The last 10 years have been the worst for Western civilization since the 1930s. At the onset of the new millennium North America, Europe and Oceania stood at the cutting edge of the future, with new technologies and a lion’s share of the world’s GDP.  At its end, most of these economies limped, while economic power – and all the influence it can buy politically – had shifted to China, India and other developing countries.

This past decade China’s economic growth rate, at 10% per annum, grew to five times that U.S.; the gap was even more disparate between China and the slower-growing  E.U.,  Yet periods of slow economic growth occur throughout history — recall the 1970s — and economies recover. The bigger problem facing Western countries, then, is a metaphysical one — a malady that the British writer Austin Williams has dubbed “the poverty of ambition.”

This lack of ambition plagues virtually every Western country. The ability to act has become shackled by a profound pessimism that according to a recent Gallup survey

Attitudes have consequences. The rising stars of the non-Western world — from the United Arab Emirates to Singapore and China — are building cities with startling new architecture and bold infrastructure. Their entrepreneurs are expanding their operations across the planet. contrasts with the optimism found not only in rising states like China, India and Brazil, but also deeply impoverished places like Bangladesh.

Of course, you can chortle at the outrageous overbuilding in places like Dubai, but the Western world might do better to appreciate the scope of their ambition. Indeed, for years New York’s Empire State building, erected  during the Depression, was derided as  ”the empty state building.” Today it’s visionary developers like Iraqi-born Istabraq Janabi who are planning unlikely  new structures even  in  troubled places like Ramadi, Iraq.

The difference in ambition can be seen clearly at airports, which now serve as the entry halls of the global economy. A traveler to John F. Kennedy Airport, Heathrow, Charles De Gualle LAX or Dulles passes through decayed remnants of fading late 20th century buildings and technology. In contrast, airports in Dubai, Hong Kong and Singapore offer clean, ultra-modern facilities with often impressive design.

The West’s retreat from space exploration further underscores its metaphysical poverty. Today, Europe and the U.S., the world’s historic leader in the field, are cutting back on plans to explore the cosmos, which has included a manned operation to the moon. President Obama wants NASA to focus more on issues regarding climate change instead. In contrast, the rising countries of Asia, notably China and India, have begun plans for manned flights to the moon and beyond.

This divergence is not about resources; it is about the growing conviction in the West that moving forward is an illusion or, as the British academic John Gray’s puts it, “progress is a myth.”  Victorian empire-makers and intellectuals, like their republican American successors, believed perhaps naively in the potential of humanity, economic and technological progress. Today our intellectual and political classes have gone to the other extreme.

The West’s politics are in the grips of two profoundly retrograde mentalities. One, a small-minded conservatism, harks back to the “golden” age of the 1950s when Western power faced only a flawed Soviet challenge. The idealistic but flawed commitment to imposing democracy by force of the Bush years has faded; it has been replaced by an obsession with taming a bloated public sector. While this focus may be justified, it is fundamentally more reactive than proscriptive.

The Left, which once portrayed itself as the bastion of scientific rationalism, increasingly embraces neo-druidism, a secular form of nature worship. This tendency’s roots can be traced back to the “Limits to Growth” ideology of the early 1970s which projected, mostly mistakenly, that the planet was about to run out of everything from food to oil. Concerns over climate change have transformed this dismal sentiment into a theology, with carbon emissions treated as a form of original sin.

The anti-progress nature of the new Left is unmistakable. Rather than seek ways to control climate change, suggests The Guardian’s George Monbiot, environmentalism is engaged in “a battle to redefine humanity.” Monbiot believes the era of economic growth needs to come to an inevitable denouement; that “the age of heroism” will be followed by the decline of the “expanders” and the rise of the “restrainers.”

Europe, particularly the U.K., suffers acutely from metaphysical angst.  Once touted as the new great power by its leaders and their American claque, the E.U. is quickly dissolving along cultural and historical lines; this is especially evident in the division between the  resilient countries of the north (something like the Hansa trading states of the late Middle Ages) and the weaker countries along the periphery. For the most part, Europe no longer seems capable of doing much more than finding ways to control an unaffordable welfare state without tearing about its social net. The once cherished notion of a multi-racial “new” Europe largely has dissolved as immigration has devolved from a source of demographic and cultural salvation to a widely perceived threat to the E.U.’s economic and social health as well as security.

Such defeatism usually has less success in the United States. But America’s “progressive” left increasingly resembles its European cousins.  Obama’s science advisor, John Holdren, has been a long-time advocate of the idea of “de-development,” the purposeful slowing of growth in advanced countries in order to protect the environment. The critical infrastructure needed to accommodate upward of another  100 million Americans — new dams in the west, intelligent development of our vast natural gas reserves and building new cities, airports and ports  – are not at the center of either party’s platforms. These could be financed largely with private sources, given the right incentives.

Read it all: Poverty of Ambition: Why the West Is Losing to China – Joel Kotkin, Forbes

 

Who is in charge? Who is coordinating policy?

Geithner: Strong Dollar!

Bernanke: Weak Dollar!

Huh????????????

BJS

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The US is pursuing a policy of weakening its currency which is driving up exchange rates in the rest of the world, according to Alan Greenspan, the former chairman of the Federal Reserve.

Writing in today’s Financial Times ahead of the G20 meeting in Seoul, Mr Greenspan argues that with China also holding down the renminbi, the upward pressure on currencies elsewhere risks a return to widespread trade protectionism. Mr Greenspan criticises China for continuing to prevent the renminbi strengthening, saying it reflects a misguided view that a weak currency is necessary for export growth and political stability. “China has become a major global economic force in recent years,” he writes. “But it has not yet chosen to take on the shared global obligations that its economic status requires.” More unexpectedly, Mr Greenspan adds: “America is also pursuing a policy of currency weakening.”

 

It may be the start of the biggest oil job in the world. Each day, 20 workers from BP and China National Petroleum Corp. (CNPC) buckle down to the task of prepping the Rumaila oil field in southern Iraq for rapid development. In industry lingo, Rumaila is a “supergiant”—a 50-mile-long deposit of sweet crude with estimated reserves of 16 billion barrels, whose output may someday rank second only to Saudi Arabia’s vast Ghawar field. The Saudis, though, have carefully managed their oil assets for decades. In contrast, Rumaila, a lightly inhabited expanse of date groves and Bedouin encampments, has not had a proper upgrade since the 1970s. The Iraqis contracted with BP and CNPC last year (BP) to juice Rumaila’s production from 1.06 million barrels a day to 2.85 million, all in seven years. No one has ever tried such a ramp-up at a field as huge as this one. Putting Rumaila back in full working order will take tens of thousands of workers, 1,000 new wells, and billions in investment.

BP is the largest partner in the venture, but only by a dipstick: It has a 38% stake, while the Chinese hold 37% (the rest is owned by an Iraqi company). The media focus has been on BP’s decision to take up the Rumaila challenge for a low fee of only $2 for every barrel the venture produces. But the more important story could be China’s role. “CNPC’s involvement brings together the country with the most rapid growth in energy demand in history with the country that plans the greatest buildup of production capacity ever,” says Alex Munton, an Iraq specialist at Edinburgh-based oil consultants Wood Mackenzie.

China has moved fast. In a little over a year, CNPC, China’s main oil producer with revenues of more than $188 billion and a 1.5 million-worker payroll, has won large stakes in three Iraqi oil fields. The total production target for those fields is around 3.5 million barrels per day—close to China’s domestic output. In two of the ventures, China is the controlling partner. Over two decades or so, CNPC may spend some $20 billion on the fields, the most of any oil company in Iraq since Saddam Hussein fell. For China’s oil industry, “Iraq is a game-changer,” says Wenrang Jiang, an authority on the country’s energy thirst who teaches at Canada’s University of Alberta.

Red Star Over Iraq Business Week (hat tip to Naked Capitalism)

 

Assume you had put much of your savings into U.S. government bonds and then you learned the following. In just the last eight months, the Congressional Budget Office estimates of the amount of additional federal debt to be held by the public grew by an astounding $4 trillion for the 2010-19 period; and that the amount of federal debt held by the public grew from $5.9 trillion to $7.5 trillion in just the last 12 months.

In addition, you learned that the federal government (i.e., taxpayers) now owns (primarily through Fannie Mae and Freddie Mac) or insures (through the Federal Housing Administration and other government programs) about 80 percent of the $14.6 trillion of home mortgages outstanding in the United States. Last week, Congress passed a bill requiring all student loans be made by the federal government rather than banks, which means the taxpayers will be 100 percent liable for any student loan defaults.

You also learned that the Federal Deposit Insurance Corp. is considering tapping its Treasury credit line for up to $500 billion. It needs to do this because of the high number of bank failures and because each bank account is insured by the government (i.e., taxpayers) up to $250,000. The president and many in Congress are calling for a roughly $1 trillion health care bill – paid for by additional debt and/or more taxes, which will further slow economic growth, eventually leading to even more debt.

Finally, you also became aware of the following facts: Federal government expenditures are growing far faster than the economy, and thus the government is becoming a larger and larger share of gross domestic product. Obviously, this cannot continue forever because eventually the government would totally drive out the private sector.

The entitlement programs (i.e., Social Security, Medicare, Medicaid, etc.) all continue to grow faster than the economy, and they will take more than 100 percent of all federal tax revenue this year, requiring that virtually all of the other government spending programs, including defense and interest payments on the debt, be funded by more borrowing.

You are also aware that the government cannot tax its way out of the deficit situation, because increasing income tax rates on the upper income people will both slow the economy and cause them to find legal or illegal ways to avoid the tax increase, and the politicians have pledged to not increase taxes on those making less than $250,000, which includes all but a very few Americans.

Even if the politicians break their pledges not to increase taxes, they still cannot solve the deficit problem as long as they refuse to cut back on the growth in Social Security, Medicare, and Medicaid – because any new tax revenue will be quickly absorbed by the growth in spending. The best that any tax increase could do is delay the explosion of the debt bomb by, perhaps, a couple of years while further weakening the economy and job growth.

Now suppose you are not an individual bondholder but the Chinese government official responsible for the Chinese economy, and you know your government holds about $1 trillion in U.S. government securities. You have watched Congress and the administration become less and less fiscally responsible – more spending, more taxes, and more debt.

Then suddenly the administration puts punitive tariffs on your tire manufacturers while at the same time refuses to approve the trade treaties with Colombia, Panama and South Korea that have been negotiated.

You understand that these foolish and destructive actions by U.S. government officials indicate it does not understand the importance of free trade in fostering economic growth, and seem to be intent on replicating the mistakes of the 1930s.

The Chinese are not stupid, and they have been vocal in saying they are concerned that U.S. policies will lead to a further fall in the dollar and higher rates of inflation, both of which undermine the value of their investment in U.S. government securities.

The Chinese are now trying to diversify their holdings – and their recent activity in buying large quantities of tradable commodities is probably, in part, a hedge against a falling U.S. dollar. Thus, at the same time, the U.S. government needs to sell trillions of dollars of new bonds. It is by its own actions driving away foreign purchasers of bonds, which can only result in higher interest rates in the United States, which will further slow economic growth.

What is particularly frightening is that neither political party has offered a serious plan to defuse the debt bomb. The Democrats are just piling up more debt as if there were no limit, and the Republicans, to date, are only proposing measures to reduce the increase, rather than reverse it. When the debt bomb explodes – within the next one to three years – expect to see record high real interest rates and/or inflation, coupled with a collapse of many “entitlements.” It will be like the neutron bomb, the buildings will be left standing, but the people will not.

Richard W. Rahn is a senior fellow at the Cato Institute and chairman of the Institute for Global Economic Growth.

The Growing Federal Debt Bomb – Richard Rahn, Washington Times

 

Chinese stocks soared this year after diving off the cliff in 2008.  However, since hitting the high point, Chinese stocks are now down about 20% in the past month or so. Prior to this recent drop, Chinese stocks had had a very good run in 2009.

Now, we may be getting some inkling of what drove the performance and the answer is Chinese government stimulus.  This report, based on analysis at the Bank of China suggests that massive amounts of cash from stimulus loans may have gone into buying stocks rather than equipment [emphasis added]:

Mis-Directed ‘Stimulus’ Was Huge Part of China Market Action (Business Insider, September 2, 2009, Vincent Fernando)

Shanghai stocks have cratered over 20% from their August highs, despite Premier Wen Jiabao’s continued jawboning.

Most people realize by now that speculative inflows, resulting from easy domestic lending, have fueled the rally year to date. What hasn’t been so clear, until now, was the exact size of these inflows.

It turns out that as much as 1.2 trillion yuan ($175 billion) of stimulus-related money, intended for fixed asset investment, may have accidentally flowed into Chinese stocks and property as per Bank of China analyst Shi Lei.

Such a massive quantity amounts to 26% of the entire Shanghai and Shenzen stock market turnover for the first half of the year. It also equates to 76% of real estate turnover over the same period…

This is interesting, but not terribly surprising I suppose.  The Chinese government engaged in massive financial stimulus and, not surprisingly, a lot of that money was put into financial assets rather than long-term business equipment, factories and so on.

Assuming that flow of co-opted cash has slowed, it’s no wonder the Chinese stock market action has cooled off.  Question is, is this a short-term phenomenon?

This report from China Stakes give details on borrowers using cheap government-backed loans to speculate in stocks.

Chinese Stocks, Bubbles and Bears – Kurt Brouwer, Fundmastery Blog


 

Before Chinese and U.S. officials sat down this week for high-level economic and strategic meetings, Rachel Ziemba and Adam Wolfe looked at “What’s on the Table at the U.S. China Strategic and Economic Dialogue (S&ED)?” China and the U.S. might be in rough agreement on short- and long-term issues, but diverge widely in the middle.

 

As U.S. deficits increased, global investors edged away from the dollar into the German mark, the Japanese yen, the Swiss franc, the Euro, and more recently baskets of Asian currencies.

Which brings us to today. Only goodwill (defined both as an accounting term and as political deference to military might) now supports the U.S. dollar as a reserve currency, which is what allows the United States to issue dollar-denominated bonds in world money markets.

It is this borrowing capacity that allows the Obama administration to bailout the banking industry, offer to pay for universal health care, fight colonial wars in the Middle East, stimulate the economy, send billions to Egypt and Israel, buy out General Motors, and subsidize every windmill start-up company in Nancy Pelosi’s home district. (Madoff’s problem was that he failed to set himself up as a country. He otherwise understood deficit spending.) But the shell game requires full faith in the dollar.

For those riding out financial storms by “sitting on cash,” here is what’s under your seat: in recent months U.S. federal debt has grown to $11.3 trillion, almost equivalent to gross domestic production. About one quarter of this indebtedness, or $2.8 trillion, is held abroad, and China and Japan hold just under half of those assets (liabilities to Uncle Sam).

Elsewhere on the American balance sheet is another $11.4 trillion in household debt, an annual trade deficit of about $725 billion, and a federal budget deficit that is estimated in 2009 to be approaching $1.8 trillion. That’s if the economy grows at 3 percent.

Off-balance sheet risks, what accountants call contingent liabilities, include about $10 trillion in new bailout guarantees (Fannie Mae, Bear Stearns, Countrywide, and whatever the administration launches as its New Deal of the Day). None of the above includes the unfunded liabilities of Social Security ($41 trillion), which, by comparison, make the shares of Lehman Brothers and AIG look like Scottish bonds held for widows and orphans.

The geese laying the golden eggs of U.S. financial stability are the printing presses of the U.S. Treasury, and, for now, those collecting them in their Easter baskets include a number of countries and regions perhaps tiring of American arrogance, if not of the drop in the dollar’s value. Who would blame such popular targets of moral abuse as China, Russia, Switzerland, Arabia, or Latin America for dumping their dollar-denominated assets?

All that lies between the U.S. dollar and a financial Armageddon is the Faustian house of credit cards under which Asian economies invest their trade surpluses in U.S. Treasury instruments — to keep the dollar strong, their own currencies weak, and purchases brisk between the likes of Wal-Mart and the Asian Greater Co-Prosperity Sphere.

Sooner than we think, China and Japan, like all nervous creditors, may send the United States a letter, suggesting that, henceforward, if Washington needs to borrow money, the bonds be issued in renmimbi, yen, or a basket of Asian currencies (a Pacific Euro).

Wall Street bankers did the same to the farm interests in the late nineteenth century, when they insisted that debt be based on a gold standard, as opposed to “free silver.” President Obama may be as eloquent as William Jennings Bryan. But at that point he will need to use all his oratory for the business of selling junk bonds.

The Dollar: Running On Reserve – Matthew Stevenson, newgeography

 

Trade skirmishes are one thing, full-blown trade wars quite another. Politicians, even the most fervent believers in the virtues of free trade, sometimes have to bend to constituents’ demands for protection. Ronald Reagan urged Japanese auto manufacturers to accept “voluntary quotas” on their exports to the U.S., and George W. Bush found merit in domestic manufacturers’ demand for steel tariffs. No lasting harm done to what remained basically a globalized free trading system, made freer at periodic intervals by multilateral deals cut under the aegis of the World Trade Organization (WTO). When those proved difficult, then-U.S. Trade Representative Bob Zoellick, now head of the World Bank, led the way in negotiating bilateral trade-opening agreements and pushing them through a sometimes reluctant Congress.

A worldwide recession changes things. President Obama professes fidelity to the teachings of Adam Smith, perhaps without realizing it, but is driven by domestic pressures to tilt towards protectionism. Banks availing themselves of bail-out funds were told not to hire foreign workers, even though some of the most talented financial analysts working in these international institutions are not American citizens. States receiving stimulus money are enjoined to “Buy American,” a congressional insistence that the president, to his credit, tried to get around by introducing language to provide suppliers and contractors with a large, but in the event ineffective, loophole. And when wearing his hat as CEO of General Motors, Obama forced the car maker to shift production of small vehicles from China to states that were important contributors to his election victory.

U.S., China and a Protectionist Vortex – Irwin Stelzer, The Weekly Standard

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