Politick

Calif Recall Presages - Direct Democracy

The SF Chronicle ran several excellent articles today on the   recall and what it means.  Polls show that the race is coming down   to Davis vs. Ahhnold, with the margin in favor of  recall beginning to widen.  The Gallup Poll showed it began at 70%, faded to 53%, and now seems to be at 63% and widening; overnight party polls showed it peaking at 58%, fading to close to even, and now holding at 53%.  The other candidates are fading, in particular the other democrat in the race, Cruz Bustamonte.  Ahhnold did well enough at his one debate to push his main opponent, State Sen. Bill McClintock, into the background. 

The Chron did its best in the series of article to prop up its candidate, Davis, by showing that Calif was not in as bad a shape as people think. Of course, they skipped over that little problem of a $38B overall deficit and a $8B operating shortfall of funding normal operations.  The recall is energizing voters. Registrations are up, and turnout may rival a presidential election. 

Phoney Recovery?

Prechter exhorted the faithful this week to resist the temptation of wave 2 bullish optimism, as wave 2's are wont to cause. He compared the statistics of prior recoveries to today's. The recoveries of the period from 1949-1989 were quite strong; the recovery after the Bush I recession of 1991 was middling, and the current recovery is downright weak, no more than "a temporary respite within a major bear market." We continue to have a 'recovery' which is losing jobs at a rate not seen since the 1930s. We continue to have economists extrapolating from a slight pop in GDP growth in Q2 that was largely caused by a one-time event - the Iraqi War - an event which adds to GDP statistics when it truly should be subtracted, because war expenditures are literally the shredding of wealth into pellets of lead in the ground.

Rush Limbaugh commented today that the economic growth of the end of the Clinton Era was phoney, as history has shown much of it to have been based on fraud and deception. Rush has an axe to grind, and grind it he will. Zoran believes that bear markets are <em>caused </em>by the reaction to such excesses at the end of a bull market, as the market pulls back due to growing distrust. Government statistics since the beginning of this bear market have been revised quite frequently, usually downward, calling into question the honesty of the initial figures in the first place. It is of course only the initial figures which get widely reported and remembered.

In Silicon Valley, the signs of a recovery appear first in chips, later in hardware, and last in software and services. The chip business has been solidifying, particularly in consumer electronics. Yelnick has noted how the home refinancing (ReFi) business has provided continued consumer credit, and consumer spending has been keeping the economy afloat. It is no surprise then consumer chips have seen increasing demand, but not other chip sectors. ReFi's are way down from their peak in June, and it is now very unclear if the consumer spending binge will continue. Will the tech recovery be stillborn?

Yelnick's view is that the legitimacy of the recovery will be revealed in Q4, when all the various levers will have played out: Bush's tax rebates, Bush dividend tax cut, Greenspan's interest rate cuts, consumer mortgage ReFi's, and Greenspan pump-priming in equity markets. In particular, we will see if consumer spending continues to ramp, or diminishes with the drop in ReFi's. One can hope that business spending begins to recover and fill the gap. The statistics will begin emerging in the new year. The Big One may miss its expected window in October and come with a vengeance right smack dab in the primary season of the 2004 election.

Recall Bush?

Well, it hasn't come to that. But his poll numbers are plummeting and his popularity is evaporating as fast as his Dad's. Today's WSJ had a commentary called "Bush's Talk About Spending Discipline Is So Much Hot Air" next to a news report that the deficit would crest $500B shortly. The out-of-control spending involved Medicare, AIDS in Africa, homeland security and of course nation building in Iraq, Afghanistan, Liberia, etc. This from a Republican! Maybe Compassionate Conservative means War-Mongering Liberal Without Restraint.

The stock market implication is trouble ahead as the social mood is turning from momentarily optimistic (wave 2!) to dour and soon downright sour, and rightly so given our leadership. The Calif recall is still showing most want the Gov to go. He just signed a bill he had twice vetoed - allowing illegal aliens to have driver's licenses - to pander to the Latino vote. His Lt Gov who is running took an enormous campaign contribution from Indian Casino owners, who in general not are Native Americans (guess who they may be), and had to give it to charity to escape the public outcry. This is craven, blatant political corruption. If the Gov escapes recall, woe to California - he will be as out of control as, well, the Prez himself!

Senate Threatens China with Tariffs, Shoots off Big Toe in Process

Today a senator introduced punitive tariffs to force the Chinese to revalue the Yuan. Is this good policy?

It certainly is risky - it is the type of attitude that happened in the 1930s with the Smoot-Hawley tariff that led to a beggar-thy-neighbor death spiral of world trade. Not a surprise for the Yelnick worldview, as the social mood now most resembles the early '30s, and we shouldn't be surprised if we recapitulate the mistakes made then.

It may not be in our interest. The advantage the US gets in seniorage (being the world currency) is so profound it actually makes sense to let the Chinese keep their Yuan cheap. We buy physical things for paper, and they either hold the paper - so the physical things cost virtually nothing - or they recycle it into the world economy by buying oil or whatever. The more they build up reserves, the more we get *free* stuff. (We can be concerned over outsourcing our core advantages, but the value we save in cheaper imports creates new skills elsewhere in the economy, the mystery of free trade.) The Chinese are in no position to pull out of US bonds - where will they put their reserves? Anything they move into will be bid up, and could come tumbling down in value. They need to have US reserves to trade in the world economy, and if they move their reserves and lose value, they are worse off.

It may set in motion forces which have worse consequences. The French understand the value of seniorage, and have been trying to get the oil trade switched to Euros. Iraq went along with that! And I think so did our hemispheric partner, the Columbians. Only our closest friends! But few others. The Chinese would need to create an alternative reserve currency, or move from Dollars to Euros as part of a broader movement away from the Dollar, to preserve value. Hard to do, but probably being discussed between the French, Germans, Russians and Chinese as a consequence of US unilateral action in Iraq. (Sometimes the consequences of an action like Iraq are hard to see and years away, but nevertheless could have enormous negative impact on the US, and once in motion would be hard to stop.)

It also may prove unnecessary to force them to revalue. The pressure of large reserves at low interest rates will cause them to have an increasingly difficult time holding the Yuan where it is, since the reserves need to be recycled for Chinese imports or reinvested inside China; holding them means the government is draining wealth from their economy. (Ponder the value of sitting on a pile of gold, and not reinvesting it.) I suppose a people can live at low wages and postpone their economic improvement for a considerable period of time, but eventually they see the big city and want a piece of the action. China has a history of unrest, and does not want to stir up the up-and-coming.

Right now the trade statistics show an increase in Chinese imports, which suggests the reserves are being recycled and the people inside are beginning to consume to enjoy their new-found wealth.

All that said, I think the world economy would be better off if the Yuan were to float relative to the Dollar as Chinese reserves creep up, whether through a floating currency as in much of the world, or through a world currency/gold standard which has automatic mechanisms to readjust based on relative reserves and growth rates.

An intriguing question is how did it come to this? In 1996 there were rampant rumors and investigations of Clinton taking illegal contributions from the Chinese Govt in return for certain favors. Most of the focus was on leakage of US sateliite and military secrets. Maybe they were looking under the wrong rock, or not enough rocks. Around that time the Chinese cheapened their currency from 5 to 8.3 to the $. Coincidence? The US did not respond. The consequence of that move was to undermine the Four Tigers and cause the Asian Flu that almost pulled the world financial system down in 1997. The "fix" was Greenspan pumping liquidity into financial markets, which action, combined with further pump priming around Y2K, fueled the manic blowoff of 1998-2000 and led to our current doldrums. I hope Clinton thought the money worth it!

The law of unintended consequences reigns supreme in the land.