Comments on the News

Putting a man on the moon. Many of my friends and co-conspirators like to evoke that 1960s goal as they search for some way to harness the energy, talent and hard work of Americans in pursuit of an overarching national goal. I’ve used that metaphor myself for the same reason.

Yet on reflection, I’ve come to realize that Neil Armstrong is the wrong icon for what lies ahead us as a country. Instead, I’d propose Rosie the Riveter. After Pearl Harbor, she moved from the farm to places like Detroit after Pearl Harbor and used her brain and brawn to produce the hardware that won a world war.

The Apollo program was a national achievement, to be sure. It helped us catch up with the Russians’ lead in space technology, lifted our spirits after a botched invasion of Cuba, and helped the country get over a series of political assassinations that shook confidence in our democracy.

But what did Apollo require of us as individuals? Sure, some of our tax dollars were devoted to the space program. And we watched the big events on television, awestruck by the take-offs, splashdowns and that glorious July night adventure on the lunar surface. But we didn’t have to change a single thing in the way we lived, earned our incomes, or managed our expenses.

During World War II by contrast, we saved, conserved, rationed, reused, substituted, and melted down unneeded metal – all for the war effort. Ordinary people as exemplified by Rosie did extraordinary things. In a period shorter than the current conflict in Iraq, we won a global world and laid the basis for a period of spectacular growth and prosperity.

In the midst of the meltdown of the postwar system, we need to emulate Rosie and all the ordinary citizens who won the WWII on the home front. We need to change many aspects of our lives, learning new skills and developing new habits. While we’ve been profligate and irresponsible, these changes shouldn’t be regarded as a form of punishment or purgatory. If we see them that way, we’ll get over them as quickly as we seem to have $4 a gallon gasoline. Rather we need to dedicate ourselves individually and our country collectively to the pursuit of a new, overriding national objective.

As I’ve written before, the goal for me is clear: Invest. Produce. Export. Pay down our massive foreign debt. Organizing our policies and our personal behavior to pursue those goals will pay off in terms of better jobs, higher incomes, a cleaner environment, a legitimately strong dollar, a more secure country, and a legacy for future generations that we can take pride in. Like World War II, this is a challenge we must accept and conquer. And as Rosie would say: We Can Do It.


Charles Blum

Labels: national interest, U.S. Economy

Here we go again. After throwing checks at consumers in the vain hope of averting a recession and hundreds upon hundreds of billions at Wall Street in the hope of stemming the financial meltdown, there is constant talk about doing more of the same in the hope of promoting a “recovery.” This makes our economic malady sound like a bad cold. In fact, it’s more like learning to walk again after a crippling accident. We need rehabilitation, not recovery. We need a fundamental restructuring of our economy to address the inescapable central fact of our national economic life: we have lived beyond our means for decades, owe the rest of the world a staggering amount of money (every dollar is an IOU), and lack the means to repay our debt with goods and services.

If we do not solve this problem and make ourselves fit for international competition again, the dollar will lose its value and we’ll have to balance our lopsided accounts through a massive inflation. Americans will “enjoy” a lower standard of living. However richly deserved, this sort of economic purgatory won’t be pleasant.

Yet that is the default setting for a debtor society. If we want to avoid it, we need to get back to basics:

• The central problem in our economy is a chronic lack of investment. Not in stocks, bonds, derivatives or any other paper asset. Not in existing assets. In new productive assets.
• With more such investment, we can expand our domestic production of services and especially goods.
• With expanded production, we can increase our exports. This should always be considered in net terms: that is, it is just as valuable to replace imports with domestically produced goods (think energy) as it is to ship surplus goods abroad. The cheerleaders for the mindless process of “competitive liberalization” -- one faulty “free trade” deal after another – value increased exports but seem to regard any effort to reduce imports as an unattainable or even undesirable goal. They are wrong.
• With increased net exports, we would require less borrowing from abroad. Eventually, increased savings in this country can help reverse the flow of capital and make the United States a creditor nation again.

It’s that simple: more investment leads to more production; more production to an improved trade position; and an improved trade position to reduced dependence on trading partners for financing. Let us hope the incoming administration will adopt a coherent, comprehensive national trade strategy – one that melds trade and domestic policy into a powerful force to transform our economy -- that gets back to basics and frees us, our children, and our grandchildren from the crippling burden of debt.

Charles Blum

Labels: Debt, Trade, Trade Deficit, U.S. Economy

When physicians harm their patients, they face lawsuits, higher insurance premiums, and possibly loss of licenses as a result of their malpractice. When Wall Street wizards build a Ponzi scheme of worthless assets, some of them at least stand to lose their bonuses, their jobs and even their companies. It’s gratifying to hear reports that the FBI is investigating possible criminal wrong-doing at four of the failed companies. That might mean some degree of restitution and even jail time might result from their financial malpractice. There’d be a modest measure of justice in all that.

But when it comes to economics, bad advice seems to go unpunished. Throughout the Wall Street meltdown, an opinion piece published September 10 in the Washington Times has been gnawing at me. The article in question, “Another Nonproblem,” was penned by Richard Rahn, Ph.D., a regular contributor to that paper’s op ed page. Rahn is a senior fellow at The Cato Institute, former chief economist at the US Chamber of Commerce, and a university professor.

His sterling credentials didn’t speak to me as loudly as his argument, which in essence is:

• The United States can run a trade deficit, importing more than it exports, “forever.”
• Citing a study by the Federal Reserve, he bases this startling contention on one statistic: “U.S. investment in other countries receives, on average, a higher rate of return (because more of it is in equities) than foreign investment does in the United States (because more of it is in bonds).”
• Thus, he concludes: “As long as the United States is politically and economically more stable than many other countries, the trade deficit can persist without doing any damage to the U.S. economy – for many decades or even centuries. [emphasis mine] So drop this from your list of worries.”

Now, Dr. Rahn wrote his opinion without once mentioning “China,” “renminbi,” or even “debt.” Instead, he makes a lot of the aggregate “net asset position” of US citizens. In his view, our net asset deficit – debt in straight talk -- is “only” $2.5 trillion or 17 percent of GDP. Rahn suggests that this level will remain constant because the US will grow so strongly that the economy will double by 2023.

Wait a minute! Our current account deficits, which include the net return on foreign investments, have been piling up for decades. Foreigners are holding huge stocks of dollars beyond what they owe us. Every one of those dollars is a claim on goods or services that we can produce or assets that we own. Our capacity to produce is now so limited that we rely on imports to fill our own needs. The value of what we own – especially real estate and shares of stocks – has fallen dramatically. Moreover, we have a chronic savings deficit; exactly where are the future foreign investments that Rahn assumes will be made supposed to come from?

Trade deficits have sapped strength out of the US economy, hollowing it out for a lack of investment in productive assets and supplying vast amounts of foreign funding for the Wall Street Ponzi scheme that has just come crashing down on us and the rest of the world. Trillions of loose dollars are held by foreigners now anxious to do something with them before they lose more of their value. America is ripe for a fire sale. It’s a question of “confidence” in America, says Dr. Rahn. Does that mean confidence in Fannie Mae, Freddie Mac, Bear Stearns, AIG, Lehman Brothers? Just whom are foreigners with ready cash supposed to trust now?

Should we place our confidence in economists trading in snake oil? Not me. They are prescribing more of what’s been ailing us – for centuries to come. So, caveat lector. The stuff in this bottle surely won’t cure you, but it might kill you – not in a matter of centuries, either, but any day, week or month now.

Charles Blum

Labels: Trade, Trade Deficit, U.S. Economy

You have to hand it to the U.S. Department of the Treasury. On a day (September 15) when the Dow Jones dropped more than 500 points, Wall Street began to triage the survivors from a weekend massacre, and nervous money skittered around the world in search of a safe haven, Treasury chose to announce the launch the following day of a new campaign “aimed at combating the issue of financial illiteracy among young adults.” The aim is to “teach young adults about credit.”

Tellingly, Treasury is conducting its multimedia, bilingual campaign in conjunction with the Ad Council. The latter presumably knows a thing or two about how less than fully literate Americans of all ages were duped into sub-prime loans they could not afford, into investing in securities issued by Fannie Mae and Freddy Mac “backed by the government,” and into zero-interest balance transfers from one credit card to another – with a lead balloon attached. Yes, they should know what they’re talking about.

Now I have nothing against financial literacy among young adults. Seems like a splendid idea. My question is when will Treasury launch a financial literacy campaign for:

• the surviving Wall Street hot shots to ensure that, MBA or not, they might never again be so blinded by greed as to repeat the foolish Ponzi-schemimg of this decade?
• America’s credit-card gougers so that they might learn that jacking interest rates on struggling customers only helps top hurtle them toward bankruptcy?
• America’s off-shoring multinationals so they might learn how to make a profit without accepting huge bribes in the form of subsidies, targeted tax holidays, and undervalued currencies?
• the budget experts at the Office of Management and the Budget to ensure that they might finally produce balanced budget proposals without accounting gimmickry?
• the members of Congress who collectively seem to have no clue as to how they or the country might live within their own means?
• high government officials and so-called experts who argue that deficits “don’t matter,” because we can always borrow more?

I could go on, but you get the point. Nothing against financial literacy for the few, but dare we stop there? If the US and the world economies are to be righted any time soon, we need a crash course in adult literacy for Wall Street and Washington, starting at the top.


Charles Blum

Labels: budget, U.S. Economy, Wall Street

As one of my intellectual heroes, Herb Stein, observed: “If a thing cannot go on forever, it will stop.” The growing financial imbalance in the world seems to be a strong candidate for the next chapter in Lessons Learned the Hard Way, a book I’ve been working on for 63 years now.

Consider the numbers in the following table, prepared by IAS staff using official data through the IMF:

Foreign Exchange Reserves

Top Ten Countries in Asia (Valued in Billions of USD)

	2005 Q2	2005 Q4	2006 Q2	2006 Q4	2007 Q2	2007 Q4	2008 Q1
China (Total)	838.71	949.84	1075.63	1208.69	1480.06	1694.18	1857.29
*Mainland	710.97	818.87	941.12	1066.34	1332.63	1528.25	1682.18
*Hong Kong	122.00	124.28	126.63	133.21	136.31	152.70	160.78
*Macau	5.74	6.69	7.88	9.13	11.13	13.23	14.34
Japan	843.54	846.90	864.88	895.32	913.57	973.37	1015.59
India	138.37	142.82	162.91	177.25	213.35	275.32	309.72
Taiwan	253.62	253.29	260.35	266.15	266.05	270.31	289.38
South Korea	204.99	210.39	224.36	238.96	250.70	262.22	264.25
Singapore	114.90	116.17	128.32	136.26	144.06	162.96	177.46
Malaysia	74.76	70.18	78.77	82.46	98.40	101.34	120.29
Thailand	48.36	52.07	58.06	66.98	73.00	87.46	109.97
Indonesia	33.87	34.72	40.11	42.59	50.92	56.92	58.99
Philippines	17.70	18.49	21.12	22.97	26.38	33.75	36.62
TOTAL	2568.81	2694.88	2914.49	3137.62	3516.50	3917.82	4239.55

In other words, these ten Asian countries have piled up huge foreign exchange reserves – more than four trillion dollars’ worth as of March 31 of this year -- as the result of their continued massive current account surpluses. Those reserves are growing rapidly – up almost 70 percent in the eleven quarters since mid-2005. These numbers are shocking because China, Japan and Korea (at least) have taken measures since 2004-5 that were supposed to ameliorate what was then perceived to be a dangerous imbalance in payments. Unless something is done sooner, the Asian holdings of foreign reserves will shoot past five trillion dollars before the next American president gets his feet on the ground.

Under IMF Article 4, all members are obligated to avoid using exchange rates to prevent adjustment of imbalances in trade flows and balance of payments. It is no secret the IMF is a paper pussy cat, lacking any credible means of dissuasion to governments intent on a mercantilist mission. Still, ignoring an obligation opens one up to such charges as we’ve heard in the presidential campaign that “China cheats.”

The other side of the coin was argued in the Wall Street Journal of June 9 by economist Judy Shelton (“The Weak-Dollar Threat to World Order” at http://online.wsj.com). She insists that, current Treasury and Fed rhetoric notwithstanding, America is pursuing a cynical weak dollar policy precisely to promote inflation. The Asians are acting so as to keep the dollar overvalued against their currencies, so it’s clear she’s talking about the weakness of the greenback in terms of euros, Canadian dollars, British pounds and other more or less freely floating currencies. Listen to her tough words:

“When the U.S. turns a blind eye to the consequences of diluting the value of its monetary unit, when we abuse the privilege of supplying the global currency by resorting to sleight-of-hand monetary policy to address our own economic problems – inflating our way out of the housing crisis, pushing taxpayers into higher brackets through stealth – it sends a disturbing message to the world.

“Why would a nation that espouses Adam Smith and the wisdom of the invisible hand permit its currency to confound the validity of price signals in the global marketplace? How can Americans champion the cause of free trade and exhort other nations to rid themselves of protectionist measures such as tariffs and subsidies – and then smugly claim that U.S. exports are becoming “more competitive” as the dollar sinks?

“That’s not competing. It’s cheating.”

Oh, that's great! In the high-stakes poker game being played out in the waning months of the Bush administration, both sides think the other is cheating. Such scenarios must stop at some point and usually end in gunfights in which a lot of innocent bystanders are killed or wounded. Perhaps the Bush administration is betting it can bluff its way until noon on January 20 and then dump this unmanageable mess in the lap of the poor sucker who wins a majority in the Electoral College. What’s needed here is a heavy dose, not of altruism, but of enlightened self interest. Are there so few clear-headed governments that plurilateral negotiations can’t produce a rational solution to avert a hard landing? Can’t the Congress do something to persuade all the parties to come to the table? Won't someone please do something that makes sense?

Charles Blum

Labels: U.S. Economy

The Washington Post prominently reported today (http://www.washingtonpost.com/wp-dyn/content/gallery/2008/05/30/GA2008053002534.html?hpid=artslot) on the opening of a furniture factory by the price-conscious retailing giant Ikea. Ikea supplies itself from plants all over the world, so one more wouldn’t be worthy of the page one coverage plus two photos that the Post gave to it. But this one is located in Danville, Virginia, and is the first that Ikea operates in the United States – and that is big news. Bookshelves and coffee tables made in Virginia – bravo!

The article cites a number of factors, including the will power of Virginians, as helping to reverse two decades of job losses. “The weakening dollar,” says the report, “has made the United States more attractive to foreign investors. Companies from England, Canada and India have recently opened operations or expanded in Danville.”

True, Danville has lost tens of thousands of manufacturing, mostly textile, jobs in recent years, and the Ikea plant will eventually employ only 740. True, unemployment in the Danville area still exceeds 7 percent. And true, for many of the new hires, wages are substantially lower than they used to earn.

For several years, I’ve been speechifying that there is only "good" news and better news. The "good" news is that, if we do nothing, market forces will wring the excesses out of the American economy. That will entail a lower dollar, higher inflation, and a lot of belt-tightening by many Americans. That process has now begun in earnest but is far from complete. If allowed to run its course, America will eventually be a highly attractive place for folks with money to invest and produce and a cheap export platform. There will be plenty of jobs, especially for workers with skills. The downside is that our standard of living will be reduced, painfully. What’s happening in Danville illustrates this point very well.

The better news, as I try to argue at every opportunity in this space, is that we can avoid a lot of that pain with smart, globally competitive public policies. Rather than relying on the cheaper dollar (which also contributes to higher energy prices and interest rates), America could achieve a lot of the same gains by making intelligent changes in our tax, energy, infrastructure, and health care policies. Better still, those gains are more likely to endure than market-driven corrections, leaving us better equipped to compete successfully in the global market.

Already there are signs that the US and some of its major trading partners want to reverse the depreciation of the dollar in order to reduce energy costs and ease inflation. That’s understandable, of course. The other side of that coin, however, is that the market incentive for more investments like Ikea’s in Danville will be commensurately lower.

As I tried to argue in “Receding Recession?” relying on market forces to solve structural problems is foolish and subjects us unnecessarily to the whip-sawing discipline of market forces. The Invisible Hand leaves visible scars on individuals, families, communities and nations. We can do better with smart policies.

Charles Blum

Labels: U.S. Economy

In remarkably clear and unnuanced language, Alan Greenspan told the Financial Times a few days ago: “I still believe there is a greater than 50 percent probability of recession” in the United States. The former Fed chairman added: “That probability has receded a little and I think the probability of a severe recession has come down markedly.”

Others disagree. Some say we are already in a recession. Others say that the threat of recession has passed.

Honestly, I don’t care much about this debate for several reasons. First, the pain being felt by so many Americans – higher gas and food prices, tighter credit, disappearing student loans, lost jobs, and more – is just as real whether we are in, still headed for, or successfully avoiding a “recession.”. Second, recessions are generated and cured by market forces. That’s why, by the time we know officially that we’ve been in a recession, it tends to be over. Third, all the fuss about the status of a recession continues to distract us from the structural problems of our economy.

Unlike recessions, we can be reasonably confident that those structural problems are both long-lived and not self-correcting. They have to do with public policy and institutions, not market forces. For example, back in the 1970s the Nixon administration delinked the dollar from gold, implicitly committing US to run trade deficits as a means of providing liquidity to the world (our excess of imported goods is offset by the export of dollars). So long as we were the world’s largest creditor, those deficits mattered little. The biggest challenge was to recycle first the petrodollars and now the sinodollars, too. We have succeeded so well that the US has become – thanks largely to relentless trade deficits, a stupid tax system and overreliance on imported energy – the world’s biggest debtor.

So, my fear is that Dr. Greenspan may be proved right. The threat of recession may recede, the dollar may strengthen, imported petroleum prices may come back down from stratospheric heights, firms may begin hiring again. If all that happens, we will of course breathe a collective sigh of relief. But will we have begun to address our structural problems? Not even close. All we will have done is to postpone the day of reckoning.

If one political party or the other comes up with big ideas to reorient our economy, it may reap rewards for many elections to come. How ironic that neither McCain nor Obama has shown much fluency in such matters. For that matter, a lot of professional economists do no better, and the media are hopeless. But this is why we have elections. Four out of five Americans believe the country is headed in the wrong direction. Let’s hope the diminished threat of a severe recession is not enough to satisfy them.

Charles Blum

Labels: U.S. Economy

In today’s New York Times, Tom Friedman asked in a terrific op-ed piece: “Who Will Tell The People?” In it he argued that the American people are hungry to make this country strong again. Isn’t that the essence of patriotism?

He wants a president tough enough not just to withstand the lies of his opponents but also to tell us the truth. Isn't that the essenece of leadership?

He also laments that:

“We are not as powerful as we used to be because over the past three decades, the Asian values of our parents' generation — work hard, study, save, invest, live within your means — have given way to subprime values: "You can have the American dream — a house — with no money down and no payments for two years."

Right on all points. I’d add one more. It’s not enough to have truthful leadership and a personal commitment to traditional values. We need: a) a political system in which money doesn’t dominate; b) a tax system that rewards savings, investment, production and export; and c) a trade policy that puts the interests of domestic producers first. Do any one of these, and the other two will be easier to achieve. Do all three, and watch the resurgence of “Asian values” in this country.

Idealism and moral virtue at the level of individuals are simply not enough to turn our country around. They are undermined by a governmental system that systematically puts special interests before the public interest. If you want this country to be strong again, start demanding more -- a lot more -- of all public servants. If you want better public servants, study the real issues, raise hell whenever necessary to bring attention to them, and vote on that basis, not some PR-fed image.

Charles Blum

Labels: U.S. Economy

For an old government hand, nothing is more infuriating than the anti-government slogan: “It’s your money. You know better how to spend it than the Feds do.”

Well, looking at the record of this administration, they may actually have a point. Certainly, ordinary American citizens would know better than to run up a deficit in excess of $1.6 trillion as the Bushites and four irresponsible Congresses have since FY 2002, right? We’ve borrowed enough to cover that shortfall, increasingly from foreign creditors. Sorry, kids and grandkids, but you’re expected to pay that back.

But wait, maybe the citizenry is not so smart after all. Over the same time span, according to the Federal Reserve, collective household debt has doubled from over $7 trillion in 2001 to over $14 trillion today. Sorry, kids and grandkids, but you’ll be expected to repay that debt, too.

Let’s say that the youngest 200 million of you will share that responsibility equally. Eight point six trillion divided by 200 million is “only” $43,000 per capita. Think of it as a year of that Ivy League education that you never had.

Of course, not all of you will suffer equally. The IRS says that it fails to collect $345 billion a year from tax scofflaws. Those folks -- and they know who they are – will ride at a reduced fare. There’s just one more burden that the honest ones among our kids and grandkids will have to bear. Sorry.

There may be a ray of hope -- career change. If you play with other people’s money, you can make a fortune – even when you foul up. Consider that the top10 – yes, ten – hedge fund managers “earned” a collective $16.1 billion last year, according to Alpha Magazine. Based on a 2,000 hour work year, their hourly rate would exceed $800,000. And we complain about lawyers, movie stars and A-Rod? Better, yet, J. P. Morgan paid top executives at Bear Stearns a cool $500,000 each to stay on after the latter was rescued at a government-backed fire sale. Wait a minute, aren’t these “indispensable” executives the same ones who destroyed 98 percent of Bear Stearns’ market value? See, kids, it’s a matter of what line of work you choose and whether you think that honesty pays.

This is no “rough patch,” as the President still insists. No, our economic system has stopped working for many of those who cling to American values, and our political system is so beholden to the special interests that it can’t begin to address the real issues of the economy. Those who say that American political campaigns are “too long” may have a point; apparently no amount of time is adequate for an honest debate of real solutions to real problems. Sorry, kids and grandkids.

Charles Blum

Labels: U.S. Economy