15 minutes reading time (2984 words)

Strategic Global Intelligence Brief for July 20, 2018

Short Items of Interest—U.S. Economy

Claims for Unemployment Fall to Five-Decade Low
In yet another sign of a really robust labor market, the rate of new claims for unemployment have hit a fifty-year low. There are many permutations involved with tracking unemployment—for an economy to be truly benefiting from the increasingly low rate of joblessness, there have to be several factors in play. For example, there are two ways an economy can see low rates of unemployment—lots of hiring or very little firing. In truth, it is great if they are both in play, but usually one dominates the other. There have been many times when hiring has been up, but so has firing. That means that senior-level people are losing jobs and junior-level workers are gaining. It means losing better-paid jobs for less well-paid jobs—that doesn't advance the economy much. The fact that there has been little firing would seem to suggest there may be more preservation of those well-paid jobs.

Car Industry Fights Back
The threat by Trump to impose stiff tariffs on the importation of vehicles from Europe (and other nations) to the U.S. has galvanized the industry in a way that has not been seen in a while. This is a case of an industry that has successfully adapted to the changes in the world over the last several decades and is now facing an action that would undo all that has been accomplished. In very simple terms, the sector has developed a truly global system of assembling a vehicle from parts and assemblies sourced around the world. This has allowed the automobile to be within the reach of nearly everyone in the developed world and much of the developing world as well. Setting up these barriers will mean a loss of close to 800,000 jobs in the U.S. and could double the price of cars sold in the U.S. These assessments are coming from a variety of groups that study this market. This explains the urgency of talks between Trump and the carmakers.

Don't Blame the Economy This Time
It has been repeated often that when it comes right down to it the voter reacts to economics, but this assumption is being tested this year. The reason that "culture wars" seem to dominate this mid-term is that most people are doing OK as far as their economic status is concerned and they are indulging other issues. With jobless rates at record lows, economic growth at respectable numbers and only distant threats of inflation, they have become complacent. That attitude may not survive a whole lot longer, but for now it seems to be a factor.

Short Items of Interest—Global Economy

Chinese Companies Start to Shift
As the tensions between the U.S. and China intensify, the Chinese business community is not standing by idly. There has been a rapid and significant shift in production into parts of Southeast Asia as companies seek to avoid the tariffs and barriers the U.S. has been threatening. This will not help the U.S. lower its global deficit, but it would diversify it. The Chinese companies would be able to slide production between China and these other nations according to the whims of the U.S.

Tweets Damage Dollar Value Again
Once again, the dollar has been slapped around as President Trump has opined on the activities of the Europeans, Chinese and Japanese when it comes to their currencies. He accuses them of currency manipulation although nothing they have done meets the definition. The assertion is that these countries are keeping their interest rates low while the U.S. has been raising them. This does indeed give these states a trade advantage, but the reason for the rate differences is simple enough—a U.S. economy that is likely growing at close to 4%, while they are struggling to get past 1% on an annual basis.

Some Hope on Ireland
There are some signs that Europe is starting to loosen up on the issue of Ireland and Northern Ireland—the single stickiest issue that Brexit deals with. There is nothing firm yet, however.

What Is at Stake With Trade Wars?
President Trump has escalated the tensions between the U.S. and China again and this has sent the global markets reeling as well. It seems that every week, there is a nice little surge in activity around the world that subsequently gets halted by another round of political invective. Unfortunately, trade conversations are immensely complex. It is nearly impossible to assert that any given action is universally bad or good. There will be winners and losers regardless of the decisions made. That said, there are some immediately obvious impacts that have left whole business sectors in serious disarray. If the latest threats issued by President Trump are carried out, there will be a lot to lose in the U.S. economy as well as with the rest of the world.

Analysis: The latest salvo is a threat to impose tariffs on everything the Chinese sell to the U.S.—all $500 billion worth. The motivation is the same as it has been throughout this debate. China is accused of "cheating" the U.S. and these tariffs are simply designed to "level the playing field." It is simply not that simple and never has been. China has developed a surplus with almost every country with which it trades because the country has long had much lower production costs. The wages in China are far lower than in the U.S. or Europe, the regulatory burden is far lighter and the government actively supports the export sector with everything from subsidies to tax breaks. In truth, China also cheats with its failure to protect intellectual property rights and its moves to restrict the ways that U.S. companies are allowed to do business. To be equally fair, the U.S. engages in some of these actions as well—every nation does to some degree as every nation wants to develop and maintain a competitive edge.

The bombast from President Trump implies that cutting off Chinese exports to the U.S. would benefit U.S. manufacturing and business in general as this would mean more opportunity for U.S. companies. In the real world it doesn't work that way. Much of what we now import from China has not been made in the U.S. for years and even decades. The U.S. will not suddenly start producing these cheaper consumer goods, they will simply be imported from some other nation the U.S. has not targeted, but they will likely be more expensive than the Chinese alternative. That simply means that U.S. consumers pay higher prices for goods that are coming from India, Honduras or Nigeria. There are also many products from China that go into a finished assembly in the U.S. These parts would either be very expensive or would have to be sourced from some other nation. Again, the U.S. consumer takes the hit.

Beyond the issue of what the U.S. buys from China, there is the fact that China will retaliate by setting tariffs and restrictions of their own. That hits several key sectors of the U.S. economy—most notably farming. China has been a major market for U.S. farm output for years. China now threatens to cut that off. Finding alternatives for soybeans, wheat, corn and the like is far easier than finding replacement sources for the things we buy from China. We also sell commodities like coal and ore, and we sell machinery and high-level material that China will be likely to simply buy from Europe or Japan.

One point that should be obvious but apparently isn't revolves around who is buying what. It isn't the Chinese government selling to the U.S. government or vice versa. These are individual companies that are trying to make profits. They have to find ways to control their costs at the same time they meet demand. The U.S. company that buys from China is getting a product of acceptable quality at a price that allows it to sell in the U.S. If it loses Chinese sourcing, there is no guarantee it can get the quality and price needed. If it is too expensive for U.S. consumers or is of poor quality, that company in the U.S. shuts down. Trade is a symbiotic relationship and doesn't lend itself to the kind of black and white thinking manifested by the Trump team.

Dramatic Decline in North Korean Economy
There has been some level of confusion as to North Korean motivations ever since the flirtation began between Trump and Kim. It was only a few months ago that a defiant North Korea was lobbing missiles all over the Pacific and threatening to attack Guam. Then, there was a flurry of diplomatic overtures culminating with the face-to-face between the two. It is still not clear what made President Trump want to go down this road, but it is now clearer what has been motivating North Korea.

Analysis: The economy of North Korea has taken a severe dive—the worst in over 20 years. The sanctions that have been imposed by the U.S. and allies in the region have started to bite hard as the Chinese have not elected to pour resources into offsetting them. This kind of economic collapse is enough to set a political coup in motion. That seems to have forced Kim's hand.

What Happens When Central Banks Are Not Independent?
The major central banks (and most of the minor ones) are all independent of the politics of their country. The dominant players in the world are the U.S. Federal Reserve, Bank of England, European Central Bank and the Bank of Japan. There are others that play significant roles (Bank of Canada, Bank of Mexico, Reserve Bank of India, Reserve Bank of Australia, etc.). However, some major banks are not as fully independent as these—for example in China and Russia. There are also banks that are completely at the mercy of the political leadership with many economic disasters that can be traced to this lack of control over the powers that be.

Analysis: The pattern is nearly always the same. The political leaders want growth at all costs and want the central banks to make lending as simple and easy as possible. The surge feels good in the beginning, but sooner than later, there is too much money and prices start to climb as shortages and bottlenecks develop. In the end, you see nations battling inflation rates that climb to 8% and far beyond. Some nations crush their economies with rates of 1,000% and higher. In these extreme cases, the value of the money is ruined to the point that it costs millions to buy a cup of coffee. The U.S. and Europe and other developed states will not reach this level of absurdity, but inflation rates of just 5% or 6% can plunge millions of people into crisis as they have no economic pad to adjust to these higher prices. They are the ones that have to start choosing between food, shelter and medicine (among other things) as they simply can't afford them all.

And This Is Why the Federal Reserve Is Independent
The Federal Reserve Bank of the U.S. is somewhat mysterious to the average person. That mystery and confusion surrounds all the central banks in the world today. Every nation has one and they all wield a great deal of power over the economy of the country they are in. Monetary policy is the responsibility of the central bank as opposed to fiscal policy, which is the mandate of the legislature. Taxing and spending decisions are in the hands of the elected officials, but the value of the currency and the way the economy reacts to threats of recession and inflation are in the hands of an unusual institution. The Federal Reserve (and the majority of the other central banks) is not elected. The Board of Governors at the national level is selected by the president and must be approved by the Senate (similar to the process used to select Supreme Court justices). The Fed members on the Board serve 14-year terms, but many have chosen to leave before that full term has been completed. The members of the Fed Board that come from the 12 Fed districts are not appointed by the president or approved by the Senate—they are chosen by people in the region that serve on these regional boards. I go through all this to illustrate the fact that great pains are taken to ensure that the Fed is an independent entity and not subject to the political whims of either the Congress or the president.

Analysis: This independence has been extremely annoying to members of Congress and presidents over the years. Now, it appears that Trump can be added to that list as he has broken yet another tradition by directly attacking the Fed over its policy of hiking interest rates. This issue is precisely why such efforts have been made to isolate the central banks from day-to-day politics. The central bank has only indirect levers with which to push the economy. They control access to money through the establishment of the Federal Funds Rate—basically the rate that banks charge each other for a loan. From that rate, the banking system derives the other rates that govern credit access—prime rate, mortgage rates, car loans and the like. The Fed Funds Rate is not the only thing that banks look at to set these other rates, but it is the most important factor.

The toughest task for those who wish to govern the economy is controlling inflation. The only way to reduce the threat of inflation is to slow the economy down by hiking interest rates as well as manipulating some other factors that affect the levels of money that banks are able to lend. It is essentially throwing a wet blanket on an economy that is booming. The very fact the economy is surging creates the threat of inflation. Because the Fed moves indirectly, through manipulating access to money and credit, the actions they take have to be in advance if they are to be effective. It does no good to wait until inflation is savaging everybody's paycheck to act—the Fed has to anticipate and act months ahead of time. Legislatures and presidents do not like to call off the party and will regularly insist that a little inflation is not all that bad—they really just want to point to continued growth. The reality is that inflation hurts more people than recession does. There are many millions who do not feel the impact of a recession much at all as their incomes are not affected much. In contrast, everybody watches their spending power erode with inflation. Those with incomes that can't adjust are in crisis very quickly. It is irresponsible to ignore inflation threats, but elected politicians do it all the time—hence the need to keep the central bank as free of that political meddling as possible.

Trump is not the first president to become irritated at the Fed's actions and he will not be the last. In the past, these critiques have been more subtle, but Trump doesn't do subtle. In the end, he will find out what presidents before him have learned. The Fed members could care less what the president or Congress wants when it comes to monetary policy. They will be governed by their twin mission of avoiding both recession and inflation and will act according to the realities of the economy. The fact is the economy is growing fast. That will always set up inflationary pressure. Today, it has been President Trump who has accelerated some of that pressure on commodity prices with his tariffs and trade wars. Interest rates will continue to go up regardless of Trump's desires. And those of us who would rather not see our incomes erode due to inflation will be glad the Fed acts the way it does.

I Love Humanity, It's People I Can't Stand
These words from the great philosopher Linus continue to resonate with me the more that I have contact with the rest of my fellow planetary inhabitants. I like to think that humankind has made progress and that people are capable of kindness and consideration. In the abstract, I know this to be true. I do see nice people on occasion and hear tales of selflessness. But the unfortunate fact is that I see lots of behavior that drives one to despair. Not just on the nightly news as it chronicles the latest senseless shooting, but in simpler ways. There are always ways people seem to look for to dismiss and belittle each other.

There was the guy who refused to allow my wife to back up at the gas station. We had pulled in to get fuel and the pump was broken, but nothing indicated this until we were next to it. She tried to back up to another pump as a guy in a truck pulled up. We gestured our intent and got nothing but a rude gesture in return. Really? At the airport, I watched another episode of "learning to juggle at other's expense" as a woman decided she could navigate a crowded lobby with two bags slung over her shoulders while talking on her phone and carrying two lidless cups of coffee. Her act needs some work as both cups of coffee ended up in the floor. The only response was a string of obscenities as she stalked on through the crowd.

I just want to scream "STOP." Please acknowledge the needs and wants of others. We are not locked in a battle to the death for the last scrap of food. We have time to be considerate and time to avoid being rude. We eye one another like mortal enemies and seem to delight in the travails of others. I don't think it used to be this way—at least not in my world growing up. I would like to think there are more generous people than not, but sometimes the evidence is lacking.

Strategic Global Intelligence Brief for July 23, 2...
UK Councils Not Following 30-Day Payment Rule


No comments made yet. Be the first to submit a comment
Already Registered? Login Here
Friday, 08 December 2023

Captcha Image