Olympics Stuff (6 Months After)

I doubt many people care that Michael Phelps smokes weed occasionally, but there are still a few of the "Phelps Image as Hero Hurt by Photos" stories. Some people feel they have to pretend to be upset, for the 'sake of the children'. But, it seems there is less trivial moralizing than there would have been a few years ago, because it's so obvious we have bigger problems.
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Also read that the "Bird's Nest' in Beijing is in disuse:

"The only confirmed event at the 91,000-seat stadium this year is Puccini's opera "Turandot," set for Aug. 8 — the one-year anniversary of the Olympics' opening ceremony. The stadium has no permanent tenant after Beijing's top football club, Guo'an, backed out of a deal to play there."

The Olympics have become a big money pit, in which countries build things they don't have much use for, at the expense of their social safety net. In Athens, host of the 2004 Olympics:

"many of the venues are still vacant ... promised parks never materialized, and new transportation infrastructure has caused problems like flooding and increased traffic... Citizens question the event's $15 billion price tag – most of it paid for by the state."

The Beijing Olympics were celebrated as a cultural milestone and, for this reason, the $ 40 billion cost was generally accepted by the mainland population. But, the U.K. population will not be so accepting for the 2012 Games, given that they are going into a major recession, and have hosted the Olympics before. Which is fine. Hopefully the Olympics will become more centered on the athlete, and less on the production value - with its resulting expense.

Does Manufacturing Matter ?

In 1970, U.S. manufacturing represented 28 % of world output, while U.S. GDP was 31 % of world output. After several peaks and valleys over the ensuing decades, by 2007, manufacturing had slumped to just under 20 %, while GDP was at 25 %.

The separation of the two outputs, relative to world production, widened dramatically starting in the mid 1990's. Manufacturing/World Manufacturing relative to GDP/World GDP was at at .894 in 1995, fell to .854 in 2000, and .786 by 2007. This 'gap' in the economy was filled in through financial speculation, grown through the watering of deregulation and easy credit. The most visible aspects of this were the equity and housing bubbles.

It remains to be seen whether the financial sector can rebound and remain durable, in an economy whose manufacturing base is dwindling. Or, if manufacturing needs to be healthy for other parts of the economy to be healthy. I would bet on the latter.


source of statistics

Putin Calls for the End of the Dollar's Reserve Status

From the BBC:

Russian Prime Minister Vladimir Putin has told the Davos economic forum it is dangerous for the world to over-rely on the dollar as its reserve currency.

He called for a range of reserve currencies and said he envisaged the emergence of several strong regional currencies in the future.

The emergence of regionally based reserve currencies would create more political instability, not less. It would beget trading blocs, which would lead to the kind of economic rivalries that capitalist powers had during the first half of the 20th century, ending with World War 2. Capitalism is not a very stable economic system to begin with, as its components seek constant expansion and productivity growth. Without the unifying backdrop of dollar-based assets, there would be an intensifying of rivalries and trade disputes.

One Consequence of the Equity Crash

Private foundations have drastically cut back on their grants and donations. A local arts organization I work with had their annual allotment cut by 70 %.

Only A Week,

but it looks like the Obama administration is making some significant errors, which may ultimately derail the success of his first-term. Incrementalism, as expressed by an $ 800 billion economic stimulus package, will not help enough people get work. Compromise with a weak Republican minority will not shield Obama from blame if the stimulus fails. He should just go all-in, if this is what he believes in, and forget the Republicans. Krugman writes:

Whatever the explanation, the Obama plan just doesn’t look adequate to the economy’s need. To be sure, a third of a loaf is better than none. But right now we seem to be facing two major economic gaps: the gap between the economy’s potential and its likely performance, and the gap between Mr. Obama’s stern economic rhetoric and his somewhat disappointing economic plan.

On the flip side, Obama has discarded incrementalism in Afghanistan. Troop strength is set to increase by 30,000 in the "Graveyard of Empires", with more probably coming later. In conjunction with this, are the repeated missile strikes into Pakistan. A good number of people are getting killed in these strikes, with seemingly little operational damage being done to the leadership of the Pashtun-oriented resistance. Juan Cole writes, regarding Pakistan :

If he thinks the drone attacks on FATA are a painless way to signal to the world that he is no wimp, he may find, as Lyndon Johnson did, that such military operations take on a momentum of their own, and produce popular discontents that can prove deadly to the military mission.

Prosperity is Not Just Around the Corner

From David Rosenberg, Chief Economist for Merrill Lynch:

"My sense is that many clients are totally underestimating the extent of the trauma that exists on the household balance sheet from this credit collapse and asset deflation,” said Mr. Rosenberg.

In a report that came the same day as widespread layoff notices, Mr. Rosenberg said: “We now have 30 per cent idle capacity in the manufacturing sector, which we've seen only one other time in the past five decades. That means that spare capacity in the economy is now so big that it would take six years of 4 per cent real GDP growth or alternatively three years of 5 per cent real growth just to get the economy back to full employment.”

The market's rapturous celebration of a dip in housing inventory shows that too many believe "prosperity is just around the corner". It was the housing bubble which fueled what little economic growth there was, from 2001-2007. The collapse of this bubble, and the resulting loss of equity and jobs, will leave the U.S. consumer deep in the hole for a long time. The permanent scar will be a lack of confidence in an ever-improving American standard of living. We have had two spectacular bubbles crash in less than a decade and economies just don't bounce back from that in short order. Couple this with an erosion of the social safety net, under the mantra of "shared sacrifice", and the U.S. consumer is going to become a lot more like their savings-minded counterpart in East Asia.

The Pressures for Protectionism

What is often missed during academic debate on the matter, is that there is a substantial constituency in the U.S. that favors protectionism. Actually, they would not even call their policy ideas protectionism, but rather, Fair Trade. They include labor unions, and a broad swath of domestic manufacturers who are under the umbrella of NAM , or National Association of Manufacturers.

The opinion piece, "Depression is Already Here", can be placed in the context of this constituency, and outlines their arguments well. (Although other aspects of the article are more speculative, such as its analysis of the New Deal and wage equity.)

Excerpts:

If President Obama is not willing to take tough steps to redress the trade imbalance with China and reduce oil imports, together the Persian Gulf oil exporters and China’s sovereign wealth funds may be able to buy the New York stock exchange eight years from now. Americans, outside those working for the New York banks that facilitate this sellout, will find their best futures waiting on tables for Middle East and Chinese tourists.
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The dollar is too strong against the Chinese yuan, Japanese yen and other Asian currencies. The Chinese government intervenes in foreign exchange markets to suppress the value of the yuan to gain competitive advantages for Chinese exports, and the yuan sets the pattern for other Asian currencies. Similarly, Beijing subsidizes fuel prices and increasingly requires U.S. manufacturers to make products in China to sell there.
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The choices for the new president are simple. It’s either recovery or depression. Fix the banks, trade with China and energy policy or become America’s Nero.

As Goes California,

So goes the nation ?

California's unemployment rate surged to 9.3 percent in December as employers cut 78,200 jobs, pushing joblessness to a level not seen since 1994, the state Employment Development Department said Friday.
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"Economically we're in uncharted waters," Haveman said. "We haven't seen anything like this certainly since the end of World War II and maybe since the Great Depression."

Besides being ground zero for the housing bubble, California is essentially ungovernable now. Tax raises require a 2/3 vote , and state finances are tied up in a number of proposition measures that were passed by referendum.

Plans to Use Military During 'Civil Unrest'

Persistent stories about deploying the U.S. military on American soil. If I didn't know better, I would say it almost feels like the rollout of a product, or floating an idea to get the public's reaction.

The stories have been published , or based, in the border regions of the South West - and often center around Mexico's spiraling drug war and its potential for spillover. Yet their origin, an Army College report titled "Known Unknowns", places a military deployment in the context of civil unrest. That sounds more like protests, or rioting, not crime. Incidentally, crime in U.S. is way down now, on a per capita basis, from the early 1990's.

AP: "Feds Plan 'Surge' If Mexican Drug War Spills Over"

If Mexican drug violence spills across the U.S. border, Homeland Security officials say they have a contingency plan to assist border areas that includes bringing in the military. "It's a common sense extension of our continued work with our state, local, and tribal partners in securing the southwest border," DHS spokeswoman Amy Kudwa said Friday. Link

El Paso Times: "Unrest caused by bad economy may require military action, report says"

A U.S. Army War College report warns an economic crisis in the United States could lead to massive civil unrest and the need to call on the military to restore order. Retired Army Lt. Col. Nathan Freir wrote the report "Known Unknowns: Unconventional Strategic Shocks in Defense Strategy Development," which the Army think tank in Carlisle, Pa., recently released. Link

Arizona Business Times : "Ariz. police say they are prepared as War College warns military must prep for unrest; IMF warns of economic riots"
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Nick Dranias, director of constitutional government at the libertarian Goldwater Institute, said a declaration of marital law would be an extraordinary event and give military control over civilian authorities and institutions. Dranias said the Posse Comitatus Act restricts the U.S. military’s role in domestic law enforcement. But he points to a 1994 U.S. Defense Department Directive (DODD 3025) he says allows military commanders to take emergency actions in domestic situations to save lives, prevent suffering or mitigate great property damage. Link

Yuan and Dollar

Obama has long signaled his unhappiness with the valuation of the Yuan relative to the Dollar, and his Treasury nominee further emphasized that today.

Timothy Geithner, President Barack Obama’s nominee for Treasury secretary, said the new U.S. administration believes China is “manipulating” its currency.

As I wrote in an earlier post, Obama's political power base is different than other recent presidents, being geographically located in the Upper Midwest and Chicago. Economically, this means agriculture, domestic manufacturing, and unions. Protectionism does not have a negative connotation in these circles.

It does seem there is a power struggle among the political class in regards to the American - China relationship. An editorial by the war-criminal Kissinger represents the view that "the Sino-American relationship needs to be taken to a new level". However, if Kissinger is writing editorials, it indicates that he is on the outside looking in.

If international trade curtails substantially, I think it's quite likely that China will attempt to establish a regional trading bloc, with the Yuan as the dominant currency. It seems to be starting this process with the ASEAN countries, who surround a strategic choke point to the Indian Ocean. Kissinger mentions this in his editorial; "A frustrated China may take another look at an exclusive regional Asian structure, for which the nucleus already exists in the ASEAN-plus-three concept."

The unwinding of the current over-leveraged, unbalanced model, means that many countries will be looking twice at 'globalization'.

No One Could Have Known

About the housing bubble, and the over-leveraged U.S. consumer.

The Coming Financial Tsunami

By George Mullen
June 9, 2005
World economies, including that of the United States, have been built not only on a house of cards, but on a foundation of beach sand as well. The tide, which had been going out for some time, convinced us of the soundness of our financial structure and the brilliance of our government stewardship and individual decisions. However, the tide is now coming in again (via the Federal Reserve), and we are failing to grasp the magnitude of the danger before us. It is a tsunami.
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According to the National Association of Realtors, 36 percent of all new homes purchased in 2004 were secondary homes either for investment (23 percent) or vacation (13 percent). This is evidence of rampant speculation.

I knew many middle-class people in California that were buying houses as 'investments', using cheap credit and the equity on their primary residence.

Over the three years of this "supposed" economic recovery, wages have increased a meager 4 percent, a startling 10 percentage points behind the 14 percent average wage gain of the five preceding cyclical recoveries.
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By February 2005, Americans were carrying a record $803 billion in revolving credit card debt, up $40 billion in the past year alone. (Note: debt levels typically do not increase in economic recovery periods.)

Long-term wage stagnation is one of the key factors to this unwinding. The only way to grow an economy with stagnant wages is to make credit cheap and accessible. But eventually, if the money is not paid back, there will be a period of liquidation to cleanse the system.

This article is still one of the best primers for explaining the housing collapse and its domino effect on an over-leveraged consumer, and economy. Not a surprise that it was written from San Diego, which was probably the first housing market to peak and begin crashing.

Clean Up Crew for the Inauguration

After the party ...

For those serving the general public, however, this author found that poverty-wage day labor is being used to clean up the massive outdoor events. The job description recruiting for this work, seen through the window of a Labor Ready temporary staffing office in Richmond, Virginia, is worth quoting in full:

Time to be in branch: Will know Friday (Probably 5 am)
How Long Job Lasts: With travel time—15 hours plus / Please be aware travel time is not paid
Pay: $7.55 an hour
Job Duties: trash pickup / horse manure pickup (no joke!)
Dress Attire: Must dress warm—gloves/hats/scarves/extra liners/jackets. You will not be able to go if you don't dress warm.
LONG HOURS / TEDIOUS WORK / OUTSIDE IN FREEZING WEATHER / HIGH SECURITY / NO BAGS ALLOWED / PLEASE BE AWARE

I have actually worked for the above organization, but thankfully, not for long. In my experience, they were bottom-of-the-barrel for temp agencies, in terms of wages, conditions, and how the workers were treated.