If you have not read this article, you need to.  It is presented as a “why the middle class is squeezed” in America piece, with the premise being that we were once great enough to be the world’s manufacturing powerhouse but we no longer are and this is our fault.

Wrong.

Let’s start with this:

Not long ago, Apple boasted that its products were made in America. Today, few are. Almost all of the 70 million iPhones, 30 million iPads and 59 million other products Apple sold last year were manufactured overseas.

Why can’t that work come home? Mr. Obama asked.

Mr. Jobs’s reply was unambiguous. “Those jobs aren’t coming back,” he said, according to another dinner guest.

Ok, so why not?

Is it because the Chinese are smarter?

Is it because we lack the ability to perform the manufacturing?

Is it our tax structure?

In short, is it our fault?

In a word: NO.

This, my friends, is why:

Apple executives say that going overseas, at this point, is their only option. One former executive described how the company relied upon a Chinese factory to revamp iPhone manufacturing just weeks before the device was due on shelves. Apple had redesigned the iPhone’s screen at the last minute, forcing an assembly line overhaul. New screens began arriving at the plant near midnight.

A foreman immediately roused 8,000 workers inside the company’s dormitories, according to the executive. Each employee was given a biscuit and a cup of tea, guided to a workstation and within half an hour started a 12-hour shift fitting glass screens into beveled frames. Within 96 hours, the plant was producing over 10,000 iPhones a day.

“The speed and flexibility is breathtaking,” the executive said. “There’s no American plant that can match that.”

It’s easy to be “speedy” and “flexible” when you effectively own your “employees” as slaves!

How many of you caught the paragraph up there?  At midnight, without warning, the factory foreman went into dormitories in which the workers were sleeping, roused them and effectively compelled them to work a 12-hour shift with nothing more than a biscuit and cup of tea.

Did you get that?  These are not employees, they’re slaves.

After all, were they employees they’d be working for great wages, right?  Uh, maybe not.

The facility (Foxconn) has 230,000 employees, many working six days a week, often spending up to 12 hours a day at the plant. Over a quarter of Foxconn’s work force lives in company barracks and many workers earn less than $17 a day. When one Apple executive arrived during a shift change, his car was stuck in a river of employees streaming past. “The scale is unimaginable,” he said.

The unimaginable part is that these employees are slaves.  A communist nation can get away with this sort of thing.  They can, and do, prevent the organization of those employees into a consolidated negotiating block, imprisoning or simply “disappearing” anyone who tries.  A coordinated strike is impossible, meaning that labor has no balance of power with capital.

This power does not come from natural economic forces.  It literally comes from the barrel of a gun.

Companies like Apple “say the challenge in setting up U.S. plants is finding a technical work force,” said Martin Schmidt, associate provost at the Massachusetts Institute of Technology. In particular, companies say they need engineers with more than high school, but not necessarily a bachelor’s degree. Americans at that skill level are hard to find, executives contend. “They’re good jobs, but the country doesn’t have enough to feed the demand,” Mr. Schmidt said.

Are you reading this America?  How do you square college costs escalating at double or more the rate of inflation and crushing levels of debt with the premise of a technically-trained workforce?  You can’t.

….in the last two decades, something more fundamental has changed, economists say. Midwage jobs started disappearing. Particularly among Americans without college degrees, today’s new jobs are disproportionately in service occupations — at restaurants or call centers, or as hospital attendants or temporary workers — that offer fewer opportunities for reaching the middle class.

Free market principles are fine right up until people start using slave labor on an effective basis, along with environmental arbitrage, as the means of “progress.”  And let’s not mince words: That is exactly what has happened.

Absent intentional interference in our monetary and economic system on both sides of the Pacific what happened can’t be sustained.  Americans cannot buy iPhones without money to spend on them and they cannot have those funds absent “free credit” and ponzi bubbles without good jobs.

In other words, absent the intentional distortion that is generated by massive deficit spending by state, local and federal governments what happened can’t as it immediately self-corrects.  Henry Ford understood this — which is why he paid his employees enough so they could buy one of his cars!  He not only drove down the cost of building a car he increased the modestly-skilled laborer’s wage so he could afford one.  He took the efficiencies he found in automation and manufacturing and allocated some of it to labor so that the total economic surplus would be recycled back into the purchase of his, and others, products.

That’s what productivity improvement is, it’s what powers the natural deflation that is the ordinary state of all economies over time, and it brings common improvement in the standard of living for the majority of the people.

“We shouldn’t be criticized for using Chinese workers,” a current Apple executive said. “The U.S. has stopped producing people with the skills we need.”

What Apple (and other companies) want are employees that are housed in dormitories, can be roused at midnight to work a 12-hour shift on demand fueled with only a cup of tea and a ten cent biscuit, paying them $17/day.

THAT is what Apple and these other firms demand.

It is absolutely true that America cannot fill that demand, because at one dollar an hour you can’t manage to put the food on your table for a family of four, say much less pay rent, electricity or gasoline for your car to get there and back!

“We sell iPhones in over a hundred countries,” a current Apple executive said. “We don’t have an obligation to solve America’s problems. Our only obligation is making the best product possible.”

That’s absolutely true.  But America remains a monstrously-large market and America has no obligation to let you bring products into this nation without tariff or impost while you exploit the existence of authoritarian governments and environmental arbitrage.

A 100% tariff on all of Apple’s foreign-produced or assembled products should make the decision easy — is this really about the availability of a workforce, in which case it would not matter to Apple, or is it really about state-sponsored enslavement and exploitation?

As is my usual practice it’s that time of year when I score my “best guesses” from the previous year, and look forward with my next set.  If you’re not inclined to bother with long-winded explanations the title is probably sufficient.  But for everyone else, let’s look at the 2011 list and see how I did.

• We’re not going to get away with spending another $450 billion in deficits on top of the $1.6 trillion we blew last year.  $2 trillion in deficits?  Not a prayer.

Well that “more or less” worked out.  I don’t have the final numbers yet and won’t for a bit as I’m writing this before the end of the year, but we most-certainly did not run a $2 trillion deficit.  As of 12/21 it’s right near $1.1 trillion gross ($1.3ish involving cash adjustments.)  This is a bad number though as the most-recent data isn’t in and neither are the cash adjustments that Treasury usually makes. Nonetheless there’s no way we’re going to see another trillion “magically appear”, so that’s a point.

• Europe will not get their debt situation under control.  I give us a 50/50 chance that Ireland repudiates it’s “deal” immediately following their elections, and the cancer there will spread.  I won’t call a breakup of the Euro – yet – but the possibility exists that one or more nations will leave the common currency next year.  I only see the odds as something around 50% though, so it doesn’t go on the “prediction” board for this year.

Nothing but net on this one.

• The Dollar remains the hooker with crabs while many other currencies have AIDS.  The wildcard is the Pound.  Britain may actually have their act under reasonable control.  We’ll see.  For the Euro, no such luck.  I expect a wide trading range with lots of both euphoria and tears, perhaps as much as 40% or more.  That means we’ll get plenty of whipsaws in the /DX as well.  Nonetheless, the doomers call of a dollar collapse and gold at $3,000+/oz will be wrong.

Nothing but net again.

• Oil is going to $100, and maybe considerably higher – but not on demand, rather on a “safe haven” and speculative play.  Go look at 07/08 for how this plays out.  And get ready for the bad effect on your wallet from higher gas prices.  I expect the $4 line to be breached in high-cost areas by the summer, and we may see $5 gas this year.  But – by the end of the year oil will be on the decline.  Again.  And again, it will be because the economy is in fact going down the crapper.

Again, score.

• Commodities will continue to ramp right up until oil tops as the economic reality that “charge it” can’t fix what’s broken sinks in.  Recognition will come hard and fast, and metals will not be exempt.  When oil starts to roll over beware.  Everyone loves commodities.  When everyone’s on the same side of the boat it usually tips over and there are sharks in the water below.

How’s that gold trade working out for ‘yall?  Topped nicely and sliding now.  Point.

• Fannie and Freddie will get some sort of “resolution” path – and it won’t be positive for them.

Miss.

• “Someone” will pry open the REMICs in MBS-land for at least private-label deals and fun will ensue.

Miss, but I think only on time.  The lawsuits are coming — California and Nevada are leading this charge but I said 2011 and it didn’t happen.  No score when the timing is wrong.

• China will roll over as their attempts to tighten policy have come too small and too late.

Score.  Shanghai market is down about 25% on the year.  They’re not done either.

• Housing is and will “double-dip.”  There’s no bottom.  Those who bought the gamed reflex bounce on the tax credits and faux “stabilization” are in big trouble.  My projection is for a mid-single-digit to 1x% decline in prices nationally in 2011, and even then it won’t be over.

Half-point; we got a massive restatement on sales but the 1x decline in prices didn’t happen.  No bottom though — that’s agreed by pretty-much everyone.

• States will try to tax their way out of pension trouble, and fail.  The Whitney call will be wrong but only because of how she phrased it.  States and municipal governments will be increasingly recognized as insolvent but they will continue to play games to try to stretch cash flow rather than defaulting outright.

Score.  No defaults en-masse but the games and the problem were spot-on.

• Between forced State austerity and semi-forced Federal austerity the rug will get pulled of the master “credit card spending” support chart up above.  The disruption that will become evident, especially in the back half of the year, will be material.  But the worst of it won’t be in 2011 – it will be in 2012 and beyond.

Nope.  Early — this one gets repeated for 2012 though.

• Fed Index price paid/received divergences along with inventory build say we’re going to double-dip in the general economy.  I believe it.  The Fed has of course tried to stop this with their QE games but they’re not getting the effect they claimed they were after.  The Hopium runs out in 2011 and the addict will go through withdrawal.

Eh, no point.  But the earnings flow-through on the PPI is here but I can’t take the point yet.  This one gets repeated for this coming year and I might have only been off by three months.  Nonetheless, early is wrong.

• Margin compression will become realized.  I’m just about the only one who’s been talking about it in the back half of 2010 based on the PPI/CPI reports and regional Fed indices, but that won’t last.  We’ll start to see it in the Q4 earnings and by Q1 people will be talking about it.  This will put a cork into the “multiple expansion” crap that a whole lot of “pundits” have been running over the last year.

It got talked about but didn’t hit earnings until the start of 4Q.  Miss on time, will repeat this one too.

• The inventory build we’ve experienced will prove to have been unwise.  Expect a cycle of write-downs which will further damage earnings.  Unsold inventory is a millstone around your neck.  I’ve been talking about the warnings evident in the data on this for six months or so – the bet the market has made is that this will be sold through.  Nope.

Ditto.  No point.

• The Fed will get neutered, but it won’t be due to Ron Paul.  He’ll huff and he’ll puff and then blow a fart instead of blowing down their house.  It won’t matter.  Bernanke’s credibility will be severely trashed by the end of the second quarter as his monetization will be increasingly seen by The Republicans as nothing more than a way to pander to the profligacy of Congress (which they’ll try to pin in the Democrats, despite their fully-complicit role in it.)  The end result (albeit through the typical partisan BS) will be that QE2 is the last time that happens, period.  I expect an all-on attempt to change The Fed mandate to remove “employment” and possibly define “stable prices.”  These two things, incidentally, would be tremendously positive, and the first might actually succeed.  The second?  Don’t hold your breath.  Dennis Kucinich’s bill would be even better, and it will be reintroduced – and fail to gain any material sponsorship including from the Pauls.  Somewhere around the middle of the year this entire dynamic starts to become interesting in the 2012 Presidential sense.

I’ll take that point.  NO QE3, despite everyone who called for it.

• The TNX will hit 4%, likely in the first quarter. 

Clean miss.

• We won’t get bond auction “fails” per-se (that’s impossible given the Primary Dealer setup) but there will be plenty of “D”s and “F”s in terms of grades, with lots of tail showing.  Again, I expect this mostly in the first half of the year

Clean miss.

• The market will roll over this year.  And not in a small way either.  We may finish the year over 1,000 on the SPX, but we’re going Helium-style diving at some point first.  Since timing is everything in this game I’ll stick my neck out – there will be a sucker sell-down early this year, the market will bounce, and then Hell will rain on earth later in the year and into 2012.

We got a lot of it but not enough.  Half credit – big sell-offs but the ending point is definitely wrong.

• Expect extreme volatility.

Uh, yeah.  Point.

• The potential for a regional war to break out is extremely high.

Nope.

• Civil unrest will spread beyond a few demonstrators in Europe.  This includes the possibility of unrest in the United States.

Miss.  “Occupy” doesn’t count and while there has been some over in Europe in particular what we’ve seen is not what I had in mind.  No point.

Looks like 10 out of 21.  Remember that to be right you have to hit both the event and the time, so I consider this a pretty good score.  You can judge it however you want.

Now let’s look at how things are today.

As this goes to press The ECB has tried to “put out” the Euro debt zone fire for about the 10th time this year.  None of the others have worked and this one won’t either.  There’s simply no “there” there.  The EU banks are ridiculously over-levered, there is no real attempt to force them to cut that crap out and in fact at this point they probably can’t since they’ve geared up on sovereign debt — if they sell it down rates will spike to the moon and the entire EU comes apart.  If they don’t and something goes wrong (anything!) then they blow up, rates spike to the moon and the EU comes apart.

If you’re wondering why there’s been no solution that’s the reason — there isn’t one that doesn’t involve taking these wealth-destroying institutions out back, shooting them, paying off depositors as best you can and then either charging their executives under the law or simply turning them over to the now-very-pissed-off citizens who just saw their pensions and social benefits go “poof” (never mind that it’s really the politicians fault that it all happened in the first place!)

Speaking of that I want to go into a bit of detail, because it seems that people just don’t “get it” in this regard.  It’s convenient to blame the big banksters, and they’re certainly a big part of it.  But the primary blame has to rest with the political class for two reasons: They make the laws under which the banks operate and they love making political promises to spend money they both don’t have and are unwilling to tax someone to acquire.

What Congress spends but doesn’t have Treasury must borrow.  When Treasury borrows it creates the capability for banks (including The Fed) to create monetary inflation and bubbles.

There are three sorts of “money” — actual surplus capital from past economic activity, self-liquidating credit and non-liquidating credit.  All three spend exactly the same but they are not the same.

The first is earned by someone’s efforts and it is what’s left after you pay your costs (including taxes, if any.)  That’s actual wealth — and is the only sort of “money” that one can call “real.”  At least in theory it is supposed to be durable and able to be saved, invested, or spent as you choose.

The second is credit money that is created to liquify an asset.  An example of this is a letter of credit guaranteeing payment for a shipment from Japan to the United States.  It’s hard to sue someone in the US from Japan, so this is very useful to commerce.  But this credit money goes away when the bill is either paid or defaulted.  The same model exists with a credit card that you pay off every month.  This has no inflationary impact because it disappears when the transaction is closed.

The third is credit money that is created based on nothing other than a promise to produce something tomorrow.  In the case of government that “something” is of only one form — taxes.  In the case of an unsecured private loan it could be anything from a revolving credit card to an OTC derivative trade.  The problem with such a loan is that it does not self-liquidate as it’s never closed — instead, it’s rolled over again and again.  Since this sort of loan permanently expands the number of monetary units in circulation it is a pure act of monetary inflation.  It is important to note that all government deficit spending has been of this form in the modern era — we have never actually run a budget surplus save one year — a tiny one in calendar 2000 (but not fiscal 2000.)

Why is this understanding so important, you might ask?  That’s simple — it is the explicit and intentional acts of the government in their overspending that lends cover to virtually all of the other ills with capital misallocation, trade imbalance and other games.

Let’s take a simple example: Nation “A” and “B” both have floating fiat currencies.  Nation “A” runs a trade deficit with Nation “B”.  What happens?  Capital drains from Nation “A” to “B” since the funds to buy the goods move and never come home.  This makes Nation “B” more wealthy and “A” poorer; that in turn makes the goods “B” is exporting more expensive in “A”s terms and almost-immediately cuts off the imbalance.

So how do you prevent that?  Oh that’s easy — get the government to run a $600 billion budget deficit!  Now you can “replace” $600 billion of capital with $600 billion of non-liquidating (that is, permanent) credit money.  Heh maw, look — my trade deficit didn’t self-extinguish!

But notice what’s going on under the surface: Capital and credit aren’t the same thing.  One is wealth, the other is a promise to labor tomorrow.  In other words one is the product of free men and women, the other is a demand that others submit to slavery — a promise that others will pay taxes in the future!

If you’re wondering where our jobs went, that’s how it happened.  The actual capital flowed out of the country and was replaced by credit which spends the same but isn’t the same at all.  What disappeared was wealth and freedom, and what replaced it was bondage, unemployment and McJobs.  If you’re wondering why despite Congress saying they don’t want to see all of our jobs go to China and Mexico it keeps happening, it is happening precisely because Congress will not stop spending more than they tax!

In other words it is Congress that has drained the capital of our nation through their policies.  They have serially lied to us for thirty years in this regard with those lies really picking up steam in the last decade.  The so-called “Tea Party” along with the Democrats and “mainstream” Republicans are all liars in this regard — every one of them is complicit, as any of these groups could have shut this down at any time. 

Had the Congress refused to raise the debt ceiling in August it would have immediately forced a balanced budget — without the need for a Constitutional Amendment.

Remember too that the House and Senate both have permitted “Continuing Resolutions” to run the government now for two years.  This was agreed to by both Houses, ergo, it’s both of their fault and those claiming otherwise are liars.

This same dynamic has played out over in Europe.  Greece, Spain, Portugal, Italy and others have all made promises they can’t keep with their current tax revenues. The same dynamic has led to the same outcome — they’re just a bit ahead of us on the road to perdition.

Of course the political impetus to spend money you don’t have is strong.  It’s easy to buy votes for a while by promising people things you know you can’t afford, and it is wildly unpopular for a politician to say “No.”  Even the vaunted Ron Paul who claims to be “Dr. No” in his voting record in fact does not honor that when it comes to earmarks — he lambastes them on the floor but when it comes to vote he pushes for, votes for and accepts them for his own district!

The reason of course is simple — he wants to keep his seat.

But overspending is a corrosive act no matter who is doing it.  It eventually bankrupts any entity that engages in this practice, but when governments get involved the results are particularly nasty, as it is the entirety of the nation that suffers.  The more attempts are made to cover up the effects of the stupidity, such as by financial repression of interest rates, the worse the harm and the more-widely that harm is spread across the population.

There’s been no honest attempt to deal with any of these issues, including most-particularly in the United States.  You cannot solve a debt problem with more borrowing any more than you can drink yourself sober.  We continue to believe we can run trillion-dollar+ deficits without consequence and the 10 year Treasury yield seems to agree.  What must be kept in mind is that this is the same dynamic that played out in Europe — including in both Greece and Italy — right up until it didn’t, and when the bond market came apart there it did so with extreme violence.  The same thing can and will happen here.

This, of course, leads to the obvious next question: when?   It is here that math provides a useful degree of guidance.

In 2007 we had to shrink our Federal Government by about 20-25% in order to restore balance to the economy.  Those who have followed The Ticker for what is now approaching five years and 5,000 articles know that I’ve been calling for this realignment incessantly since that time.  Instead we grossly expanded the size of our vote-buying programs with more and more deficit spending.  This led us to today where the required shrinkage is now approaching 50% in size — four years later.

This is an important fact, because that is a geometric progression.  Now let’s go back and see what we have four years previous and see if the progression holds up — to 2003.

In 2003 we ran about a $600 billion deficit against a GDP of $11.5 trillion, which was about 6%.  That is, we tracked under the geometric expectations on a backtest (which were about 10-11%.)

Can we survive a 50% reduction in the size of the Federal Government, a doubling in actual taxes received by the government, or some combination of the two?  I don’t know, but it doesn’t matter whether we can — one of the two or some combination adding to that point is going to happen whether we survive it or not!

The “outside window” on “when” is four years hence.  Of course that’s the “100% reduction” line at which point we simply collapse into civil war and anarchy forced by mathematics, and in truth we’ll blow sky high long before we get there.  You can reasonably expect that there will be attempts to push the line backward, but there is no actually stopping of the process until and unless we run a surplus in terms of economic growth — that is, growth in the economy must exceed growth in government spending (this, incidentally, means that if economic growth is negative the government must shrink at least as much.)

The members of the Simpson-Bowles deficit commission had their own private estimates of “how soon.”  None believe we have more than two years left.  I think that’s about right, and we may not get that far.  History says that these walls always are closer than they appear, just like the T-Rex was in the rear-view mirror in Jurassic Park.  Revulsion tends to come from a “moment of recognition” that precedes the actual hitting of the wall, just as it did in Greece and the rest of the European continent. Thus it will be here if we fail to address the issues facing our nation and defer to political expedience and vote-buying.

Now let’s look at the current macro picture.  We have durables reports showing massive inventory levels — in fact, the December report had inventory at all-time highs.  This, standing alone, is bad — it “pulls forward” GDP numbers but the sustainability of that is predicated on sell-through.  If there is no sell-through you’re in big trouble.

Add to that the earnings misses coming from various companies.  We are now into the maw of the profit impact from the PPI ramps of a year to 18 months back, which I’ve been pounding the table on now since August of 2010.  The PPI has slacked off on the rate of advance, but the damage is done.  That’s in the pipe and can’t be avoided.  In addition the organic profit cycle has almost-certainly peaked in terms of percentages of profit from gross sales.  Those two factors plus the inventory situation are all the ingredients for a severe inventory (conventional) recession while The Fed has already backed itself into a corner with ZIRP and The Federal Government continued to overspend!  In other words the policy tools to “help” are slim and none and Slim is in the bar getting drunk.

Politically we have a huge problem — the premise is “tax cuts good, anything that raises taxes bad.”  At the same time “spend more” remains the mantra of both political parties.  The “Pay For” on the recent FICA deal was spread over 10 years but the impact on the deficit — some $200 billion — is all right now.  Of course in a year nobody will be willing to “raise taxes” either, so the $200 billion over 10 years will be $2 trillion.  To those on the right who argue that “we can’t give more to the government; they’ll squander it” you’re free to run that line when the budget is balanced — until it is you’re just arguing for jamming the accelerator as we approach the brick wall at 100mph, exactly as are those on the left.  “Blow up in one year or blow up in two” still is “blow up.”  Both are stupid and indefensible and we should call them what they are — calls for anarchy — because that’s exactly what we’re going to get on this path.

Now let’s look east — specifically at Japan.  The most-recent budget, accepted by their government, calls for an astounding near-50% deficit — that is, they intend to borrow half of what they spend!  The willingness of the bond market to swallow whatever the Japanese government emits has led them to believe they can continue that sort of game forever.  They’re wrong.  And while I’m at it may I remind everyone that the Japanese stock market remains down more than 75% from its all-time highs — 20 years ago?  How’s that “earnings growth” and “economic progress” thing working out over there?

Finally, China.  The most-recent news is that of large minimum-wage hikes.  Nice idea.  Can they successfully navigate from a mercantile jackbooted exporter that steals anything that isn’t nailed down (and some things that are) to a consumer-led, consumption-based economy that generates actual economic surplus?  I’m not sold, especially when you add to that the need to stop treating the land, air and water like open sewers.

Returning back home we have one final area of contention to consider — it’s an election year.  If you think either major political party is going to do anything that might be perceived as “helping the other guy”, you’re nuts.  They most-certainly will not.  This will lead to some very interesting times in the next few months, given that the second half of the debt increase is subject to vote and as of the 22nd of December we’re a grand total of $113 billion from hitting the wall — again.  January is usually a month that Treasury runs a surplus due to tax payments, but you can still expect the clamoring — and games — to start up pretty much with the drop of the ball in Times Square.

Will the so-called “Tea Party” fold their claims of fiscal prudence once again?  You bet.  After all, they just did vote to blow a $200 billion hole in the deficit with the payroll tax cut extension — a vote that was taken by “unanimous consent” because not one Representative out of 435 thought it was more important to stand on principle and demand a recorded vote than it was to drink eggnog with those providing their bribes — er, “family and friends.”  You got that right folks — not one man or woman stood on principle.

Not one.

So we are consigned to the same sort of cock-n-bull game now that we were back in 2007, and 2008, and last year.  But Mr. Market doesn’t care.  He’s going to do what he’s going to do, and he’s issued his warnings — which were ignored.

So with that, here’s your 2012 Outrage List, and we’ll see how many I get right.

• We’re going down — and this time it’s not “buy the dip.”  The can-kicking will be attempted, of course, but we’re pretty-much out of policy tools — we used them.  Add in a peak in the profit cycle and the PPI pass-through and you’ve got trouble.  Formally, this is “market ends lower than it began.”  (The next four are verbatim repeats, as I said I would; these are marked with asterisks)  Note that there’s no place to hide overseas in equities either (see below.)
• * Between forced State austerity and semi-forced Federal austerity the rug will get pulled of the master “credit card spending” support chart up above.  The disruption that will become evident, especially in the back half of the year, will be material.  But the worst of it won’t be in 2011 – it will be in 2012 and beyond.  (Ed: Repeat from last year.)
• * Fed Index price paid/received divergences along with inventory build say we’re going to double-dip in the general economy.  I believe it.  The Fed has of course tried to stop this with their QE games but they’re not getting the effect they claimed they were after.  The Hopium runs out in 2012 and the addict will go through withdrawal. (Ed: Yes, this is an actual “official” recession call.  Q2-Q4 timeframe.)
• * Margin compression will become realized.  I’m just about the only one who’s been talking about it in the back half of 2010 based on the PPI/CPI reports and regional Fed indices, but that won’t last.  We’ll start to see it in the Q4 earnings and by Q1 people will be talking about it.  This will put a cork into the “multiple expansion” crap that a whole lot of “pundits” have been running over the last year.  (Ed: The reports on this have already started.)
• * The inventory build we’ve experienced will prove to have been unwise.  Expect a cycle of write-downs which will further damage earnings.  Unsold inventory is a millstone around your neck.  I’ve been talking about the warnings evident in the data on this for six months or so – the bet the market has made is that this will be sold through.  Nope.  (Ed: Inventory levels are at record highs — not smart!)
• The fissures — if not outright failure — in the Euro Zone become realized.  I fully expect one or more nations to leave the Euro and there is a non-zero chance of an outright collapse.  Timing is the problem — I’ll go ahead and stick this in 2012 but may be early a year.  We’ll see.  Incidentally because of how I worded this Greece leaving is a “score” but I’m not thinking Greece here — try Spain or Italy on for size.
• A viable third-party candidate emerges and runs for President in 2012.  Viable is defined by votes.  1% doesn’t do it.  Double-digits does.  There’s the marker.
• Serious changes — and charges — will come out of the MF Global disaster.  I don’t know if Corzine will get indicted or not, but the light will go on within the regulatory and Congressional offices and a “burnt offering” will be made.  Maybe more than one or two.  The issue is the risk of a lockup in the commodity forward markets, which would be disastrous for the global economy (consider that such an event would make impossible buying an airline ticket for more than a month or so in advance, as just one example.)  In short this is prediction that we will see actual handcuffs.
• The Dollar will be flat to materially stronger.  Once again those calling for a sub-60 (or worse) dollar index will be wrong.  In short cash will be King.
• Housing will not recover.  That won’t stop government from continuing to try to hold prices up of course. Doesn’t matter — there’s no recovery in the offing on housing.
• There will be severe issues with subgroups who don’t get their “cheese.”  Whether this reaches the formal level of “riots” is open to some question but the impact won’t be.  It will be real and ongoing; the political season will definitely play into this as well.
• Lots of noise will be made about deficits and debt but real, effective moves toward addressing the problem will not be made.  The reason of course is that admitting that we’re addicted means cutting of the games — and that’s unacceptable to both sides of the political aisle.  As such actual effective movement will require the market to act.
• A real shooting conflict breaks out in the Middle East. I’ve got my suspicions on who starts it and why, but the story told in the papers has a less-than-50% chance of being the truth so I’ll leave that out.  Any large-scale shooting conflict counts (not a couple of cruise missiles or similar.)
• The Fed will back off and rates will rise.  The pressure will simply get too be too high; they’re aware of, I’m convinced, serious gaming and risk in the financial system and interconnection (e.g. MF Global) problems but will deduce they’ll never get away with another large-scale bailout.
• The squeeze in state and local funding will get materially worse.  This is going to be an interesting development to watch; the first real cracks of realization that big pension obligations to police, fire, teachers and similar will not be paid is odds-on to show up this year.  The wild card is how everyone involved deals with it; the blast radius is likely to be pretty wide.

Here ‘ya are — 15 for the New Year.  As always I reserve the right to revise and extend until 12/31 at 11:59 PM.

Todd Martin, an Asia equity strategist at Societe General SA, talks about the outlook for China’s economy and credit market. Martin also discusses global stocks and commodities. He speaks with Rishaad Salamat on Bloomberg Television’s “On the Move Asia.”

The interview starts off with a very weak idea “fundamentals have been thrown out the window”.  However the analysis gets much better as the video progresses. Here are a few key ideas from Todd Martin.

• RMB offshore vs. onshore rate is at a historic low. This shows Hong Kong or China mainlanders are hoarding cash, possibly to repay debts.
• The liquidation phase is concerning. Markets are looking into a deflationary abyss.
• Recent capital inflows into China are misleading. It was not investment but rather mainland money repatriated to repay debt.
• Cash crunch in China picks up momentum. We are going into a new down phase and true credit cycle in China. That can take on a life of its own.

Select Quotes

Rishaad Salamat: “Are you saying at the moment that the Chinese economy is teetering on the edge as a consequence of all this?”

Todd Martin: “It’s beginning to look like that. There are signals that there is a cash crunch and it is picking up momentum. The offshore RMB market for one. The repatriation of capital for two. This could cascade into a property correction. Once that gets going, you could probably get a lot of sellers jumping into the market.”

Rishaad Salamat: Is commodities the worst asset class to be in, at the moment?

Todd Martin: “Commodities is probability the worst asset class to get hit. If you are in a business seeing input prices fall and you have some pricing power downstream, then you could come out OK. Steel prices are still falling faster than iron ore, so that is still not one to be in yet. It’s pretty bloody. We are withing 15% of the bottom but the credit cycle concerns me.”

Fundamentals

I disagree with Martin about the fundamentals. I think fundamentals on China are horrible. I have been bearish on commodities because China is overheating at a time global demand from Europe and the US will collapse.

For further discussion, please see Michael Pettis: Long-Term Outlook for China, Europe, and the World; 12 Global Predictions written August 22.

Hopping into commodities or commodity-related currencies with a strengthening US dollar, falling global demand, a potential breakup of the Eurozone, a default by Greece,  etc, was a poor investment idea.

Please see the link for a very nice discussion of 12 detailed ideas for the global economy.

This is what I said on August 22, in response to the ideas of Pettis.

Six Key Ideas

1. China Will Slow Much More than China Bulls and Commodity Bulls Think
2. Non-food Commodities Take Big Hit
3. Eurozone Experiment Ends in Breakup
4. US Protectionism Takes Hold
5. Deficit Countries Control Demand, Thus Have the Best Cards
6. Disaster Hits BRICs

Contrarian Thinking

Except perhaps for points three and four (and perhaps for all six  points) investors and analysts have taken the opposite view. Most are  looking to buy the dip, invest in commodities, invest in commodity  producing currencies, and invest in the BRICs.

We did not have commodity producer decoupling in 2008 and there is  no reason to expect it as debt-deflation plays out and China abandons  its reckless investments in infrastructure.

I suspect China slows sooner than Pettis thinks, but no sooner than  the next regime change in China. Markets, however, may react well in  advance.

Global Deflationary Outlook

Pettis does not use the word “deflation” in his writeup, but he  describes a very deflationary global outlook complete with  protectionism, beggar-thy-neighbor policies, currency wars, and falling  non-food commodity prices.

Pettis did not discuss energy, but the forces are clear: peak oil.  vs. global slowdown. Given peak oil and the possibility of war over it,  energy is a wildcard.

China did not decouple in 2008 (except perhaps in reverse), and it will not be immune from this global slowdown either.

Mike  “Mish”  Shedlock
Global Economic Analysis

Oh boy….

The European banks include French lenders Societe Generale , Credit Agricole and BNP Paribas .

“Apart from spot trading, all swaps and forwards trading (with the European banks) have been stopped,” one source who is familiar with the matter told Reuters.

The question is this: How much flow are we talking about here?

This is either a nothing or it’s a precursor to a really, really big…

http://www.youtube.com/watch?v=j8WLYzA0lCs

Which is it?  I don’t know.  But the banks over in Europe this morning, especially BNP, are acting like it’s the “Big Bada-Boom” that’s inbound – right now.

The lack of transparency and demonstrated willingness to lie – including, in fact, European ministers openly stating that when things are bad you have to lie – is a huge problem.

There are many who claim that we can “ward off” crisis with the ECB and such stepping in to “save” people “as required.”  The fact of the matter is that we’re right back where we were in the 2007/08 mess when it became clear that lending people money who you know can’t pay you back is not a sustainable business model.

How long will we continue to play this game where we have 2% moves in the market in the space of hours or minutes and “contagion” continues to percolate while investor confidence is decimated?  Eventually this sort of volatility and the plethora of lies results in a bid collapse into one of those volatility spikes.

This is not how you get a market decline — it’s what generates crashes.

There is only one solution: The truth.  It involves acceptance of pain, which nobody is willing to do in the present tense, yet there is no way around it.  The longer we play “extend and pretend”, the more we lie and the longer the games go on the worse the situation becomes both here and abroad.

We in fact learned nothing from 2008 – we simply gave a bunch of whining children on Wall Street that had just smashed their fingers with a hammer a candy bar, and we didn’t even have the dollar to buy the candy with.

Jeffrey Immelt, the head of Barack Obama’s highly touted “Jobs Council”, is moving even more GE infrastructure to China.  GE makes more medical-imaging machines than anyone else in the world, and now GE has announced that it “is moving the headquarters of its 115-year-old X-ray business to Beijing“.  Apparently, this is all part of a “plan to invest about $2 billion across China” over the next few years.  But moving core pieces of its business overseas is nothing new for GE.  Under Immelt, GE has shipped tens of thousands of good jobs out of the United States.  Perhaps GE should change its slogan to “Imagination At Work (In China)”.  If the very people that have been entrusted with solving the unemployment crisis are shipping jobs out of the country, what hope is there that things are going to turn around any time soon?

Earlier this month, Immelt made the following statement to a jobs summit at the U.S. Chamber of Commerce….

“There’s no excuse today for lack of leadership. The truth is we all need to be part of the solution.”

Apparently Immelt’s idea of being part of the solution is to ship as many jobs overseas as he possibly can.

A recent article on the Huffington Post documented how GE has been sending tens of thousands of good jobs out of the country….

As the administration struggles to prod businesses to create jobs at home, GE has been busy sending them abroad. Since Immelt took over in 2001, GE has shed 34,000 jobs in the U.S., according to its most recent annual filing with the Securities and Exchange Commission. But it’s added 25,000 jobs overseas.

At the end of 2009, GE employed 36,000 more people abroad than it did in the U.S. In 2000, it was nearly the opposite.

GE is supposed to be creating the “jobs of tomorrow”, but it seems that most of the “jobs of tomorrow” will not be located inside the United States.

The last GE factory in the U.S. that made light bulbs closed last September.  The transition to the new CFL light bulbs was supposed to create a whole bunch of those “green jobs” that Barack Obama keeps talking about, but as an article in the Washington Post noted, that simply is not happening….

Rather than setting off a boom in the U.S. manufacture of replacement lights, the leading replacement lights are compact fluorescents, or CFLs, which are made almost entirely overseas, mostly in China.

But GE is far from alone in shipping jobs and economic infrastructure out of the United States.  For example, big automakers such as Ford are being very aggressive in China.  Ford is currently “building three factories in Chongqing as part of $1.6 billion investment that also includes another plant in Nanchang”.

Today, China accounts for approximately one out of every four vehicles sold worldwide.  The big automakers consider the future to be in China.

Just a few decades ago, China was an economic joke and the U.S. economy was absolutely unparalleled.

But disastrous trade policies have opened up the door for a mammoth transfer of jobs, factories and wealth from the United States to China.

China has become an absolute powerhouse and America is rapidly declining.

Beautiful new infrastructure is going up all over China even as U.S. infrastructure rots and decays right in front of our eyes.

You can see some amazing pictures of the stunning economic development that has been going on in China here, here, here and here.

America is being deindustrialized at lightning speed and very few of our politicians seem to care.

Back in 1979, there were 19.5 million manufacturing jobs in the United States.

Today, there are 11.6 million.

That represents a decline of 40 percent during a time period when our overall population experienced tremendous growth.

We used to have the greatest manufacturing cities on the entire globe.  The rest of the world was in awe of us.

Today, most of those formerly great manufacturing cities are decaying, rotting hellholes.

The following is what one reporter from the UK saw during his visit to Detroit….

As you pass the city limits a blanket of gloom, neglect and cheapness descends. The buildings are shabbier, the paint is faded. The businesses, where they exist, are thrift shops and pawn shops or wretched groceries where the goods are old and tired. Finding somewhere to have breakfast, normally easy in any American city, involves a long hunt. ‘God bless Detroit’, says one billboard, just beside another offering the alternative solution: liquor.

You can see some really shocking images of the decline of Detroit right here.

Our politicians insisted that globalism would not result in a “giant sucking sound” as millions of jobs left America.

But that is exactly what has happened.

Sadly, most American families still don’t understand what has happened.  Most of them are still waiting for things to get back to “normal”.

Millions of unemployed Americans are dealing with incredible amounts of stress right now as they wait for jobs to start opening up again.  But the jobs that have been shipped overseas are not coming back.  In a globalized economy, it doesn’t make sense to hire American workers when you can legally pay workers slave labor wages on the other side of the globe.

Millions of good middle class jobs have been replaced by low paying service jobs.  Today there are huge numbers of Americans that are cutting hair or flipping burgers because that is all they can get right now.

Many others are only able to survive because of the safety net.  One reader named David recently left a comment in which he shared his story.  David did everything that the system asked him to do, but the promised rewards never materialized.  Now David is broke, unemployed and he feels deeply frustrated….

A year ago I had a job, we were struggling, but bills were getting paid, and somehow we were getting by. Then I made the mistake of getting sick, one day before my company insurance kicked in. An auto-immune illness almost killed me, if it weren’t for the amazing efforts of my physicians and an emergency spleenectomy, I would not be here.

My wife would have been a single mother,raising two young sons, one of which is autistic. Instead, I pulled through. The disease damaged my liver, leaving me with a chronic condition, and even after a year, it is hard to get up and go some days. My “employer” dumped me as soon as I left the hospital, and I haven’t worked since. It isn’t for lack of looking. There just isn’t anything.

Oh, I get my government cheese money. Here I am college educated, unable to find something that can pay the bills better than the money that we get from the government. It sickens me to be this dependent on the system like this. But the system de-incentivizes work, and makes living on the dole make a perverse economic sense.

I used to have dreams, but I have given up on them. My wife and I have no savings, we have no life raft and if it weren’t for the generosity of her parents and mine, things would have ground to a halt a long time ago.

I believed every thing adults told me. Work hard, I did. Get an education, I did. Find a nice girl and settle down, I did. Two cars, a dog, a cat and couple of kids, a nice townhouse…the american dream. Yep.

I love my country. My heart is broken, broken because I have been betrayed. I did what you asked, I played by the rules. I did what you said to do; I submitted, I conformed, I stopped dreaming. Now what?

I am willing to pay for my faults and transgressions; my failures are my own, I get that. My children should not have to suffer for my failures, they did not do anything wrong. My youngest boy is autistic, we hope he will be able to integrate into society, but the fact is we may have to take care of him for the rest of his life. How do I do this with nothing, and no opportunity in the foreseeable future?

Depression, stress…yep, I’ve got all that. I used to be hopeful and optimistic about the future. Now all I am is afraid.

As the United States continues to bleed good jobs, stories like the one you just read are going to become much more common.

So what are our politicians doing about all of this?

They tell us that we need even more “free trade”!

Barack Obama says that we need more free trade.

The Republicans say that we need more free trade.

In Washington D.C. our politicians do not agree on much, but one thing they do agree on is that we need to keep shipping jobs out of the country.

Until the American people wake up and start demanding an end to the globalization of the U.S. economy, the job losses are just going to continue to get worse.

The United States has lost a staggering 32 percent of its manufacturing jobs since the year 2000.  If this trend continues, millions more Americans will soon be surviving on food stamps or living in tent cities.

The American people are deeply concerned about the economy, but they still have not connected the dots on these issues.  The mainstream media and most of our politicians keep telling them that the globalization of the economy is a wonderful thing.

It is so sad that people just do not understand what is going on right in front of their eyes.

Whether you are a conservative or a liberal or a libertarian, you should be against the deindustrialization of America.

Allowing our industrial base to be raped is not a good thing.

Allowing big corporations and foreign governments to pay slave labor wages to workers on the other side of the globe making things that will be sold inside the United States is not a good thing.

Allowing the destruction of our industrial capacity to threaten our national security is not a good thing.

Allowing millions of precious jobs to leave the country is not a good thing.

The biggest corporations are making some extra profits by exploiting cheap labor on the other side of the globe.  Corporate executives love to shower themselves with larger and larger bonuses.

But our current trade policies are not working for American workers.

We need “fair trade”, not “free trade”.

The United States is being taken advantage of, and the Democrats and the Republicans are both laying down like doormats and letting it happen.

If you want to know where all the good jobs went, it is not a big mystery.

They have been shipped out of the country and they are not coming back.

Unless fundamental changes are made, things are going to get worse and worse and worse for American workers.

So what is going to happen next?

It is up to you America.

The Economic Collapse

Europe is now openly burning once again (Italy-Bund spreads just hit a new record), the US is 9 days away from being bankrupt, and completing the trifecta is China, which just failed to sell half of the proposed 50 billion in CNY of local government debt at an auction, courtesy of the SHIBOR supernova which oddly only Zero Hedge has been covering. From Bloomberg: “China’s finance ministry failed to sell all of the three-year debt offered at an auction on behalf of local governments as a cash crunch curbed demand. The ministry sold 23.9 billion yuan ($3.7 billion) of bonds at a yield of 3.93 percent on behalf of 11 provinces and municipalities, falling short of its 25 billion yuan target, said a trader at a finance company required to bid at the auction. The Shanghai interbank offered rate, or Shibor, for three-month yuan loans, was fixed at 6.24 percent today, near a record high of 6.46 percent reached on June 28. “While the interbank borrowing cost is so high, investors won’t spend money on local government debt,” said Huang Yanhong, a bond analyst at Bank of Nanjing Co. in Nanjing. “Demand is low also because the debt’s secondary-market trading isn’t active. After you buy it, you can only hold it till maturity.” Who would have possibly thought that 7 week money costing 7% and more could have implications and stuff…

Not helping things is last week’s interest rate hike: “Demand for debt is also cooling after the central bank raised its benchmark one-year lending and deposit rates last week for the third time this year to help stem gains in consumer prices. Inflation accelerated to a three-year high of 6.4 percent in June, from 5.5 percent in May, the statistics bureau said on July 9. Last week, the finance ministry failed to sell all of the bonds offered at an auction of 182-day bills. The ministry also sold less debt than planned at a June 17 auction of one-year notes, and sales of 182-day bills and one-year bonds on May 13.” Bottom line: while you were sleeping, the financial crisis just went global.

More:

The central government will sell 200 billion yuan of bonds on behalf of local authorities this year. Today’s auction was the first involving this type of debt in 2011 and 25.4 billion yuan of five-year notes were sold at a yield of 3.84 percent.

The finance ministry in January published a list of 59 underwriters required to bid at its debt sales, including Industrial & Commercial Bank of China Ltd., Agricultural Bank of China Ltd., Bank of China Ltd., China Construction Bank Corp., China Citic Bank Corp., Postal Savings Bank of China, Industrial Bank Co., Guotai Junan Securities Co. and BOC International (China) Ltd.

Good luck with that “mandatory” issuance. Unlike in the US, China’s “Primary Dealer” equivalents apparently have no idea that their primary job is to keep the ponzi illusion going. Surely our 20 or so status quo perpetuators can teach their Chinese colleagues a thing or two about keeping your head stuck in the sand.

ZeroHedge

Any economy that constantly consumes far more wealth than it produces is eventually going to be in for a very hard fall.  Many point to relatively stable GDP numbers as evidence that the U.S. economy is doing okay, but the truth is that we have had to borrow increasingly massive amounts of money to keep GDP numbers up at that level.  The U.S. government is going to run an all-time record deficit of about 1.65 trillion dollars this year and average household debt in the United States has now reached a level of 136% of average household income.  But borrowing endless amounts of money and consuming massive amounts of wealth with that borrowed money is a road that leads to economic oblivion.  The only way to have a healthy economy in the long run is to create wealth.  But how can America create wealth if our industrial base is being absolutely destroyed?  According to Forbes, the United States has lost an average of 50,000 manufacturing jobs per month since China joined the World Trade Organization in 2001.  Hundreds of formerly thriving industries in the United States are being totally wiped out.  China uses every trick in the book to win trade battles.  They deeply subsidize their domestic industries, they openly steal technology, they blatantly manipulate currency rates and they allow their citizens to be paid slave labor wages.  So yes, the products coming from China are cheaper, but in the process tens of thousands of factories in the U.S. are shutting down, millions of jobs are being lost and the ability of America to create wealth is being compromised.

In 2010, the U.S. trade deficit was just a whisker under $500 billion.  Much of that trade deficit was with China.

During 2010, we spent $365 billion on goods from China while they only spent $92 billion on goods from us.

Does a 4 to 1 ratio sound like a “fair and balanced” trade relationship to anyone out there?

Our trade deficit with China in 2010 was the largest trade deficit that one country has ever had with another country in the history of the world.

In fact, the U.S. trade deficit with China in 2010 was 27 times larger than it was back in 1990.

Needless to say, that is not a good trend.

Our industrial base and our ability to create wealth is being wiped out so rapidly that it has now become a very serious threat to our national security.

According to Forbes, there is only one steel plant inside the United States that is still capable of producing steel of high enough quality to meet the needs of the U.S. military, and even that plant has been bought by a European company.

Meanwhile, China produced 11 times as much steel as America did last year.

Not only that, China is now the number one supplier of components that are critical to the operation of U.S. defense systems.

How in the world did we let that happen?

So what happens if we have a conflict with China someday?

But of more immediate concern is the loss of jobs that the destruction of our industrial base is causing.

For example, the Ivex Packaging Paper plant in Joliet, Illinois just announced that it is shutting down for good after 97 years in business.  79 good jobs will be lost.  Meanwhile, China has become the number one producer of paper products in the entire world.

But China is not just wiping the floor with us when it comes to things like steel and paper.

The truth is that China has now become the world’s largest exporter of high technology products.  Back in 1998, the United States had 25 percent of the world’s high tech export market and China had just 10 percent. Ten years later, the United States had less than 15 percent and China’s share had soared to 20 percent.

So how is China doing it?  Well, as noted above, they are pulling every trick that they can think of.

Most Americans think that we have “free trade” with nations such as China.  That is a complete and total lie and anyone that believes that we have “free trade” with China does not know what they are talking about.

China subsidizes their domestic industries to such an extreme extent that many global industries no longer even come close to resembling “free markets” as a recent story in Forbes noted….

According to a story in the January 20, 2009 New York Times, government subsidies so thoroughly disrupted pricing in the global market for antibiotics that many western producers had to either move facilities to Asia or exit the business entirely. The reason this might matter to intelligence analysts is that the last U.S. source of key ingredients for antibiotics — a Bristol-Myers Squibb plant in East Syracuse, New York — has now closed, leaving the U.S. dependent on foreign sources in a future conflict.

Our politicians and our business leaders have pursued economic policies that are so self-destructive that it defies explanation.

How in the world could anyone be so stupid?

Since 2001, over 42,000 U.S. factories have closed down for good.  Millions of jobs have been lost.  The ability of the once great American economic machine to create wealth has been neutered.

The business environment in America is completely and totally pathetic at this point.  The number of small businesses that are being created is also way, way down.

According to the U.S. Census Bureau, only 403,765 small businesses were created in the 12 months that ended in March 2009.  That was down 17.3% from the previous year, and it was the smallest number of small businesses created since records began being kept in 1977.

The truth is that the U.S. economy is dying.

We continue to consume about the same amount of wealth that we always have, but our net worth is declining.

According to the Federal Reserve, more than two-thirds of Americans have seen their net worth decline during this economic downturn.  In fact, the Fed says that between 2007 and 2009, the wealth of the average American family declined by 23%.

So if it seems like your family and everyone around you is getting poorer, that is because it really is happening.

We really are becoming poorer as a nation.

We can see evidence of this all around us.  Just consider a few of the examples that have been in the news in recent days….

*One school district in the Chicago area is laying off 363 teachers.

*The U.S. Postal Service is offering $20,000 buyouts to thousands of workers as they attempt to slash 7,500 good paying jobs.

*The city of Detroit, once a shining example of middle class America, is now a rotting cesspool of economic decline and it saw its population decline by 25 percent over the decade that recently ended.

Americans are not feeling the full impact of America’s industrial decline yet because we have been filling the gap in wealth creation with massive amounts of debt.

In the years since 1975, the United States had run a total trade deficit of 7.5 trillion dollars with the rest of the world.  That 7.5 trillion dollars could have gone to support U.S. businesses and U.S. workers, but instead it left the country and went into the hands of foreigners that do not pay taxes.

Therefore, the U.S. government, state governments and our local governments have had to borrow massive amounts of money to make up the difference.

Most people do not realize it, but the destruction of America’s industrial base has played a very significant role in the government debt crisis we are facing today.

In addition, the millions upon millions of workers that have lost their jobs as America’s industrial base has been destroyed are now a drain on the system.  Instead of creating wealth and being involved in economically productive activity, millions of American workers are now totally dependent on the U.S. government for survival.

Do you think that it is just some sort of accident that we have 44 million Americans on food stamps?

Don’t you think that a large percentage of those people would actually like to have good jobs that would enable them to sufficiently feed their families?

If we continue on the path that we are currently on we are not going to have much of an economy left.

Not that all trade is bad.  Certainly not.  For example, trade with Canada is generally a very good thing.

However, the horribly unbalanced and unfair trade relationships that we have with nations such as China are ripping our industrial base apart.  Our politicians have not been telling us the truth about what the “global economy” will mean for American workers.  Most U.S. workers never realized that globalism would mean that they would be competing for jobs with workers willing to work for one-tenth the pay on the other side of the globe.

Those people that believe that we can indefinitely maintain an economy where we consume far more wealth than we create are completely and totally delusional.

Until the American people wake up and start demanding change from our politicians on these issues, 50,000 (or more) manufacturing jobs will continue to fly out the doors every single month and even more Americans will become dependent on government welfare.

Is that what you want?

The Economic Collapse

My thoughts are with those trying to contain the nuclear reactor crisis in Japan, and with their families, who are justifiably worried about the health consequences their loved ones risk as they work long hours in hazardous and difficult conditions.

You can’t have it both ways, but that isn’t stopping the Fed and the PBOC from continuing their doomed policies.

The Federal Reserve and the People’s Bank of China are each trying to have it both ways: they want rapid growth in money supply, lending and the economy but no troublesome jumps in the price of essentials. Yet the rapid expansion of money supply and credit feeds volatile price increases and politically disruptive income inequality.

While the world watches and hopes the reactor containment structures in Japan hold, whatever the aftermath of this deepening nuclear crisis, we will be living in a world defined by the financial policies of the Federal Reserve and the People’s Bank of China.

Frequent contributor Harun I. neatly summarized the problem with Fed Chairman Ben Bernanke’s explanation for why the Fed’s policies had nothing to do with skyrocketing global commodity prices:

What I find troubling about Bernanke these days is his overt dissembling. Before congress he says that the recovery, not money printing is causing a rather destabilizing spike in commodity prices. Looking for evidence in nominal price charts, there is none to be found. What he is trying to make us believe that from 1982 to 1998 (the great equity bull market) there was not enough demand to drive crude oil prices where they are today. Hmm.

At any rate he can not have it both ways. He cannot claim that he needs to print money to spur “acceptable inflation” (which effectively raises prices) while claiming that money printing has nothing to do with rises prices.

Thank you, Harun.

The Fed is being disingenuous in claiming it is blameless for global inflation: the Fed’s zero-interest rate policy and quantitative easing are both unleashing “hot money” that is seeking higher returns anywhere they can be found in the global economy.

In a larger sense, the Fed is attempting to repeal the business cycle. In the normal course of capitalism, low rates and easy credit lead to increased borrowing, which leads to rising consumption and investment in production to feed that increased consumption.

This leads to higher profits, which feed more investment and debt.

At some point, the cycle hits a brick wall: borrowers can’t afford to pay more interest, so debt stops rising, and consumption and demand slump as borrowing levels off. In the rush to mint profits, production capacity exceeds demand, and as a result prices and profits both fall.

As the boom progressed, investors sought out riskier, more marginal investments. As new debt and demand fall, then these riskier investments lose money and are either shuttered or sold for a loss.

As profits decline, workers are laid off and commercial borrowers find their income streams aren’t sufficient to meet their obligations. The credit cycle turns from expansion to contraction, as marginal borrowers go bankrupt and insolvent businesses and loans are liquidated or written down.

This purging of bad debt, speculative excess and misallocated resources sets the foundation for another cycle of renewed growth.

But the Fed has attempted to repeal the credit cycle. Rather than allow credit to fall sharply and interest rates to rise as bad debt is purged from the financial system, the Fed has pursued a policy of making credit even cheaper in the hopes that financial-sector borrowers will be able to borrow more since rates are near-zero.

But since consumers and enterprises are still burdened with mountains of existing debt, few are willing or qualified to borrow more. As I recently wrote here, consumer debt in the U.S. has declined a paltry 2.7% in the Great Recession.

The Fed’s quantitative easing ends up flowing not to households or productive enterprises but to the “too big to fail” banks and Wall Street firms, which then seek higher returns in assets such as stocks and commodities.

The Fed’s intention was to push money into productive enterprises, but instead it has fed pools of speculative money chasing high returns in global commodities. This is helping to fuel inflation in food and other commodities, not just in the U.S. but globally.

Now the Fed has backed itself into a corner: if it keeps interest rates low and continues pouring hundreds of billions of dollars into “hot money” hands, then it will adding to the destabilizing consequences of rising commodity inflation. If it stops its quantitative easing stimulus to help cool global inflation, it threatens to derail the stock market run-up. Without QE2 to hold down rates, interest rates will rise, pushing marginal borrowers out of the market and increasing borrowing costs for everyone from new home buyers to those buying new vehicles.

By attempting to repeal the business cycle and refusing to allow a necessary credit cleansing (writing off of bad debt) and repricing of risk, the Fed has created an inescapable double-bind for itself: either continue to pursue easy-money policies and help destabilize the global economy with rising commodity inflation, or allow interest rates to rise and destabilize speculative markets and marginal borrowers.

China is also trying to have it both ways. China’s leadership is on the horns of a dilemma: if it continues pumping up rapid growth, it will inevitably feed inflation, while if it raises interest rates and curbs lending to limit inflation, that policy will restrain overall growth.

Though profits and gross domestic product (GDP) have been surging over the past decade as China’s productivity improved, these gains have not trickled down to the workers’ paychecks. According to the National Development and Reform Commission, incomes only kept pace with profits and GDP in three of China’s 27 provinces.

In other words, the “rapid growth” is flowing only to the top tranch of China’s households, while food and energy inflation’s impact is felt mostly by lower-income wage earners. In effect, China’s economy and political structure is creating a nation of Haves and Have-Nots. (Sound familiar? Just substitute “America” for “China” and the statement is equally true.)

Victor Shih, an Associate Professor of Political Science at Northwestern University, sees the government’s tight control over yields on savings accounts and lending rates as a primary cause of rising inequality: as inflation accelerates, China’s savers are losing money, as the return on savings is lower than the rate of inflation. Negative returns on savings act as a stealth tax on China’s households and a subsidy to the government-owned banks.

The banks then turn around and loan money to politically connected real estate developers and government-owned enterprises at interest rates that are near zero in inflation-adjusted terms. “The Chinese financial system channels wealth from ordinary households to a small handful of connected insiders and state-owned firms,” writes Shih.

Insiders and top managers take home substantial income in cash that goes unreported in regular channels—so-called “grey income.” This is another source of wealth inequality: average workers don’t receive these large cash payments, which are considered commissions and bonuses in China.

A Credit Suisse survey of urban households in China found $1.5 trillion in grey income unreported in the official household income numbers. About 60 percent of this grey income flowed to the top 10 % of households. According to Shih, while income of normal households rose 8%, the top 10% of households saw their income leap by 25%

The net result of these structural imbalances, in Shih’s view, is a China that is “increasingly splitting into a small upper class that spends freely on luxury goods, and a remaining population whose earnings and savings are eroded by inflation and state confiscation.”

So both the Fed and the PBOC are creating two equally destructive and pernicious financial forces: runaway commodity prices fueled by asset bubbles and heavily goosed speculation, and rapidly increasing wealth/income inequality as the gains from speculative excess flow to the top while the price increases and low yield on savings stripmines purchasing power from those least able to afford it.

You can’t have it both ways, and that’s something neither the Fed nor the PBOC is willing to admit–yet.

Of Two Minds