Looks Like the U.S. is Headed for Default

And not for lack of money, or 'being broke'. There's plenty of money, but the political system is damaged probably beyond repair. If there is no problem referring to the Social Security trust as 'IOU's' that are intrinsically worthless, if debt owed to the American public might be defaulted on, then certainly America's international creditors will receive far less deference if the U.S. ruling class is pushed against the wall.

Martin Wolf puts it better:

Finally, with one party indifferent to deficits, provided they are brought about by tax cuts, and the other party relatively fiscally responsible (well, everything is relative, after all), but opposed to spending cuts on core programmes, US fiscal policy is paralysed. I may think the policies of the UK government dangerously austere, but at least it can act.

This is extraordinarily dangerous. The danger does not arise from the fiscal deficits of today, but the attitudes to fiscal policy, over the long run, of one of the two main parties. Those radical conservatives (a small minority, I hope) who want to destroy the credit of the US federal government may succeed. If so, that would be the end of the US era of global dominance. The destruction of fiscal credibility could be the outcome of the policies of the party that considers itself the most patriotic.

In sum, a great deal of trouble lies ahead, for the US and the world.

1'The political genius of supply-side economics' - Martin Wolf

If China Bordered the United States

	Mexico	China
School Life Expectancy	14	11
Female Life Expectancy	80	76
Male Life Expectancy	75	72
Infant Mortality Rate	14	20
Sanitation Coverage	85	55
Per Capita GDP/PPP	14,337	6,675

American stereotypes of Mexicans and Chinese are mostly based upon immigration patterns and proximity. For one, the reason Chinese (and Indian) professionals immigrate to the United States in large numbers is because of their country's low wages. Professionals in Mexico have less reason to immigrate to the U.S. because they make enough in their home country. For another, self-sufficiency requirements in our immigration process make it all but impossible for the Chinese worker, with a per capita salary in the $ 3-5,000 year range, to get into the U.S. We are seeing a select group, a sample bias.

IMF Politicking

On IMF governance, another area of disagreement between the United States and Europe, the draft gives no indication that the EU is willing to give up seats on the IMF's executive board in order to give greater voice to fast-growing emerging economies such as China.

The draft showed the EU supports shifting slightly more than 5 percent of IMF quota shares to "underrepresented" emerging and developing economies, but wants to keep the size of the executive board unchanged.(1)

It will be darkly humorous to watch US aligned mouthpieces bash the EU on IMF over-representation; the US is the only country that has veto power over major decisions. With the IMF already unofficially expelled from East Asia, a breakdown in EU-Washington relations will further diminish its imagined mandate.

1'EU prods China for faster yuan rise: G20 draft' - Reuters

Floods in China Kill 1,400

China remains a country with critical domestic needs and wide swaths of poverty in the interior provinces. It's GDP PPP is around 90th in the world, or basically about average, even including wealthier coastal cities. Nascent superpowers don't have 70,000 people die in an earthquake or take this loss of life in flooding. The ability to project imperial power requires a degree of domestic stability and dispersed wealth that China will never have. As the U.S. declines, China will not be able to take its place - it will remain a regional land power.

We are living through the collapse of the post World War 2 US dominated capitalist order and there is nothing to replace it and no government or political organization poised to. Expect the world's regional powers to prop up the U.S far longer than would be supposed possible, because elites rarely do well when there is a political breakdown. They most definitely know this.

---
1'Severe Flooding Hits Northeast China' - New York Times; Barboza

Don't Expect China's Consumption Share to Increase

Consumption share is not just a function of repressed wages but of heavy infrastructure investment , i.e. the denominator. And it is clear from this picture of the traffic jam saga that China needs more infrastructure investment, not less. So despite a rising standard of living, we will not see a significant increase in China's consumption share any time soon.

Links

About the Chinese housing bubble that will crash their economy:

1'China property plunge would barely dent CCB -report' - Reuters

A state directed banking sector surely has been disastrous for the PRC.
---

2'Pakistan flood aid from Islamic extremists' - UK Telegraph

It appears some political groups are serious about winning hearts and minds. But Pakistan's president has his kid at Cambridge so all is well.
---

3California to Issue IOU's - Zero Hedge

Sounds like money printing to me, illegal for states under the U.S. Constitution.
---

4Consumers Dropping Pay TV Services' - Investor's Business Daily

The internet will end up wiping out more modes of profitability than it engenders.
---

5'US forges closer military ties with Vietnam' - WSWS

Why Does Google Want Our Cell Phone Numbers ?

Don't be Evil - my ass.

China Moves Closer to Challenging American Dominance in Computer Processors

As has been repeatedly written about on these pages, once a country gives up production, it gives up employment and tax revenue, and eventually everything. People laughed at Japanese cars once, even in the early years of my life, before they drove two of the Big Three to bankruptcy.

Computer processing giants AMD and Intel represent the cutting edge of technology where United States-based companies still command dominance in world markets. But that will probably change in the next decade, and it appears that the Chinese Loongson processor could even leapfrog these companies. Powering it is money; the fact that China dominates world production has given its government enormous resources in order to finance research. And very little technological research these days can thrive without state support, something the Washington Consensus cannot grasp and whose failed philosophy is driving the U.S. into the ground.

As for Loongson, it is not what is called a x86-based chip, which Windows is programmed from, but a MIPS chip which is compatible with open source, or free software systems. Therefore, if Loongson processors prove viable both Intel and Windows will all together be shut out of the Chinese market based on price alone.

1'China's Loongson Processor Effort' - OS News
2'China's Loongson Processor Could Power First Natural-Born Chinese Supercomputer' - Gizmodo

Peak Empire: July 20, 1969

Consider how far the U.S. was ahead of the world technologically at this time; where was China, where was India, where were the smaller countries of East Asia ? The U.S. still represented 30 % of global manufacturing output. Even so, the post war expansion of Western Europe and Japan meant that a few years later the dollar was unable to hold the gold standard, and Nixon capitulated. The continuing story has been of eroding account balances and the long slide from the world's largest creditor to the largest debtor. At this point, the U.S. can no longer even hold a fiat reserve currency without eviscerating its middle class and large sections of its meritocracy. The decline is irreversible and there is no country that can take over the role of global arbiter. We will see chaos in the elite ranks, much like 1917 - when World War I terminally discredited the European ruling class and their global rule.

Marx on Equilibrium Theory and Crisis in Capitalism

"Nothing could be more foolish than the dogma that because every sale is a purchase, and every purchase a sale, the circulation of commodities necessarily implies an equilibrium between sales and purchases. If this means the number of sales is equal to the number of purchases, it is flat tautology. But its real intention is to show that every seller brings his own buyer to market with him. Sale and purchase are one identical act, considered as the alternating relation between two persons who are in polar opposition to each other, the commodity owner and the money owner. They constitute two acts, of polar and opposite character, considered as the transactions of one and the same person. Hence the identity of sale and purchase implies that the commodity is useless if, when it is thrown into the alchemist's retort of circulation, it does not come out again as money; if, in other words, it cannot be sold by its owner, and therefore bought by the owner of money.This identity further implies that the process, if it reaches fruition, constitutes a point of rest, an interval, long or short, in the life of a commodity. Since the first metamorphosis of a commodity is at once a sale and a purchase, this partial process is at the same time an independent process in itself. The buyer has the commodity, the seller has the money, i.e. a commodity which remains in a form capable of circulating, whether it appear on the market at an earlier or later date. No one can sell unless someone else purchases. But no one directly needs to purchase because he has just sold. Circulation bursts through all the temporal, spatial and personal barriers imposed by the direct exchange of products, and it does this by splitting up the direct identity present in this case between the exchange of one's product and the acquisition of someone else's into the two antithetical segments of sale and purchase. To say that these mutually independent and antithetical processes form an internal unity is to say also that their internal unity moves forward through external antithesis. These two processes lack internal independence because they compliment each other. Hence if the assertion of their external independence proceeds to a certain critical point , their unity violently makes itself felt by producing - a crisis."

---
Capital I 208-209

Can the Center Hold ?

The sharply different unemployment trends between Germany and the other big three economies of continental Europe does not bode well for the future of the Euro currency.


From a purely geopolitical perspective - it's one thing if Greece is falling apart, because they can be bullied around if the larger economies are all on board. It's another story if a country like France, with the world's 5th largest nominal economy, isn't happy.

I can't see this trend continuing, and the Euro surviving.

Obama: On the Road to Another Failed Presidency

After eight disastrous years of Bush, it appears the Obama presidency is sliding into oblivion as well. His approval rating has been sinking for months and just hit over 50% disapproval on Gallup tracking for the first time.

The underlying context is a sputtering economy. And Washington has no answers because the political and ruling elite cannot imagine giving up empire. Their only answer for crisis is a reduction in the living standards of the general population, and a narrowing of the rather shaky meritocratic base that supports them. The moat is getting deeper and wider, the drawbridge going up.

The Elephant in the Room: The United States and IMF Supermajority

As it has become clear that the US economy can no longer support the dollar demand resulting from reserve currency status, a number of voices have called for IMF Special Drawing Rights to supplement and perhaps replace the dollar reserve system in international trade and finance. The percent of a country's currency within the SDR would be set by its contribution to global GDP or possibly other factors generally reflecting the strength of its productive economy. This would smooth out trade imbalances in the way Keynes envisioned with his Bancor proposal, and reduce volatility most especially in terms of unemployment. It would also reduce the need for countries and large-scale holders of private capital to waste their surpluses on US treasuries and probably lead to increased investment in some of the poorer areas of the world that are now capital starved.

The voices of currency reform are quiet in the United States, for now, but should grow louder as mass unemployment becomes the norm. Opposing them will be 'Wall Street' and politically powerful financial interests who benefit from dollar recycling and their relationship with the Federal Reserve. An overvalued dollar relative to the strength of production and output means a hollowing out of the country and an erosion or collapse in manufacturing and its associated multipliers. This unvirtuous cycle is well under way. There are no more domestic bubbles left to blow, and even if there were, domestic politics have become so chaotic that it is unlikely they will be implemented on the fiscal side.

The major obstacle to an expansion of Special Drawing Rights as an alternative to the Dollar comes from US-centered super majority provisions written into the IMF Articles of Agreement.

Article XV - Special Drawing Rights:

The method of valuation of the special drawing right shall be determined by the Fund by a seventy percent majority of the total voting power, provided, however, that an eighty-five percent majority of the total voting power shall be required for a change in the principle of valuation or a fundamental change in the application of the principle in effect.(1)

Any significant expansion of SDR's has to come with an eighty-five percent vote, with the United States holding 16-17% of total votes. It's a de facto veto.

Article XVIII - Allocation and Cancellation of Special Drawing Rights:

Section 4:
(d) An eighty-five percent majority of the total voting power shall be required for decisions under Section 2(a), (b), and (c) or Section 3 of this Article except for decisions under Section 3 with respect to a decrease in the rates of allocation.

Section 2:
(a) Decisions of the Fund to allocate or cancel special drawing rights shall be made for basic periods which shall run consecutively and shall be five years in duration. The first basic period shall begin on the date of the first decision to allocate special drawing rights or such later date as may be specified in that decision. Any allocations or cancellations shall take place at yearly intervals.
(b) The rates at which allocations are to be made shall be expressed as percentages of quotas on the date of each decision to allocate. The rates at which special drawing rights are to be cancelled shall be expressed as percentages of net cumulative allocations of special drawing rights on the date of each decision to cancel. The percentages shall be the same for all participants.
(c) In its decision for any basic period the Fund may provide, notwithstanding (a) and (b) above, that:
(i)the duration of the basic period shall be other than five years; or
ii)the allocations or cancellations shall take place at other than yearly intervals; or
(iii)the basis for allocations or cancellations shall be the quotas or net cumulative allocations on dates other than the dates of decisions to allocate or cancel.

Section 3:Unexpected major developments
The Fund may change the rates or intervals of allocation or cancellation during the rest of a basic period or change the length of a basic period or start a new basic period, if at any time the Fund finds it desirable to do so because of unexpected major developments.(2)

It's also a sweet deal for U.S. financial interests and Washington's imperial power in terms of IMF governance.

The Fund shall have a Board of Governors, an Executive Board, a Managing Director, and a staff, and a Council if the Board of Governors decides, by an eighty-five percent majority of the total voting power, that the provisions of Schedule D shall be applied.(3)

Schedule D, on 'Council' begins:

Each member that appoints an Executive Director and each group of members that has the number of votes allotted to them cast by an elected Executive Director shall appoint to the Council one Councillor, who shall be a Governor, Minister in the government of a member, or person of comparable rank, and may appoint not more than seven Associates. The Board of Governors may change, by an eighty-five percent majority of the total voting power, the number of Associates who may be appointed.(4)

Therefore, the United States is able to contribute to the IMF at a rate beneath its current global GDP while having veto power over governance and major decisions. Veto power has been historically true for core Europe as well, and will to the extent it remains politically unified - something the EU has facilitated. With the continued compound growth of surplus capital, especially in developing regions, it seems almost inevitable that rival organizations to the IMF will eventually surface unless concessions are made. But eventually is a long time, and political progress in East and South East Asia - areas of rapid growth - remains fragmented. As dollar reserve status therefore continues, it seems that a credibility crisis for the political class of the United States stemming from chronic undercapacity and unemployment is more likely to develop first.

Lastly, one must consider whether a SDR or Bancor system is even feasible within a capitalist world-system of nation states. It would mean giving up direct currency control and a significant measure of sovereignty - a possible no-go politically. From this we could conclude that a Marxian dialectic contradiction is at play that will eventually threaten the entire system with collapse.

1IMF-Article XV - Special Drawing Rights
2Article XVIII - Allocation and Cancellation of Special Drawing Rights
3IMF-Article XII - Organization and Management
4IMF-Schedule D - Council
5IMF Quotas and Voting Share
6'Soros - bring China into the creation of a new world order' - Financial Times; Interview
7'Reform the International Monetary System' - Zhou Xiaochuan, People's Bank of China

Links

1'U.S.-Saudi Arms Plan Grows to Record Size' - WSJ;Entous

Oil and petrodollars for weapons and political support to one of the most odious governments on the planet.
----
Adolph Reed on Obama, in 1996: "In Chicago, we've gotten a foretaste of the new breed of foundation-hatched black communitarian voices; one of them, a smooth Harvard lawyer with impeccable do-good credentials and vacuous-to-repressive neoliberal politics..."

Pretty much on the mark.
----
2'China and a new world economic order' - Asia Times; Henry Liu

Too bad the Chinese elite is nearly as rapacious as the American one.
----
3'Personality Set for Life By 1st Grade, Study Suggests' - Live Science.com
----
4'China is a barometer on whether Israel will attack nuclear plants in Iran' - Christian Science Monitor

Links

1'Antibiotics' efficiency wanes due to global spread of drug-resistant bacteria' - UK Guardian; Boseley
If there is no profit incentive for the private sector to research new antibiotics it needs to be done by the public sector or the U.N.
-----

2'Hungary Sees No Problems in Refinancing Its Debt Through 2012' - Bloomberg; Balazs
3'Hungary Defies IMF and European Authorities ' - Counterpunch; Weisbrot

The IMF is not nearly as powerful as it was even ten years ago.
-----

4' Top thinker says China may 'push the US out of Asia' - The Australian; Kelly

There seems to be a contradiction in the article. On one hand Professor Mearsheimer is quoted as saying: "I think that China cannot rise peacefully and that this is largely pre-determined" while on the other: 'The presence of nuclear weapons, he (Mearsheimer) argued, meant there would be "no shooting war" between the US and China.'
-----

5Pictures from the Hong Kong.

The Trade Deficit Soars

Via Angry Bear:



Nothing complex about it, the US dollar has to depreciate to match current US productive output. Otherwise a long-term decline in private U.S. employment is almost inevitable. The reason the dollar cannot depreciate is because its value in international finance and transaction is much higher that its value as a measure of domestic productivity. This is most visibly represented when looking at foreign exchange reserves, though they represent but a fraction of the dollar's international usage. There was a reason that Keynes proposed the Bancor some 60 years ago, but there are also good reasons to believe it is not feasible within the capitalist nation-state system as currently constructed. More instability lies ahead, but opportunity, for as elites quarrel their ability to control events slides precipitously.

1'Reform the International Monetary System' - Zhou Xiaochuan, People's Bank of China

The U.S., The Long Slide Down

The U.S., as things stand now, looks destined to be an empire that rots from the inside out. And the American people do not currently have the political, intellectual or historical background to analyze what is going on. So we will have more senseless attacks on the vulnerable, more finger pointing about the lazy unemployed, public sector workers or illegal immigrants. Cowardly scapegoating based upon the political ideology of 'me', in other words, no political ideology at all.

But it has gotten to the point where it is impossible for a country that represents about 15-17% of global manufacturing output, and a bit more of GDP, to continue to support the demands of reserve currency status. The dollar is too strong relative to America's productive output and quality, and because of this the country's manufacturing capabilities will continue to slide if not collapse. With it comes lost employment and the multipliers that come with manufacturing, as well as its long association with rising living standards. The U.S will have permanent structural unemployment, or employment supported by massive government borrowing and spending on a more or less permanent level. Which will create an instability of its own.

So as American financial power through the dollar's role in international trade, especially commodities and most especially oil, becomes even more concentrated, leadership will face multiple domestic credibility crises from which there is no economic solution within the current framework. At the time of Bretton Woods the U.S. represented some 50% of total global industrial output; it was productive enough to support a gold standard. Then it wasn't. Kissinger's petrodollar deal in the mid 70's forestalled crisis, but it was done from a position of fundamental weakness. That weakness has grown into a gaping hole evident in every walk of American life. The US economy is collapsing from within bringing with it unknown but probably radical political consequences. Ultimately, it will be up to the population - the masses - to determine the future.

Castro Says What the Rest of the World's Leaders are Thinking

If Obama approves an attack on Iran, (Castro) added, he will trigger a war that will spread through the Middle East and Asia and cause ``the instantaneous death of hundreds of millions people, among them an incalculable number of people in his own country.''

The ``established order of the planet ... will inevitably collapse, the reigning social order will disappear abruptly'' and all currencies will be worthless, he added.(1)

The quandary for Washington on Iran is that it is too big and too cohesive as a nation, with a historical identity, to simply shock and awe in submission. The U.S. achieved a limited victory in Iraq and then only by drenching itself in blood. It can do nothing about Iran short of a nuclear strike or a carpet bombing mission using bunker busters. Iran has retaliatory capabilities of its own, as well as a mutually beneficial and almost co-dependent trading relationship with China. Oil for refined gasoline. And as the previous day's post indicated, the economic muscle is simply not there for US imperialism anymore. They have only raw military power, and that mostly suited for war against an enemy, the USSR, long gone. Will the ruling class of the United States slip peacefully into the night ? It's very doubtful they will of their own volition.

1'Castro: Obama Can Prevent Impending Nuclear Holocaust' - Miami Herald; Tamayo

The Steep Decline in Manufacturing Portends Deep Trouble for U.S. Imperialism

U.S. manufacturing production as a share of global GDP has collapsed over the last decade. The country's economy and its stock market have not yet shaken the ending of the 1990's computer technology and dot-com boom. Unless U.S. capitalism finds a driver of private investment - for private is what it insists on - and is able to increase domestic productive capacity with that investment, the future of its working class (separate of radical action) - and ultimately the country and the imperial position of its elite is in deep trouble. Production is the heart of an economy, and historically other sectors have geographically followed production. There are smart people everywhere and, given a chance, factory workers' kids can learn Calculus (tm) just as well as the children of the elite. Any group of people can do design with training and access (which geographic proximity brings), they can certainly can do marketing. And from production comes the economies of culture, and finance - and lastly, political shifts. American culture is predominant around the world because the U.S. held 50 % of world productive output following World War 2. No manufacturing, then no Hollywood, no McBurgers, and the like. No manufacturing, then ultimately no Wall Street, which would not have become the center of global finance if the U.S. had not been the world leader in manufacturing starting about 1890 , a position it will shortly give up to China.
--
Notes: The ISM manufacturing increases seen in the current 'recovery' come from a smaller base than even 2008, considering the auto bankruptcies. So they will probably not represent any kind of cumulative increase absolutely and especially against the world.

While there were many speculative aspects to the 90's boom, it did also produce tangible benefits at all levels of the economy. Hence, the avoidance of the term bubble in association with it. It wasn't all about a 'granite countertop' mania, as the housing bubble was.

---
Source: UN National Accounts

The Pentagon Stirs Up Trouble in Asia

I interpret the long string of hornet's nest-poking over the last few months as push back by the Pentagon over any proposed War Department cuts. Consider the proposed naval exercises in the Yellow Sea, the real ones on the flip side of the Korean Peninsula, and Hillary Clinton's ambush at ASEAN over the South China Sea.

If we truly have a scary arch-enemy in China that needs to be corralled, then it's time to beef up on some new weaponry, right ? As Fox News suggests:

"The emerging Chinese anti-ship missile capability, and in particular the DF 21D, represents the first post-Cold War capability that is both potentially capable of stopping our naval power projection -- and deliberately designed for that purpose," said Patrick Cronin, senior director of the Asia-Pacific Security Program at the nonpartisan, Washington-based Center for a New American Security....

Should the U.S. adjust its investment from air to sea, and boost research and spending in submarines? And do pinpoint accurate missiles alter the military's strategy, since formerly safe bases in the area are equal targets?(1)

So, the Pentagon sunk trillions of dollars into aircraft carriers that sit on the water like half-witted ducks, at least as compared to technology that will exist in the not-to-distant future. Time to build new and better weapons and ships, enough to obliterate human life twenty times over.

1'Chinese 'Carrier-Killer' Missile Could Reshape Sea Combat' - Fox News

About Those Body Scanners

For the last few years, federal agencies have defended body scanning by insisting that all images will be discarded as soon as they're viewed. The Transportation Security Administration claimed last summer, for instance, that "scanned images cannot be stored or recorded."

Now it turns out that some police agencies are storing the controversial images after all. The U.S. Marshals Service admitted this week that it had surreptitiously saved tens of thousands of images recorded with a millimeter wave system at the security checkpoint of a single Florida courthouse.(1)

If this only affected the poor and working class then any complaints would pretty much be ignored. But scanners will probably end up pissing off too many people in the meritocracy and lower elite; there will eventually be a lawsuit or multiple lawsuits with an army of well-heeled lawyers. No one wants to take their child through one as some drooling TSA thug surveys the screen.

1'Feds admit storing checkpoint body scan images' - CNET; McCullagh

Wiki Leaks and the Future of Meritocracy

I have a held personal posit about the U.S. educational system for a while, namely, that many smart people were abandoning the hard sciences in the United States because of its close association with militarism. Coming from a family of mathematicians, one point was well drilled into me at an early age - to get the fat contracts and big pay be prepared to get money from the Department of 'Defense' (War, as it used to be called).

It's interesting that Julian Assange had a similar experience in Australia, and wrote an essay on it called "On the Take and Loving It' documenting the infiltration of militarism within the academic hard sciences. To paraphrase an interview I read, - he boxed himself into a corner - and Wikileaks was all he could come up with.

Whatever the future of WikiLeaks, and I suspect in a few years it will viewed as conservative and outdated, it possibly demonstrates that the U.S. government is losing the ability to recruit many of its best minds. (yes, Assange is an Aussie, but many WikiLeaks volunteers are American, and it's part of the same continuem.) A substantial percentage of very smart people do not want to work for an empire based on perpetual war, a government that cannot and will not provide employment for its population. Significant sections of the potential meritocracy are finding other things to do; it turns out many hackers are in that 'rebel' class, enough so that they have effectively humiliated the Pentagon and its trillion dollar budget by simply outsmarting them. It's not so hard to do when the opponent is increasingly discredited not matter how much they threaten.

All this presents a problem for the future of U.S. imperial dominance. By law, and for self-imposed security reasons, they can't import hard scientists the way a private company can. The increasing alienation from the population , the increasing though unspoken credibility crisis between Washington and the people could very well manifest itself in a lack of willing and available technical expertise.

Continuing Depression in Small Business Conditions Forecasts Hard Right Political Turn

While multi-national corporations have been reaping huge profits since the recovery in GDP began, small businesses mostly reliant on the domestic consumer have continued to be pummeled.

From Gallup:



Historically, and in the United States since World War 2, businesses reliant mostly on the domestic market have been more associated with the right-wing philosophy of low taxes, no social safety net and generally thinking about - maybe by necessity - profits in the near term. The Tea Party and Chamber of Commerce could be placed in this faction as it exists now. They stand in opposition to the banking establishment, Wall Street, and MNC's, whose leadership generally tacks more to the 'center', and is more involved with long-term U.S. geo-political strategy, though the funding of organizations like the Council on Foreign Relations. Though of course, there is overlap.

An enraged small business base, along with its political supporters , could be motivated enough to turn the elections in November. For though MNC's and Wall Street have large sway in terms of GDP, they are small numerically and don't reflect the financial position of the average American. If depressionary conditions continue hard-right figures in the Republican Party will gain traction heading into 2012. And never count out Palin, she isn't going away.

Does The Consumption Rate Matter ?

Quite a bit of fuss has been made over China's low consumption rate in some quarters. It is noticeable in the 'gap' that opens up in the graph between 1980 and 2008.



But I wonder if there is any correlation between high consumption rates and a rising standard of living. China's diminishing consumption rate has not stifled a rapid increase in living standards even if one strips out per capita GDP and only looks at household consumption. As the following chart shows, consumption rates dropped most every year between 2000-2008 while household per capita consumption was increasing.



China had a much 'healthier' consumption rate when it was among the poorest countries in the world. Low consumption in China may just correlate with large amounts of investment, i.e.. a large denominator - remembering that investment is generally the engine of a capitalist economy.

Seen in this light, high consumption rates in the West and low consumption rates in Asia over the last generation are basically a reflection of rates of investment. Or not. But I do question the notion that there is a 'normal' level of consumption that corresponds to an increased per capita GDP and standard of living. And that China must falter because of low consumption and high investment ratios. If China falters, in my opinion, it will be more likely because of weaknesses in its institutions and governmental set-up.

---
Notes: I am aware of the greater inputs theory, for instance described by Krugman before the Asian Financial Crisis. But growth in Asia was real and dramatic in the following decade as Asian economies rebounded quite strongly.

Consumption rate is defined here as Consumption/GDP.
---
Statistics from UN National Accounts Division

Yuan Put on Congressional Agenda

The House will begin hearings on the undervalued Yuan in September. Get ready for some camera inflated rhetoric ahead of elections. Originally Schumer was going to push for this 'Currency Reform for Fair Trade Act', in the Senate, regardless of what the House wanted, even if the legislation would then be still-born. The fact that the House has agreed to open debate is noteworthy and shows things are moving forward inexorably, though at the pace of molasses.

"There is no real question that China's deliberately undervalued exchange rate is unfair, contributes to global trade imbalances, and costs the United States jobs and economic growth, particularly in the manufacturing sector," Ways and Means Committee Chairman Sander Levin said in a statement.

"We must ensure that China's rhetoric translates into results that are meaningful and that the international trading system ensures fair rules of competition," Levin said.(1)

Yet, the Triffin Dilemma maintains that the U.S. dollar will always be overvalued as long as it is the reserve currency of world transactions; this will continue as long as Washington insists on projecting global hegemony over world affairs. This hegemony is best expressed not by its hundred+ military bases worldwide, but by its veto power in the IMF.

The flip side to the argument is, where would Asia be without the 7th Fleet and its umbrella of deterrence ? The history there is one of nationalism, xenophobia, and militarism - much like Europe before it blew itself up. In a world of capitalist nation-states, be careful what one wishes for when it comes to a hegemon in decline.

1'U.S. House panel sets Sept hearing on China's yuan' - Reuters