Monday, 20 September 2010

The end of the American Dream, the call for trade barriers and the rise in populism...

Flying an American flag upside down is not necessarily meant as political protest. The practice has its origin in a military distress signal; displaying a flag in this manner is "a signal of dire distress in instances of extreme danger to life or property".

Tyler Darden in the blog Zero Hedge, published a recent post (19th of September)courtesy of Gordon T. Long of Tipping Points. It goes through the structural and demand problems the US faces and the collapse of standard of living we are witnessing.

"In rent we trust"...the American dream in home ownership has been whacked. Declines in home prices have made it no more expensive to buy than rent in about half of larger markets around the US.

"Thanks to falling home prices and record low mortgage rates, it now costs less to own than it has in the past decade on a mortgage-payment-to-rent basis."

"Because house prices will keep falling in most places. Prices are still dangerously high compared to incomes and rents. Banks say a safe mortgage is a maximum of 3 times the buyer's annual income with 20% downpayment. Landlords say a safe price is a maximum of 15 times the house's annual rent. Yet on the coasts, both those safety rules are still being violated. Buyers are still borrowing 6 times their income and putting only 3% down, and sellers are still asking 30 times annual rent, even after recent price declines. Renting is a cash business that proves what people can really pay based on their salary, not how much they can borrow."

"House prices do not even have to fall to cause big losses. The cost of selling a house is 6% because of the realtor lobby's corruption of US legislators. On a $300,000 house, that's $18,000 lost even if prices just stay flat. So a 4% decline in housing prices bankrupts all those with 10% equity or less."

Another interesting fact:

"There are 70 million Americans born between 1945-1960. One-third have zero retirement savings. The oldest are 64. The only money they have is equity in a house, so they must sell. This will add yet another flood of houses to the market, driving prices down even more."

Even young graduates have become disillusioned, will they be able to therefore repay their student loans?

"Student loan amount has exceeded the total credit card debts for the first time in the American history.":
The total outstanding student loan is worth 850 billion USD and the most worrying factor is that some students do not even know on how much they owe and to whom...

Negative equity have also made it difficult for their parents to recoup the educational expenses through a home equity loan...

The house is no longer an ATM in the US, the consequences of high unemployment and deleveraging is that the use of credit cards is falling very fast, and so will comsumption ultimately...

Falling houses prices, high unemployment, and negative equity have a big impact on US labor mobility:

The latest record of Gold, which to me doesn't come as a surprise, is a testimony of the policies followed by the US which is debasing their currency and therefore lowering the standard of living of the population in the process.

Because the Chinese are not letting the Yuan raise fast enough, the US authorities are now crying foul play. Their threats could have very nasty consequences, if China and the US enter a trade war.

"Sander Levin, chairman of the House of Representatives Ways and Means Committee, said he would wait to hear Treasury Secretary Timothy Geithner's testimony on Thursday before he decides whether to move forward on the bill."

"The bill might violate World Trade Organization rules, draw legal retaliation against U.S. businesses and shut down trade in inputs from China that U.S. industry needs, said Camp, who represents the troubled industrial state of Michigan."

"Levin said he wants to enlist other countries to pressure China to raise the value of the yuan but he also endorsed the use of duties against Beijing's currency practices."

Another "bright" politician who has studied history and the consequences of Smoot–Hawley Tariff Act of 1930...Levin is just following the voice of Paul Krugman. I prevously posted why Paul Krugman is dangerously wrong.I concluded in the post: "It is up to the US to resolve their trade imbalances by being more competitive and to increase the amount of goods and services they export...should the US target as well Japan and Germany with higher tariffs?"

Should all the countries with trade surpluses be targeted?

The US are trying to do what they did to Japan from 1985. In 1985 the Plaza Accord was signed between Japan and the US where Japan agreed to let its yen currency appreciate against the dollar. Unfortunately for you Mr Geithner, the Chinese are not stupid and will not bow like the Japanese did and they have studied what happened to Japan, unlike American politicians...

Just the facts:

"We all know that the rapid growth of Japanese economy after the WWII was to a large extent driven by its fast expanding foreign trade based largely on the low exchange rate of yen. Therefore, the sharp yen revaluation enforced by the "Plaza Agreement" hit badly and directly the country's foreign trade, throwing readily Japan's economy, which depended heavily on foreign resources, into a "yen revaluation depression", (that is, depression brought about by the yen revaluation). In 1986, Japan saw its total export volume shrank by 15.4 percent, real GDP growth dropped by 1 percentage point; the industrial and mining production index decreased by 0.2 percentage point and the unemployment rate broke the highest record after the war.

To shake off the depression the Japanese government and banks adopted a series of stern policies and measures. One of them was the unprecedented "financial relaxation" policy, in which Japanese banks cut interest rate for five successive times and finally fixed it at the extremely low level of 2.5 percent. Under the prevailing financial liberalization and reduced capital demand for entity economy, the large amounts of abundant funds instigated by the extremely-low interest rate swarmed to stock and real estate markets, resulting in sharp expansion of economic bubbles with stock and land prices to soar up at the core. By the end of 1989 the Nikkei average stock price had climbed to 389,000 yen, expanding two times in four years! While during 1998 alone the land price around Japan's three major metropolitans rose by 43.8 percent, the Tokyo Rim rising even by 65.3 percent.

In early 1990s, the economic bubbles created by the yen revaluation suddenly blew up, plunging the nation into an unprecedented recession, from which the country has been trying to struggle out till today. During the recession lasting longer than a decade, almost all the important economic indexes registered the worst post-war record. By then Japan had completely lost its long-term advantageous position held in the after-war pattern of western economic growth, especially that over the US. To some degree we should say, after years of efforts as set out at the "Plaza Agreement", America finally has defeated its biggest rival in the field of international trade."

The US are asking China to play Kamikaze economic policies "à la Japan".

This is the game being played by the US...So is it foul play or fool play? I will let you make your own judgement.

About the rise of populism, no surprise there:

It is gathering pace everywhere, the trend is your friend... The rise of populism is highly correlated with recession periods and severe unemployment throughout history, have a look at my previous post:

Tea Party in the US, far-right in Sweden, etc.

Populism on the rise in the Nordic region

The Left under siege in Europe

"Globalization is a reality. And this makes most leaders today realize that populist illusions can't be sustained before they collapse into stagnation and leave their political supporters deeply disillusioned. You can't inflate away your troubles or allow mountains of debt to build up if, as a country, you have to make your living in a globally competitive environment... Building prosperity requires caution and patience. It requires time. Populism is a short cut that doesn't work."

Fernando Henrique Cardoso, former President of the Federative Republic of Brazil for two terms from January 1, 1995 to January 1, 2003.

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