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.
http://www.zerohedge.com/article/guest-post-preserve-and-protect-jaws-death



"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.
http://online.wsj.com/article/SB126282425648418817.html

"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."

http://patrick.net/housing/crash.html

"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.

http://www.reuters.com/article/idUSTRE68E3UF20100915

"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:

http://english.peopledaily.com.cn/200309/25/eng20030925_124911.shtml

"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:

http://macronomy.blogspot.com/2010/07/i-promise-to-pay-bearer-on-demand.html

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

Populism on the rise in the Nordic region
http://euobserver.com/9/30797

The Left under siege in Europe
http://www.theaustralian.com.au/news/features/the-left-under-siege-in-europe/story-e6frg6z6-1225926399084

"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.

Why Paul Krugman is so wrong and his stance is dangerous

Paul Krugman is pushing for a rise of 25% in tariffs on Chinese goods.

http://www.nytimes.com/2010/03/15/opinion/15krugman.html?src=me


If history is a lesson to a Nobel Prize in economics, Paul Krugman should probably revisit the devastating impact the re introduction of tariffs had during the Great Depression with the implementation of the Smoot–Hawley Tariff Act of 1930.

Maybe Paul Krugman should read Wikipedia relating to the Smoot-Hawley Tariff of 1930:

"U.S. imports decreased 66% from US$4.4 billion (1929) to US$1.5 billion (1933), and exports decreased 61% from US$5.4 billion to US$2.1 billion, both decreases much more than the 50% decrease of the GDP."

http://en.wikipedia.org/wiki/Smoot%E2%80%93Hawley_Tariff_Act


"According to government statistics, U.S. imports from Europe decreased from a 1929 high of $1,334 million to just $390 million during 1932, while U.S. exports to Europe decreased from $2,341 million in 1929 to $784 million in 1932. Overall, world trade decreased by some 66% between 1929 and 1934."

"Although the tariff act was passed after the stock-market crash of 1929, some economic historians consider the political discussion leading up to the passing of the act a factor in causing the crash, the recession that began in late 1929, or both, and its eventual passage a factor in deepening the Great Depression.[16] Unemployment was at 7.8% in 1930 when the Smoot-Hawley tariff was passed, but it jumped to 16.3% in 1931, 24.9% in 1932, and 25.1% in 1933."

Why on Earth Paul Krugman thinks this time it is different?(the 5 most dangerous words in the world).

I am completely baffled by such a reckless statement from a Nobel Prize and I am not the only one concerned.

John Mauldin in his latest "Thoughts from the frontline" entitled "The Threat to Muddle Through" shares the same thoughts with his readers:

http://www.frontlinethoughts.com/article.asp?id=mwo032010

"Krugman and the Keynesians are right in this regard. If consumption falls, as it does in recession, then a corresponding increase in "G" helps offset that drop. But Keynes assumed that in good times government would run surpluses. It seems that we forgot that part."

As per above extract from John Mauldin's excellent letter, this is why Keynesian cannot work anymore in our current environment in Western Europe and in the US.

Keynes assumed government would be managing public finances in an efficient and responsible way.

Well Mister Paul Krugman, looks like Portugal, Spain, Italy, France, United Kingdom and of course Greece have been exactly doing that and the US as well!

The only efficient Keynesian policies which have been implemented in fact has been done by China! The main difference is that the Chinese have been managing much more effectively their economy so far!

http://en.wikipedia.org/wiki/China_economic_stimulus_program


"A statement on the government's website said the State Council had approved a plan to invest 4 trillion yuan in infrastructure and social welfare by the end of 2010. This stimulus, equivalent to US$586 billion, represented a pledge comparable to that subsequently announced by the US, but which came from an economy only one third the size. The stimulus package will be invested in key areas such as housing, rural infrastructure, transportation, health and education, environment, industry, disaster rebuilding, income-building, tax cuts, and finance.

China's export driven economy is starting to feel the impact of the economic slowdown in the United States and Europe, and the government has already cut key interest rates three times in less than two months in a bid to spur economic expansion.

The stimulus package was welcomed by world leaders and analysts as larger than expected and a sign that by boosting its own economy, China is helping to stabilize the world economy. World Bank President Robert Zoellick declared that he was ‘delighted’ and believed that China was ‘well positioned given its current account surplus and budget position to have fiscal expansion.'News of the announcement of the stimulus package sent markets up across the world."

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.

I agree with John Mauldin, should the US target as well Japan and Germany with higher tariffs?

Should all the countries with trade surpluses be targeted?