Headlines

Democrats roll out super PAC aimed at swing states

Trump may end up torpedoing the new NAFTA deal after threatening Mexico with costly tariffs

Ron Paul: US/UK trying to kill Assange?

Fact check: No, Trump did not admit that Russia helped get him elected

Construction of privately-funded border wall begins

North Korea’s Kim Jong Un reportedly executes official after failed Hanoi summit with US

[Nikki] Haley re-emerging on 2020 campaign trail ...

Nearly 9 in 10 illegals released into U.S. not showing up for court hearings

Third House Republican blocks massive disaster aid package

The yuan is creeping toward 7 against the dollar, and that could be a problem for Chinese firms

Disney threatens to boycott Georgia over abortion laws

Barr: I don’t think people who oversaw Russian probe committed treason

Who Pays?

Now that tariffs have risen to 25% on $200 billion of Chinese imports and may be extended to $300 billion more, there has arisen a controversy about who pays these tariffs. Trump says China does and Goldman Sachs says the US consumer does. Let’s investigate ...

Assume that Walmart now buys Barbie dolls made in China for $4 and sells them for $10. When a 25% tariff goes into effect, the price to Walmart or its wholeseller would go to $5. But wait, Walmart might say (as it often does) that this is too high ... and so demand that the Chinese manufacturer eat all or part of this increased cost.

Let us assume that the Chinese manufacturer  eats it all but turns to Xi to help out. These Chinese government can do many things to help out:

- It can subsidize this manufacturer with tariff offsets or low cost loans

- It can devalue the yuan so that the $3.20 it then gets for each Barbie doll buys more yuan which it uses to pay its workers

So this example would validate Trump’s claim. Of course there are US importers who don’t have the buying clout of Walmart so here the American consumer would pay a higher price ... or the American importer would make a smaller profit.

In truth, both things will happen ... to what extent one cannot predict precisely. My suspicion is that China will bear the largest part of any tariff increases. But, if, not, America’s inflation rate will go up which is not happening currently.

So watch the future US inflation rate to see whether Donald Trump or Goldman Sachs were more right now.

Headlines

Why 'Medicare for all' is proving unpopular in Democrat primaries

Sen. Elizabeth Warren's new reform bill would ban members of Congress from owning individual stocks

Israel eases gun controls following lobe-wolf attacks ...

Rand Paul: Brennan's a 'national security risk'

Sentencing reform to test [Tom] Cotton's clout with Trump

China's central bank official rebuts Trump's claim it is manipulating the yuan

Google sued for tracking users when 'Location History' turned off ...

Donald Trump deports 95-year-old Nazi guard

Trump issues rollback of Obama's biggest climate rule

China's biggest risk may be its property values -- not the trade war

Measles cases hit record high in Europe ...

Report: [Trump] 'Not thrilled' with Fed Chair Pwell over tate hikes

Xi and Me

I have written before about the contest for world hegemony between the United States and China ... see: China vs. U.S. ... in which I discussed the strategic advantages of each. Since then I have had four more thoughts on this subject:

- One advantage I had given to the U.S. was that it sits between two oceans ... something China could not correct. Well, it seems that it is trying ... with an initiative called the New Silk Road ... see: Building the New Silk Road. I somehow doubt that this opening to China's west will equate to another ocean, hut, at least, China seems to recognize that it does have a geopolitical problem.

- China does have ambitions to make the yuan the basis of international trade ... replacing the U.S. dollar. However, it is clear that China has been recently devaluing the yuan as part of its trade war with the United States ... see: Bloomberg Article. This duplicity does nothing but undermine China's currency ambitions.

- One issue I did not previously address was the language differential between these two countries. The incredibly complicated nature of the Chinese alphabet and spoken language, I believe, gives the strategic nod to English and America. Yes, computer software has ameliorated this edge somewhat, but will never eliminate it.

- Although"diversity" is argued by the liberal left to be a strategic advantage, clearly China is far less diverse than the U.S. ... and seems to deem it a disadvantage as it cleanses itself of dissents. Diversity in America might end up being a plus ... but only after these diverse groups are assimilated ... which may take many years into the future.


These four points seem to shift the strategic advantage of America over China further to the plus side, albeit only slightly.  The real pudding tasting will be in how the current trade skirmish with China turns out. Stay tuned.

Headlines

Congress should stop meeting with Rod Rosenstein

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Syrian state media says air defenses hit Israeli plane, thwart missile strike ...

Jimmy Carter: Jesus would 'approve' of gay marriage, abortions

Trump's trade war was decades in the making

With 36 governships up for grabs in midterms, Republicans have the most to lose

Paper: China's currency [yuan] depreciation should set off alarm bells ...

Mexico border life: Cartel gunmen attack 5 bars, kill 12

[PM] Theresa May appoints new Brexit Secretary

U.S. opposition to breastfeeding reportedly stuns world health officials

Boston weighs giving non-US citizens voting rights ...

Nissan admits rigging emission tests at Japanese plants

Economic War?

Last week I commented on the possible trade war between the U.S. and China ... see: Soybeans and  Trade War? for some perspective on this pissing contest. Since these mentioned events, Trump has pushed more chips on the table threatening to add another $100 billion of new tariffs to the bundle. China has not responded with more threatened tariffs ... probably because they might be running out of  U.S. products to punish. So China has shifted its focus from tariffs and is now threatening to devalue its yuan in order to keep its mercantile edge in trading with the U.S. ... see: Bloomberg Article.

Now this currency threat tells me a few things:

- China realizes that it cannot win this trade war with tariffs alone. So, it  might have to escalate things to an economic war using its currency. This would dash its hopes of making the yuan an international currency of trade.

- Although China might devalue the yuan just relative to the dollar, the dollar is a powerful arbitration unit in international commerce ... meaning most of the rest of the world would be adversely affected ... not something China may want to do.

- The U.S. Is not likely to respond in kind to such a currency devaluation which would further besmitch the almighty dollar. But we do have other arrows in our quiver in such an economic war. One of which might be to reduce our interest payments on the $1.3 trillion of our debt by the degree of China's currency devaluation. After all such a devaluation by China artificially increases its local currency benefit of America's interest payments. This would, of course, reduce the value of this treasury hoard that China holds.

- The U.S. might adjust any threatened tariffs upward to compensate for any yuan currency devaluation. This wold be difficult for China to respond  to.

And there are many other arrows: WTO sanctions, a coordinated international response to China's mercantilism, subsidies to U.S. industries affected by any trade or currency war, restrictions on Chinese investment in the U.S., etc., etc. This is a complex chess game being played by two very smart players. But the U.S. does have more experience playing this game (although it hasn't looked like we have utalized this edge until just recently.)

Time Will Tell

Time will tell, but I am getting a sinking feeling that the Chinese have been playing Trump like a violin. They have identified his Achilles heel, his ego, and have flattered him into walking away with very little to show for his days in Beijing. Lots of pomp and circumstances seem to have clouded Trump's resolve.

A few months ago the Chinese yuan had inflated by as much as 6% ... yet today it is back at parity with the dollar ... not a good sign that Trump and Wilbur Ross are winning in their currency dance with the Chinese. Yes, lil' Kim has been somewhat quiet of late and has not pushed any of Trump's buttons during this visit ... a very good indication of how much sway Xi has over Kim. But as first stated, time will tell. Has there been any real progress with damping down North Korean belligerence ... and in our balance of trade war with China?

At the moment there seems little hard evidence of same on either front. Trump, while in China, was quite effusive in his compliments to Xi ... a little too effusive to my taste.

But. time will tell.

Race to the Bottom

The world is taking a dangerous and rocky path to universal monetary collapse.  Japan is now following the United States's Federal Reserve in devaluing its currency ... in order to give its economy a shot in the arm, see: CNBC Story.  The U.S. Fed’s Chairman, Ben Bernanke, has been pushing “quantitative easing” (QE) for the last three years in order to sop up all the debt that this country is forced to issue to cover it’s fire-hose federal spending … to the point where it has expanded our money supply (and its balance sheet) by $3 trillion.  And, in order to keep this crushing debt burden from sinking things further, it has kept generic interest rates artificially low with its banking muscle.  It has been able to run the monetary printing presses night and day without setting off crushing inflation because our economy is still so weak …  reflected in our poor employment and wage-increase statistics.

But one economic “benefit” of this monetary expansion is a weak U.S. dollar which tends to help export markets and crimp importers.  Given how poor the U.S. balance of payments actually is … image what a disaster it would be without the Fed’s dollar deflationary measures?  However, our trading partners are losing patience with us and, as indicated in the referenced article, are now mimicking Bernanke’s strategy.  The European Central Bank (ECB), China, Great Britain, Japan, and even Switzerland (for heaven’s sake) are falling over one another to try to devalue their currencies with their own QEs.  A U.S. Dollar slide begets a Chinese Yuan slide which begets an Euro slide which begets a Japanese Yen slide which begets a British Pound slide which begets a Swiss Pound slide.  This is all a very dangerous race to the bottom.

How will this end?  With all this quantitative easing, the world will be, in short order, awash in money.  The balance sheets of the central banks will have reached unsustainable levels … probably the ECB first; and the only way out will be for them to let the dogs out … allow inflation to reduce the carrying-cost pain of their excessive debts.  And, this time, run-away inflation will not be as localized as it was in Germany in the 1920s.  It will be world-wide and will engender political upheavals that are likely to be quite painful.  (At this point Bernanke will not look quite so angelic.)  So be forewarned and be prepared … own real hard assets (not cash) and owe lots of money … and live in an area of relative political sanity.

Yuan for the Money, Two for the Show ...

The conventional thinking is that free trade is good and protectionism, through higher imposed tariffs, is bad.  It was the Smoot-Hawley protectionist-trade bill that is thought to have contributed the Great Depression in 1930 as trade wars then became the order of the day and economic growth slowed around the world (see: The Economist Article).
 
Now the United States is contemplating imposing tariffs on certain Chinese goods in retaliation for China not allowing its currency, the yuan, to float (allowing world currency markets to determine its value as opposed to China itself pegging an artificially low yuan-to-dollar rate.)  It is thought that China keeps its currency at 20-30% below fair market value in order to subsidize its exports and discourage imports.  In other words, such manipulation amounts to a virtual tariff and many politicians in the United States now believe that it is time to bring things back into balance with selective U.S. tariffs on Chinese goods.  A bipartisan Senate bill that so does should be voted on today ... see: Expected Senate Vote.  China has threatened to retaliate (see: China's Threat) and this has caused some politicians, particularly John Boehner in the House, to speak out against taking such an protectionist action.  President Obama is noticeably absent in this kerfuffle (see: Wall Street Journal Article) since staking a claim on either side doesn't seem to help his reelection chances.

Whatever the results of this action against China in the U.S. Congress may be (my prediction, it will eventually pass), I believe that China's bark will be worse than its bite.  One has to only look at the recent trade numbers (see:  Trade Balances with China) to see that, if a full-fledged trade war does break out, China would be far worse off than the United States in terms of its balance of payments.  Yes, U.S. domestic economic activity may turn down in the short term, but, longer-term, there should be much benefit to be gained for U.S. industries.  However, since the United States is the major buyer of China-made goods, an industrial production  turn-down there would likely cause great social unrest ... a situation that Chinese leadership might find difficult to damp down.  Already, there are predictions of such Chinese economic dislocations independent of protectionism actions on the part of the U.S. Congress ... see CNBC Comments.

Possible investment consequences might well be: a further deflation in world-wide commodity prices, an inflation in consumer goods prices in the U.S., and an increase in interest rates on U.S. government securities (if China starts dumping its holdings).  Also, holding onto the stocks of Walmart, Best Buy, etc. might not be a great idea.

Energy Slaves

Buckminister Fuller and his Geodesic Dome

Many, many years ago (around 1971 as I remember) I had a chance to have a sit-down with the great Buckminster Fuller (see: Wikipedia Entry). I was demonstrating for him a piece of software that I had architected called MUSE®. MUSE, among many other things, had a mechanism for resolving units calculations such as BTUs to calories ... and all the more complex physics conversions. Mr. Fuller was quite impressed with this capability until I showed him that it also handled monetary units conversions (such as drachmas to dollars) at which point he bristled. Apparently he, being an outside-the-box thinker, felt that mixing the metaphysical (monetary units) with the physical units was anathema.

He then revealed to me his far-sighted solution to this dilemma – all national currencies should be based upon the cost of producing a quantity of work. He called this monetary unit an “energy slave” (see: Calculations) on the basis that it would be the same the world around and would not be susceptible to the political vagaries of national bank shenanigans and/or a particular country’s trade policies. And, if one thinks about it, the amount of energy that our world possesses is constantly being augmented by that grand and universal mint, the sun.  Therefore our global money supply would expand at a fairly predictable rate.

Upon reflection and given the current ultra-fluid nature of world currency markets, I hearken back to Mr. Fuller’s idea. Were we to adopt this notion for an international monetary base, China would not be able to artificially devalue its currency, the yuan, to capture world manufacturing; countries would not be able to inflate their way out of their profligate spending and borrowing ways; and gold might not be the Silas-Marner investment haven it has become. And, very possibly, this country might adopt more rational policies toward the development of our own energy resources. Wouldn’t that be special?