(What’s Left of) Our Economy: Two Needed Changes in U.S. China Policy

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auditing, Biden, Biden administration, China, currency, dollar, Donald Trump, fraud, investors, national security, SEC, Securities and Exchange Commission, stock market, stocks, tariffs, Trade, Wall Street, yuan, {What's Left of) Our Economy

Although I’ve been pleasantly surprised by how much of former President Donald Trump’s China policies have been retained by President Biden (like the tariffs and tech-related sanctions and tighter export controls), two recent developments reveal how much room for improvement remains – on permitting Chinese entities to list on U.S. stock exchanges, and on those Trump tariffs.

Regarding the stock market issue, Washington incomprehensively keeps giving these entities (they shouldn’t be called “companies” or “businesses” becauuse they have nothing in common with organizations meriting those labels in largely free market economies) the kind of special treatment afforded to members of its stock exchanges from no other countries – including America itself.

Specifically, these Chinese entities continue to be able to raise vital capital in U.S. markets even though they haven’t yet been required to comply with the standards for opening their books fully that are mandatory for every single one of their domestic and foreign counterparts. Therefore, investors can’t make informed decisions, and regulators can’t discover much fraudulent activity.

It’s true that U.S. authorities have just struck a deal with Beijing that potentially gives them the access to Chinese records that they need. But that’s the problem. It’s still “potential.” And the U.S. Securities and Exchange Commission (SEC) may still be bending over backwards to coddle China. Why else would it have agreed with its Chinese counterparts to keep the text of the deal secret? What devils lie in the always crucial details? Full disclosure here is especially important because of Beijing’s long record of violating signed agreements (see, e.g., here) and because the Chinese government’s statement describing its interpretation of its obligation differs significantly from Washington’s – which is virtually guaranteed to produce protracted further bickering.

This typical bobbing and weaving, in fact, raises the question of why the United States has engaged recently – or ever – in any negotiatons in the first place. After all, Washington has been seeking adequate access to the entities since 2007. China has resisted American demands by citing the important national security and other state secrets that unfettered audits might reveal. But as the SEC itself has pointed out (see the preceding link), more than fifty other countries have required their companies to turn over all records as a condition for listing. China clearly has the right to withhold any information it wishes. The U.S. response from the beginning should have been that if a Chinese entity’s operations are so critical to China’s national security, it doesn’t belong in the U.S. financial system, and able to win U.S. and other investment attracted by the Good Housekeeping seal provided by being listed,to begin with.

Washington’s position all along also should have been that there’s literally nothing to talk about. The United States should have declared listing to be a take-it-or-leave-it proposition for China, and that it will serve as judge, jury, and court of appeals (as it is in all cases). As of this past spring, America’s long failure to do so has permitted these entities to amass a market value of $1.3 trillion. And because all of them are always subject to all of Beijing’s whims, that means these valuable resources have been put at the disposal of the Chinese regime.

What to do now?  Ditch the diplomacy stuff and tell Beijing that unless each of its listed entities turn over to U.S. auditors every scrap of information demanded by date certain (meaning real soon), they all get kicked off Wall Street immediately.

When it comes to trade issues, the Biden administration’s mistake is much simpler – and easier to correct. The President deserves considerable praise for the September announcement that the Trump tariffs will be kept in place for the foreseeable future. But China’s predatory trade policies have not remained in place, and in at least one vital respect, have gotten worse – on the value of its currency, the yuan.

For many years, especially in the first decade and a half of this century, Beijing kept the value of the yuan versus the U.S. dollar artificially low. As known by RealityChek regulars, this practice gave goods made in China (including by offshoring-happy U.S.- and other foreign-owned multinational companies) big price advantages the world over for reasons having nothing to do with market forces. The result were equally artificial boosts to Chinese exports and artificial reductions of Chinese imports.

This year, China has doubled down (not literally!) on this tactic, depressing the yuan’s value versus the greenback by fully nine percent. So the American response should be obvious: The tariffs on each of the roughly $370 billion worth of Chinese goods intended each year for the U.S. market should be raised by nine percent also. And each future Beijing move to devalues the yuan another one percent or more should be matched by another equivalent U.S. tariff hike.

This American retaliation isn’t likely to fuel inflation at home, because of falling U.S. demand due to a slowing economy and a shift in consumer spending to services. So importing U.S. companies won’t have the pricing power to pass on their higher costs. But it will put further pressure on a Chinese economy whose other growth engines (like the real estate sector and the domestic consumer market) are faltering mainly because of the deflation of a ginormous Chinese housing bubble and dictator Xi Jinping’s politically inspired crackdown on his own tech companies and his over-the-top Zero Covid policies.

P.S. If China starts strengthening the yuan again, I wouldn’t lower the tariffs in response. For the aim of U.S. policy toward the People’s Republic now can’t afford to be an indulgence like fairness, but weakening this increasingly hostile and dangerous government, and maximum U.S. economic disengagement (often called “decoupling”). But I’d be amenable to some easing of economic pressure and decoupling if I saw major evidence of big, concrete improvements in Beijing’s economic and military policies – say over a five- or ten-year period for starters.

Glad I Didn’t Say That! Exponentially Up — & Then Down

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Biden, Dow Jones Industrial Average, Glad I Didn't Say That!, investing, NASDAQ Composite, S&P 500, stock market, stocks, Wall Street

“[T]he stock market has gone up exponentially

since I’ve been President.”

President Biden, September 8, 2021

 

Dow Jones Industrial Average Since Biden

Inauguration: +0.85 percent

 

S&P 500 Since Biden Inauguration: +1.56 percent

 

NASDAQ Composite Since Biden Inauguration: -18.16 percent

 

(Sources: “Remarks by President Biden in Honor of Labor Unions,” Speeches and Remarks, Briefing Room, The White House, September 8, 2021, https://www.whitehouse.gov/briefing-room/speeches-remarks/2021/09/08/remarks-by-president-biden-in-honor-of-labor-unions/) President Biden, September 8, 2021

 

 

Making News: On Israeli TV, “Jersey Joe” Piscopo Radio…& More!

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AM 970 The Answer, Breitbart.com, Brexit, i24News, Making News, retailers, stock market, The Joe Piscopo Show, Trade, U.S.-Mexico-Canada Agreement, USMCA

I’m pleased to report several recent media appearances.

Last night, I was interviewed on Israel’s i24News TV network on what could be the decisive stage in negotiations between the European Union and the United Kingdom over Brexit – the latter’s decision to leave the former.  Unfortunately, i24News doesn’t make streaming videos of its content available gratis.

Yesterday morning, I appeared on The Joe Piscopo Show on New York City’s AM 970 The Answer radio.  Since I only found out about this opportunity in the wee hours that morning (don’t ask!) I couldn’t send out a pre-program alert, but a podcast is available here.

Scroll down to the link naming me, click the play button, and if you want to skip to my segment, drag the thingamajig along the bottom to the 40-minute mark.  You’ll hear a discussion that ranged from the stock market’s recent gyrations to the new U.S.-Mexico-Canada [Trade] Agreement to the troubles of American retailers.

And on Thursday, October 11, Breitbart.com featured my finding that metals-using industries in the United States were defying all expectations that they’d start hemorrhaging jobs due to the Trump steel and aluminum tariffs – not to mention refuting numerous news reports claiming that these jobs were already being shed.

And keep checking in with RealityChek for news of upcoming media appearances and other developments.

(What’s Left of) Our Economy: Why Investors Shouldn’t Blame U.S. Workers for Inflation

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bonds, budget deficits, Federal Reserve, Financial Crisis, inflation, interest rates, manufacturing, monetary policy, quantitative easing, recession, recovery, stock market, stocks, wage inflation, {What's Left of) Our Economy

Thanks to the U.S. government’s new inflation data, we can cross one often fingered culprit off the list of developments being blamed for the recent turbulence in American, and therefore global, financial markets – wage inflation. For by a crucial indicator, real hourly pay in the United States is not only failing to lead prices upward – it’s been trailing overall inflation recently and indeed has been in recession lately by one commonsense standard.

Of course, market turmoil (like most big developments) springs from several, overlapping reasons. The first is one I discussed last Friday, and which I consider the most important: Investors fear that the Federal Reserve and other world central banks will start tightening monetary policy faster than expected, in order to prevent (more of) the kinds of reckless investments that tend to mushroom when credit is super cheap, and that can often trigger financial crises like the near global meltdown roughly a decade ago. (Happy Anniversary!)

If credit becomes more expensive, then economic growth and corporate profits will struggle to maintain their current rates of increase, and stocks will become less attractive investments, all else equal. In addition, the very increase in interest rates almost certain to result from such central bank “tightening” heightens the appeal of bonds and dims that of equities.

To complicate matters further, another engine of higher rates might be a combination of the great increase in federal budget deficits likely from the new tax cuts proposed by the Trump administration and passed by Congress, and the big-spending budget deal reached by the lawmakers and the President. The consequent budget gap will boost federal borrowing needs (and all else equal, push up the rates Washington will need to pay lenders for all this new debt) at a time when the U.S. central bank has started selling the ginormous amount of government bonds it’s been purchasing and holding since late 2008 (a practice called “quantitative easing) in order to halt the Great Recession and speed up recovery . This version of tightening – which also stems from financial stability concerns – will raise the supply of bonds even further.

The second reason for the turmoil is investor concern that rising inflation will spur central banks to raise rates regardless of the above financial stability concerns – because excessive inflation can produce its own economic disaster. And in fact, the proximate cause of the current bout of market instability seems to be those very inflation fears, and in particular, the possibility of wage inflation.

Higher compensation costs could deal their own blow to stock prices by reducing corporate profits; or by sending upward price pressures rippling throughout the entire economy (as companies tried to pass higher costs on to their customers either elsewhere in the business world or in consumer ranks); or through some combination of the two. (Interestingly, the chances seem pretty low that companies could absorb higher wages through greater efficiency, as productivity improvement has been very slow at best recently.)

So that’s why today’s widely anticipated (to put it mildly) U.S. government inflation data is so important. The inflation figures were somewhat “hotter” than most investors were predicting. But it couldn’t be clearer that wage inflation has nothing to do with these higher prices.

The numbers that most observers – whether investors or not – are looking at are the year-on-year numbers, and they do seem to signal some wage inflation. From January, 2017 to last month, the Labor Department’s headline reading showed a 2.14 percent rise in prices nationwide, and a 1.85 percent increase in “core” prices (which stripped out from the headline food and energy prices because they’re considered so volatile in the short-term that they can generate readings regarded as somewhat misleading).

During that same year, wages adjusted for inflation for the overall private sector were up 0.75 percent – which means they rose faster than overall prices. Moreover, between previous Januarys, real wages actually declined fractionally (by 0.09 percent). So in principle, investors (and other economy watchers) have reasons to be nervous about wage inflation.

But a more recent time frame tells a very different story. For since last May, private sector wages have been down on net. Although the cumulative decline is only 0.19 percent, this means that on a technical basis, real wages are in recession. (I feel justified in using this term because when economists talk about growth, a decline for two consecutive quarters is defined as a recession. So a six-month cumulative downturn seems close enough.) Indeed, more accurately, real wages are still in recession, since this development was apparent last month, too.

And the latest month-to-month figures indicate that real wage pressure is weakening, not strengthening. From December to January alone, they dropped by 0.19 percent, after rising by that amount from November to December.

The picture looks even grimmer when you go back to the start of the current economic recovery – in mid-2009. Since then, real private sector wages have risen by only 4.07 percent. And that’s over more than eight years!

But private sector real wages are practically torrid when they’re compared with inflation-adjusted pay in manufacturing. Such compensation has been in technical recession for two full years, as it’s fallen by 0.09 percent since January, 2016. On a monthly basis, after-inflation manufacturing pay plummeted by 0.46 percent in January, its worst such performance since August’s 0.64 percent tumble. At least the December figure was revised up – though only from a 0.09 percent dip to a 0.09 percent increase.

Over the current economic recovery’s eight-plus years, real manufacturing wages have risen by a mere 0.37 percent – less than a tenth as fast as those of the private sector overall.

Yet although inflation – and especially wage inflation – doesn’t seem to warrant a quicker pace of Federal Reserve interest rate hikes (or even the current, “gradual” pace), a case can still be made for tightening on a financial stability basis. And those massive federal deficits, which will need to be funded by equally massive increases in bond supplies, seem here to stay for many years. So as has been the case for so long, assuming these moves do slow U.S. economic growth, American workers appear certain to pay many of the costs for disastrous policy mistakes they never made.

(What’s Left of) Our Economy: What Really Matters About China These Days

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Asia, asymmetric warfare, China, China Century, cyber-security, intellectual property, Japan, manufacturing, protectionism, Soviet Union, stock market, subsidies, supply chains, technology, {What's Left of) Our Economy

U.S. financial markets haven’t been the only case of volatility in the world recently. Just look at the American economic and financial establishment’s broad conventional wisdom about China. Between its mysterious but apparently slowing economy, and its leaders’ erratic reactions over the last few weeks, the PRC has been at or near the center of the investment turmoil. Therefore, maybe it’s not surprising that hitherto prevailing assumptions about a dawning Chinese Century or epoch are being rethought dramatically. But it’s especially important that U.S. political leaders not succumb to the kind of fallacies that have muddled their dealings with Japan for decades.

As followers of international and business news are endlessly reminded, during the 1980s and into the mid-1990s, many American analysts were convinced that Japan’s growing prowess and wealth could enable it to challenge U.S. global predominance in finance, technology, and even overall economic power. Almost immediately afterwards, of course, Japan ran into major problems on all those fronts, and those claims – along with calls for the United States to emulate many Japanese policies and practices – were quickly dismissed as quintessential alarmism. Views of China could well start moving along the same trajectory.

What has largely been missed about Japan, however, is that what always mattered to America for the foreseeable future was not whether Japan would become “Number One” or not. First of all, no one’s crystal ball is good enough to know and second, that’s largely because, barring “shock” events like wars, these kinds of shifts usually unfold over very long time periods. Instead, what has always mattered most has been that regardless of Japan’s overall power versus America’s, it has gained enough specific strengths to be able to pose major ongoing problems for the U.S. economy.

Notably, Japanese industry has gained global leadership in a variety of advanced manufacturing sectors ranging from automotive to information technology components. Because such components are so crucial to manufacturing competitiveness, this means that Japan’s global rivals, including in America, depend heavily on Japanese businesses for key supplies – as was illustrated dramatically after the Fukushima earthquake struck in 2011.

Since Japan is still the world’s third largest national economy, its longstanding protectionist trade and anti-competitive business practices deny U.S.-based producers access both to a potentially huge foreign market and to domestic American customers they would be servicing if bilateral trade was not distorted by Tokyo’s decisions. These lost markets, in turn, mean not only lost profits but lost advantages of scale for U.S. producers and their employees. And undoubtedly Japan has been able to continue posing these problems because American confidence in its demise has persuaded U.S. leaders that it no longer deserves urgent attention.

Unlike Japan, China is not a quasi-ally of the United States – and often challenges American security interests. So it’s even more important that U.S. assessments of the PRC focus on the essentials, as opposed to “Chinese Century” claims or “Whither China” debates. There is one important exception. The suddenness of the Soviet Union’s demise demonstrated how fragile even global behemoths can be, especially when ruled by intrinsically brittle dictatorial systems. It’s not necessary to believe that China is facing a “1990 moment” to recognize that the regime’s survival could before too long be mortally threatened by any number of economic, political, and even environmental setbacks. In fact, it’s a sign of China’s current predicament that more and more commentary is going out of its way to note that some kind of collapse isn’t imminent.

But this speculation aside, what we can and do know about China is that its own advanced manufacturing industries are rapidly gaining on America’s; that its dumping of steel and other industrial products can harm U.S.-based producers for reasons having nothing to do with free trade; that it continues to steal valuable American intellectual property, which kneecaps the sales and all of their commercial benefits for American producers; and that it can marshal enough wherewithal to (a) finance investments in the United States that are both strategically and economically important, especially in the tech sector, and (b) seed the creation and foster the ramp-up of numerous high value industries.

Militarily, China has emerged as a major threat to America’s cyber-security – and possibly, as a top American military official recently suggested, a “peer competitor.” And although its more conventional military forces are doubtless far from matching U.S. global capabilities, some of its own strategists believe in a doctrine called “asymmetric warfare.” This school of thought suggests that China can prevail in regional conflicts in Asia by exploiting specific vulnerabilities against American forces even though the latter enjoy overall superiority.

China has become so big and important that I certainly hope someone important in Washington is thinking through the implications for America of large-scale upheaval in China, or worse (and of continued rapid Chinese progress). But the preeminent challenges America faces from China are much more immediate and concrete, and they should be policymakers’ first and foremost concerns. Nonetheless, I can think of one way in which the recent spate of bad news from China could significantly improve America’s approach – if it reminds Washington that the United States has always held the main cards in this bilateral relationship.

Following Up: Casino Capitalism is Everywhere But in the Macroeconomic Data

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business investment, casino capitalism, expansions, Financial Crisis, financial deregulation, Following Up, GDP, Great Recession, growth, inflation adjustment, recoveries, stakeholder capitalism, stock buybacks, stock market, Wall Street reform

Over the last year I’ve published an op-ed and a book review that both challenged the widespread claim that the Wall Street deregulation dating from the late-1970s turned American business leaders in general from responsible stakeholders dedicated to creating real wealth for society into shortsighted casino capitalists. My evidence was government data on the macroeconomy showing the contribution to growth made by business investment both before and after that de-regulatory Big Bang. If the claims – most notably made by Democratic presidential contender Hillary Clinton in a ballyhooed speech – are right, I reasoned, then such investment (on factories and labs and warehouses and equipment and the like) should have made a much smaller contribution after the supposed Age of Short-term-ism began than before.

My article found just the opposite, but recently someone in the field whose work I respect expressed some skepticism, and suggested that if I had used different data, I’d get significantly different results. So that’s how I spent some of this afternoon, and just found out that the story remains the same. That is, when you look at the economy, as opposed to anecdotes about corporate greed, there are just no figures that point to a fundamental degeneration in the nature of American capitalism.

My challenger objected mainly to my use of inflation-adjusted data. My rationale was, and still is, that for all the difficulties of accurately measuring price changes, it’s better to use figures that try to distinguish between real economic output and its increase on the one hand, and the impact of rising prices on the other. But the pre-inflation data fails to turn up any noteworthy Big Bang effects, either.

My original article looked at long American expansions since the 1960s, since the 1950s economy was surprisingly choppy, and growth kept getting interrupted, and since comparing expansions (or recessions) is the best way to get apples-to-apples data. This exercise clearly showed that business spending played a smaller role in the post-deregulation 1980s recovery than during the pre-deregulation 1960s expansion (generating 10.75 percent and 9.78 percent of their growth, respectively).

But during the 1990s boom and the bubbly recovery of the previous decade, business spending’s contribution to growth was twice as great – even though business is thought to have become even more obsessed with crackpot financial engineering. And during the current recovery, such investment has been responsible for substantially more than than one quarter of the historically weak real growth that’s been recorded.

Remove the inflation adjustment and the numbers change only modestly – and not nearly enough to even begin supporting the casino capitalism thesis. During the 1960s expansion, business spending generated 13.80 percent of total growth. As with the post-inflation data, this share dropped during the 1980s recovery (to 10.41 percent). But thereafter it rose and stayed much higher than its level in the 1960s – to 17.33 percent during the 1990s expansion, 14.33 percent during the 2000s bubble, and 18.09 percent during the current recovery.

I’ve focused on business investment’s contribution to growth because I wanted data that wouldn’t “penalize” corporations when they were making these spending decisions at times when the economy was faltering for other reasons. Moreover, fueling growth is one of the main reasons we value business spending in the first place. But my challenger wanted to know whether it was correct to argue that business spending as a share of the economy on a static basis peaked in the 1970s – before the financial deregulatory wave was triggered. The answer? Yes, but not even these results show anything like a late-1970s watershed. And that’s even using pre-inflation figures, as I was asked to.

During that decade’s relatively short 1975-1980 recovery from its oil shock-induced miasma, business investment represented 12.92 percent of gross domestic product before factoring in inflation. During the 1980s expansion, that figure dropped off significantly (consistent with the growth contribution figures), to 11.02 percent. But that so-called Reagan boom represented the nadir. During the expansion of the Clinton years – marked by, among other developments, a huge telecommunications- and internet-led technology build-out – the figure bounced back to 12.66 percent.

Business as a share of the economy did fall during the bubble decade, when Wall Street shenanigans were peaking. But the falloff was minimal – to 12.48 percent. It’s been lower during the current recovery – currently averaging 12.12 percent. But that’s still higher than its level during the pre-deregulation 1960s expansion (11.11 percent).

Moreover, it’s crucial to remember that a crash in business investment was one of the main drivers of the Great Recession – when credit seized up all around the world and Armageddon fears were rife. It shouldn’t be any surprise that corporations didn’t reopen the spigots all at once. But reopen them they have, to a great extent. In fact, starting from a low of 11.08 percent of GDP in 2010, this business spending ratio hit 12.88 percent of GDP by 2014, and stood at 12.82 percent during the first half of this year – just marginally below those late-1970s levels. And although it’s true that Wall Street reform efforts have reduced financial engineering possibilities by American financiers, the role played by share buybacks in powering the stock market’s post-recessionary surge makes clear that they’re alive and well elsewhere in U.S. business ranks.

None of this is to say that business spending levels today are adequate, and that (as just mentioned), the financial regulatory regime doesn’t enable too much capital to be expended in too many unproductive ways. But anyone yearning for re-regulation to bring back a golden age of corporate stakeholder capitalism should keep in mind that the business spending data, at least, say that America never had one to begin with.