US Resumes The Pointless “China Blame Game”

Business, China, Company Strategy, US

USdebtpostFeb2013

By John Richardson

IT IS human nature not to want to admit you are wrong. Nobody likes owning up to mistakes.

What is instead a lot easier is to look for someone else to blame when things start going very badly wrong against all your earlier expectations.

A good example might just have occurred in the US Congress earlier this week, when a bi-partisan group of Senate Republicans and Democrats introduced a new bill, “The Currency Undervaluation Investigation Act”.

Its aim is to force the US Department of Congress to level countervailing, or anti-subsidy, duties on Chinese imports because of the long-standing claim that the Yuan has been deliberately kept at an unfair low value against the US dollar.

There is also a suggestion being made by US legislators that such duties might even be broadened out to include other countries. A weaker Japanese Yen is, for example, said to have cost the US 900,000 jobs in 2013.

This could make it harder for the Obama administration to pass the Trans-Pacific Partnership (TPP) trade deal, which it has been negotiating since 2009, without making some concessions to bipartisan concerns about currency manipulation. The TPP is a proposed trade agreement between the US and Australia, Brunei Darussalam, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, and Vietnam.

But I could be wrong and might end up owing US politicians a big apology. It could instead be a case that they don’t even know they are wrong yet. I think this is more likely.

Here are some of the reasons why they are either busy blaming somebody else, or simply don’t get it at all:

  • In 1980, only one in 10 young US Babyboomers were still living at home with parents, according to the Pew Institute.
  •  But today one in five young adults are living at home with parents due to economic pressures.  This reduces the need for single family homes, and instead means multi-family units are now (as in the pre-Boomer era) around one-third of total housing starts. This goes a very long way to explaining why housing starts in 2014 totalled 1.006m compared with their peak of 2.068m in 2005.
  • Since 2000, 92% of population growth has been in minority communities.  And whilst the white population has a median age of 42 years (very similar to that of Europe and Japan), the median age of blacks is 33 years and for hispanics just 28 years.
  • This wouldn’t matter if the US was doing enough to tackle income inequality, but instead income inequality has increased over the last 20 years. Unless this trend is reversed it will be impossible to replace the lost “wealth effect’ of the mainly white Babyboomers. When they were at their peak earnings power in the late 1990s and 2000s, this explains why the US economy was going so well. But they are now retiring and so are spending a lot less money.

But for most of the time since the 2008 Global Financial Crisis, the demographic cracks have been papered-over by quantitative easing (QE). Fed policy has led to $1.2 trillion being spent on oil and gas production since 2010 alone and this investment has created 200,000 new jobs.

Now, though, as QE is wound back and real supply and demand fundamentals return to oil and gas markets, many of those jobs are in jeopardy.

This “papering over” hasn’t actually worked that well, though. If you look close enough the cracks should hit you right between the eyes.

Here is some more data to consider, from a recent study by the US Information Technology and Innovation Foundation (ITIF):

  • At the end of 2013 (the most recent year available) real manufacturing value added – the best measure of US manufacturing health – was still 3.2% below 2007 levels, despite GDP growth of 5.6%.
  • 2007 was the recent high-water mark for US manufacturing. Despite the on-and-off US recovery since June 2009, the ITIF study notes that “there are still two million fewer jobs and 15,000 fewer manufacturing establishments [in the US] than there were in 2007”.

The ITIF study reached the conclusion that “reshoring” – a flood of US manufacturing from overseas – was largely a myth.

Here is why: You cannot create a manufacturing recovery without enough local demand. And, at the moment, lack of policy initiatives to tackle demographics guarantee not enough demand.

Here is something else that US policymakers need to recognise: The winding down of QE has boxed other countries into a corner. As the dollar strengthens and “hot money” flows back to the US, they feel that they have no choice but to weaken their currencies.

US politicians might want to blame foreign countries for this – i.e. nobody forced them to ratchet-up debt to unsustainable levels when the US dollar was very weak and there was no prospect of a US interest-rate rise.

In response to this, though, I want to say these two things.

  1. What is done is done. Debt is debt and it has to be dealt with regionally or globally. It simply have to be written off.
  2. “People in glass houses shouldn’t throw stones”. The US sub-prime crisis, and now the $1.2 trillion spent on oil and gas, much of it wasted, shows how the US economy is also highly debt-driven.

Finally, and most importantly of all, I need to talk about China’s particular problems with QE.

It, too, like other emerging economies, is suffering from a stronger dollar as its export competitiveness declines. What makes this an especially big deal is that its economic growth is slowing very alarmingly as it attempts its boldest, most sweeping set of economic reforms for at least 20 years.

China has few good policy options left other than being forced into devaluing the Yuan in order to protect jobs and compensate for the unwinding of the “China carry trade”.

Sure, US legislators might decide to penalise China and other emerging countries for doing what they strongly feel they simply have to do.

But the end result would be a rise in trade protectionism that I have long identified as a risk as the New Normal further develops. This will benefit nobody because when everybody throws up trade barriers everyone suffers.

A further longer term worry US politicians should, surely, also be this: Take on China at your peril as it is set to become the dominant global economic superpower. The “New Silk Road” project supports this argument. Do business in cooperation with China or do not do business at all.

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