. That caused problems for Japan but the emergence of Korea and China as exporters of manufactured goods would have cause problems for Japan even if the USA allowed Japan to use the USA as much as it wanted to in suppressing the Yen.

Limiting Japan's currency manipulation only helped the US workers a little bit because China was beginning to take over low end manufacturing.

Forcing China to stop manipulating it's currency won't matter much. China is already having some manufacturers pull out of China to move to Vietnam for cheaper wages.

Deliberate currency manipulation is not the only reason that foreigners accidentally manipulate the dollar upwards. Foreigners drive the dollar well above it's "natural" value for the same reason that gold is driven well above it's "natural" value. People (particularly third world rich) are always desperately seeking stable liquid places in which to store their wealth. When you don't trust your own nation's economy and your nation's law and order you hedge by parking some of your wealth some place more stable.

There is also a demand for dollars as a medium of exchange for goods and contracts flowing between nations other than the USA.

Then their is the US budget deficit. If foreign investors stopped buying US bonds the US government would have to raise interest rates to attract domestic investors or raise taxes or cut spending. Any of those actions would hurt the US economy in the short term. If the US attracted US investors to US Bonds with higher interest rates what investments would the US government be pulling US investors away from? Pulling US investors out of US stocks and US real Estate only to have foreign investors take up those positions in US stocks and US Real Estate would not change anything in terms of foreign ownership of the USA or foreign money pushing the US dollar above it's "natural" value.

By "natural value" of the dollar I mean the value the dollar would have if it rose during trade surpluses and fell during trade deficits like a normal theoretical textbook currency is supposed to do. In theory trade deficits and trade surpluses are self-correcting because they cause the currency to fall or rise until the comparative advantage of the nations as producers settles into an equilibrium. But the US of the US dollar and US economy as a tool for storing foreign wealth in a relatively stable liquid form and as a tool for suppressing your own nation's currency has meant that the US dollar is propped far above it's natural value for decade after decade at the expense of the American workers and to the benefit of the American shoppers.

Do you have a rational basis for this opinion or are you just parroting the sort of things that the smart winners would say? Talking like a winner, walking like a winner, dressing like a winner and acting like a winner is not something to be disparaged. In schooling we are taught to regurgitate what we are fed and analysis is only to aid us in parrotting complex intellectual bird songs. Sometimes it is hard to tell when one is analyzing and when one is parroting. Parroting the winners is more efficient than analyzing everything and constantly reinventing the wheel. Doing your own analysis leaves a person open to mistaken analysis. The winners are correct more than they are wrong otherwise they would not have won. Doing ones own analysis is useful in two situations, 1 when you have a specific puzzle to solve and there is nobody to copy and 2 when the emperor is wearing no close and it is necessary for the sake of the empire that somebody be able to see that the emperor is wearing no clothes. But even if the little boy sees that the emperor is not wearing any clothes how will the little boy convince anybody else that the emperor is not wearing any clothes?


If an equivalent electrical engineer in India is paid 1/4th what an electrical engineer in the USA is paid why should we employ any electrical engineers in the USA?

You can argue the the Indian electrical engineer is not equivalent to the US electrical engineer. He may not be equivalent now but the Indian electrical engineer becomes more and more closer to equal to the US electrical engineer with every passing year. You can argue that India does not produce enough electrical engineers to replace American Electrical engineers. India is expanding their supply of electrical engineers and other highly trained people at an fast rate that is growing exponentially.

Talking like a winner/sounding smart on economic policy in the US breaks into two camps, trickle down and hand up. Robert Reich typifies the parrotry of the hand up camp. Consensus sophisticated parrotry of both camps denies that their is anything fundamentally wrong with the US economy. Both camps believe only tweaking is necessary. The trickle down camp wants to reduce the safety net to motivate the losers and give more capital for winners to create wealth that will trickle down. The trickle down camp wants less regulation stopping winners from winning and creating trickle down wealth. The hand up camp wants government to help people and businesses to win. The hand up camp things creating more educated Americans like electrical engineers can stop the decline of American wages.

If have you pegged as being in the hand up camp. Creating more technically educated Americans might slow down the decline in American wages but it won't stop the decline. Other nations are not going to do the "bad jobs" while Americans do the "good jobs". India and China with the current exchange rates can eventually out compete the USA for the "good jobs" as well as the bad jobs.

Ross Perot and I predicted the giant sucking sound of jobs going to Mexico because of NAFTA back in 1990. We were wrong the Jobs went to China rather than Mexico and the jobs did not go as quickly as Perot and I expected.

Why if equally skilled foreign workers work for less are so many jobs that could be outsourced still in America? Were the Parrots saying everything is OK correct and Perot and I analyzing with basic economics wrong? My interpretation of why outsourcing has proceeded slower than I expected is inertia. Business leaders don't change their ways until they are forced to. Why create more work for management by engaging in a complex outsourcing project when your making money doing business as usual. Small companies in particular find creating the networks to outsource difficult. The emerging markets did not always have the infrastructure and personel ready to take American jobs, But slowly and steadily jobs go. Robotics helps but won't prevent jobs from going. Skilled Intellectual work does not have shipping costs. People are becoming more comfortable with telecomforencing which reduces travel costs. At these exchange rates there is no end in sight to the slow dismantling of American productive capacity.

What about the service economy? In India people have several servants before they own a car. Declining American wages will make it possible for Americans with decent jobs to eat at restuarants more and hire servants. This is not a replacement for production. Insurance, law and medicine are expanding. Insurance law and medicine also are not replacements for production. In India fruit sellers practice multi level pricing by haggling over the price of a peice of fruit. This multi level pricing may help the poor afford to buy stuff but it is a non-productive zero-sum economic activity. Increasingly I see American businesses moving into non poroductive zero sum activities like multi level pricing and other financial and marketing games as global competition reduces the rewards for positive sum production.

How does this growing service economy sustain itself? We are familiae with the multiplier effect of reduced banking reserve requirements. What is the multiplier effect of foreign investments /asset purchases pouring into the USA? What happens to the US service economy if these investment inflows stop? How much of a bubble economy are these investment inflows creating? We remember the SouthEast Asian currency crisis when trendy investment inflows into Thailand created a frothy bubble in Thailand which collapsed when the investment flows reversed. Is the USA's reaction to investment inflows a fundamentally different situation than Thailand was?

Loans to nations and people are only good when they are used to enable production. Loans for consumption end up hurting both the borrowers end the lenders in the long run. A lender may make money on the loan for a while but it is like a game of musical chairs. Borrowing for consumption eventually leads to default and which ever lenders have loans outstanding when the default happens lose. Goldman made bad real estate loans but they got out {with the help of the AIG bailout) before the music stopped. When the investment inflows to the USA stop and the trade deficit starts collapsing the dollar will all the liquid money race to get out of the USA before the music stops like they did in Thailand? Why not?

In am not suggesting that the USA should manipulate the dollar. I am just saying that the USA should not allow others to manipulate the dollar intentionally or unintentionally. I see no way for the USA to get out of the predicament that it has gotten itself into other than through the collapse of the dollar and a unavoidable accompanying major depression during the restructuring of the American economy. The longer this pain is stalled off the more hollowed out America productive capacity will become and the worse the restructuring and depression will be.

Ross Perot and I were wrong about the timing. Status quo can go on for a long time. But as Stern's law states, "things that can't go on forever don't go on forever". America can't sell assets forever. Eventually America will have to become a sustainable economy not propped up by forreign investors.

How far should the dollar fall to reach it's "natural level"? It has to fall enough so that America can stop running trade deficits. The USA does not really compete with China at this time. The wage disparities are so broad that the two nations are producing for different markets. When China enters a market the US is producing in the US simply has to abandon market share to China. This is not true for US competition with Europe and Japan. If the dollar falls enough to take market share from Europe and Japan resulting trade deficits in Europe and Japan will cause their currencies to fall offsetting the gains in market share from a falling dollar.

Europe and Japan are in the same predicament that the USA is in. Germany has a bit of a sollution with their nimble manufacturing but that niche is not big enough to save the USA, Europe and Japan from decline.

The Dollar, Euro and Yen all must fall until the workers in these places are not paid more for doing the same work as equivalent workers are paid for doing that work in less developed economies. Inertia can't sustain the mature economies for ever. Eventually the mature economies must compete on prices rather than rely on business inertia and emerging market underdeveloped human and physical infrastructure to protect them.

There is one major advantage that the mature economies have over many emerging markets besides ifrastructure and inertia. In general emerging markets are more corrupt than mature markets and this corruption does hurt those nations abilitytro compete. Arab spring if it succeeds may help Egypt to become a more competitive producer.

Even if Chinese wages rise their are so many nations waiting for the opprtunity to follow in China's footsteps.

If you are using American assets as collateral or the actual source of wealth with which to buy under-priced emerging market assets you benefit from a high dollar.
If you are buying an Apple Ipad made in China you benefit from a high dollar. If you are competing in an auction against a Chinese business man to purchase a Van Gogh painting you benefit from a high dollar. If you are staying in a five star hotel while visting the Taj Mahal you benefit from a high dollar. If you are buying or renting a factory in China to produce your brands goods for Walmart you benefit from a high dollar,

Do you still think this after reading the above? Thinking that American workers can compete with equal workers paid 1/4 their wages is hogwash designed to spare us the burden of making painful decisions. A currency devaluation is far better for American Workers than having their wages decline without a currency devaluation. Declining wages without a currency devaluation is in the selfish interst of the American wealthy. A currency devaluation spreads the pain of reduced American wealth in global terms more equitably.

These corporations that produce in China to sell to the middle class American market are destrying the market they are selling into. The corporations and Wealthy are not so selfish that they want to destroy the American middle class. They are jus busy making money and like everybody else the prefer to believe ideas that make them feel good about themselves. Self delusion is a major element of culture.

The dollar must fall to save the next generation of American workers.

We need you to understand this so that you can help others see that the emperor has no clothes. Only when enough people understand the problem can the denial of the problem be overcome so that we can take the correct actions.

 

What S&P did was nonsensical and stupid. Yes the US government is stupid and irresponsible but is there any default risk? Paying back bond holders with dollars that have had their purchasing power destroyed by inflation is not default risk. If the US government destroys dollar purchasing power by creating too much money then all denominated bonds will be paid back with less valuable dollars.

S&P is free to publicly scold governments all they want but their ratings are supposed to correlate with default risk. Even if the government gets so busy with partisan showdowns that they pay interest late that is not the same as a corporation paying late. Corporations pay late when they are in trouble.

There is no doubt about whether the US government can pay, just whether or not the future dollars will have much purchasing power. To the best of my knowledge S&P has never involved itself with concerns over future purchasing power of the currencies in which bonds are denominated. I have no objection to S&P starting to add inflation risk into their ratings but if they choose to do this they need to state that that is what they are doing and downgrade all long term bonds denominated in currencies likely to experience inflation.

Since S&P claims to deal with default risk rather than inflation risk it is nonsensical to give US government debt anything less than it's top rating regardless how badly the US government is jeopardizing the economic future of it's citizens. As long as the US government can create money there is no default risk.

 

You don't call out of control spending (1.4 Tril Deficit!!) a "risk"?

It was completely justified, esp since the U.S is pretending to not know where to possibly cut (DUH U.S Army, which should have been cut 60 years ago - useless)

 

You got a good post my friend . There is a lot of truth to it in my eyes . What does corporation care about high priced American workers anyway . Why would they care ?

 

S&P did not down grade the US economic future, it downgraded US debt instruments. S&P considers government's potential unwillingness to cause hyperinflation by creating money when rating their bonds but the S&P does not directly rate inflation risk. The S&P claims to be rating default risk.

I don't see default risk from a government that can create money out of thin air. I could see the US creating some geopolitical drama with China as an excuse to seize/freeze Chinese assets and thereby do a backdoor default on the Chinese portion of US bond holders but S&P was not talking about that. S&P claims to be rating undisguised defaults not situations that are effectively defaults but not technically defaults.

 

Does S&P rate inflation risk? Not exactly but sort of.

Two good articles.

http://wallstreetpit.com/71647-one-more-time-credit-rating-agencies-show-their-incompetence
http://blogs.reuters.com/great-debate/2011/08/09/why-does-anyone-take-sp-seriously/

 

Thanks.

Corporations have a fiduciary duty to their stockholders. Their job is to make money for the stockholders. Caring about the workers or the nation at the expense of the stockholders would be almost illegal. Of course in actuality most big American headquartered corporations illegally put the interst of the board and the CEO above the interests of the stockholders.

Then again corporations are made of people. Even the CEO's with their typically delusional inflated idea of their worth to the to the corporation and society in general, are people with hearts theoretically capable of compassion and loyalty to their fellow countrymen. I don't think corporations want to be cruel and ruthless but they also don't want to leave any potential profits unearned so the tell themselves what they need to tell themselves to make going after as much profit as possible even by ruthless means not sound ruthless.

Even street criminals rationalize their own behavior. CEOs are much better liars than street criminals so some of them they can find a lie to fool themselves. Not every CEO is gullible enough to fool himself. To some degree corporations are uncomfortable exploiting their workers and being disloyal to the nations in which they operate.

 

Why are people always equating "deficit" with "spending?"

You might as well complain about out-of-control tax cuts, or out-of-control deregulation that sacked the economy (and so tax revenues), if the entire basis for the position is going to be the deficit.