Monday, February 29, 2016

Official Data on U.S. Global Trade and Trade with China in 2015

The U.S. Bureau of Economic Analysis publishes statistics on U.S. international economic and financial transactions with the rest of the world.

Exports of goods:  $1,513.9 billion
Imports of goods:  $2,272.9 billion

Trade deficit in goods:  $759 billion

Exports of services:  $716.4 billion
Imports of Services:  $489.0 billion

Trade surplus in services:  $227.4 billion

Global U.S. trade deficit in goods and services:  $531.6 billion

Trade with China in 2015:

Trade deficit in goods:  $365.7
Trade surplus in services:  $31.0 billion

U.S. trade deficit in goods and services with China:  $334.7 billion

Saturday, February 27, 2016

British Exit (Brexit) From the European Union: Right or Wrong?

British media and leaders from all walks of British life have been chattering non-stop about the pros and cons of Brexit since Prime Minister David Cameron returned from consultations with EU members to announce new conditions and safeguards for Britain that the EU had accepted to keep Britain in the EU. 

First, some background on the EU.  It consists of fourteen governing institutions.  Much like any central government, the EU has steadily grown in scope, size, and budget, which constitute an-ever increasing encroachment on member countries’ sovereignty.

Your friendly proprietor believes that U.S. history illustrates the danger to Britain if it remains (Bremain—Britain remains) in the EU.

The Constitution of the United States, which formed the government of the United States from the original thirteen colonies, was officially ratified by the states on May 29, 1790.  The first Congress to meet under the Constitution drew up 12 amendments and sent them to the states for approval, of which ten, known as the Bill of Rights, were ratified.  The first nine stipulate the rights of the individual vis-à-vis the federal government.  The tenth limits the power of the federal government vis-à-vis the states.   The framers of the Constitution were concerned that the federal government would tend to grow over time, infringing on the rights of the people and the powers reserved to the states.

Amendment X:  “The powers not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved to the States respectively, or to the people.”

As recently as 1929, the federal government taxed and spent about 3% of the gross domestic product of the U.S.  State and local governments taxed and spent about 7%.  The founders’ intent remained largely intact for about 150 years.  Too, there were only a handful of federal regulatory agencies before World War II. 

During the past 30-40 years, federal taxes have averaged about 17-18% of GDP and federal spending about 22%, six to seven times their share in 1929.  State and local government taxation and spending have doubled to about 13-14% of GDP.  The alphabet soup of federal agencies has grown by dozens.

In addition, the Supreme Court has made a number of decisions that expanded the power of the federal government at the expense of the states.

Now to Brexit, and the threat of Scottish exit from the United Kingdom that would enable an independent Scotland to join the EU.

Britain as a sovereign state (much like the 13 sovereign states that assembled to draft the U.S. constitution) has witnessed a decline in autonomy as more and more of its legislative, executive, and judicial powers have been transferred to the EU.

Since the EU was founded, it has grown in its powers, steadily replacing sovereign European parliaments as the basis of national law, regulations, tax regimes, and so forth.

The EU budget has steadily grown and is projected to continue to increase.

EU legislation and implementing regulations increasing supersede those of member nations.

Extrapolating these general trends presages further reduction of British sovereignty, regardless of the reliefs Prime Minister David Cameron received from the EU in February.

Three additional factors favor Brexit.  First, England is home to the common law, which is far superior in every respect to continental law.  Allowing the EU Parliament and executive agencies to legislate and regulate an ever-increasing share of British life is a big mistake.

Second, English history, culture, customs, and its economy, based on liberties rather than continental-style restrictions, are superior to their counterparts in France, Germany, Italy, Spain, and other EU nations.  (I use “England” and “English” advisedly in the event that Scotland exits the UK and joins the EU.)

Proponents of Bremain point to the economic dislocations that Brexit would cause in Britain; better to keep its mess of pottage than retain its historical liberties.  No one can forecast the net economic benefits or losses from Brexit, so those in the Bremain camp could be wrong.

Proponents of Bremain also contend that Britain’s membership in the EU is necessary to keep the European Union from unraveling.   An unnatural arrangement is just that.  Sustaining a failed model of uniting countries with different languages, cultures, fiscal and economic systems, and different levels of development is a recipe for more troubles tomorrow.

The EU is the Borg.  If you Bremain, you will be assimilated.

Thursday, February 25, 2016

Hong Kong's New Reality

Britain transferred sovereignty over Hong Kong to China on July 1, 1997, when Hong Kong became a Special Administrative Region of China (HKSAR).  It was to be governed by a Basic Law, a mini-constitution, in accordance with Deng Xiaoping's formula of "One Country, Two Systems." Hong Kong was to enjoy a high degree of autonomy.

Freedom from mainland control is stipulated in Chapter I: General Principles.  Article 5 states that "The socialist system and policies [of The People's Republic of China] shall not be practiced in the Hong Kong Special Administrative Region, and the previous capitalist system and way of life shall remained unchanged for 50 years."

In the past few years, China's Central Government has increasingly encroached on Hong Kong's liberties.  These violations were forecast in our book published twenty years ago in 1996.

Sunday, February 21, 2016

Why Jeb Bush Failed

Barack Obama won the presidential election in 2008 because American voters were weary of the war in Iraq and traumatized by the onset of the Great Recession in 2008.

So, who did Jeb Bush select for his foreign and economic policy advisers?

Look above at his foreign policy advisers.  Twenty of these 21 distinguished individuals were connected to teams of his father and brother.  The average Republican voter could reasonably assume that a third Bush presidency would result in the same foreign policy that destabilized the Middle East in the search for the Holy Grail of democracy, costing the United States over $2 trillion, thousands of casualties, with Iran emerging as perhaps the big winner.

Now look at his economic advisers.  Only two prominent persons were officially announced, with two others contributing to Jeb's tax policy proposal.  The average voter could reasonably assume that those who advised or served in his older brother's administration were not likely to achieve economic success in a Jeb Bush administration.

No new young fresh faces played a prominent role in Jeb's policy teams. To Republican primary voters and caucus goers, it was a case of "same old, same old."   Small wonder that Republican voters were attracted to something new in Donald Trump, Marco Rubio, and Ted Cruz.

Monday, February 8, 2016

China’s President Xi Jinping Channels His Inner Mao Zedong

In the February 2, 2016, edition of The Wall Street Journal, Andrew Browne published a very interesting article on current political trends in China entitled “Self-Criticism Makes a Comeback in Xi Jinping’s China.”  Contrition, practiced in Mao’s time, has returned as a humiliation ritual, broadcast on national television—even including foreigners accused of various crimes against the state.  These shows are known as jiantao (political theater), a joint production of China Central Television and the security police.

Since his ascension to the presidency of China, Xi has mounted a national campaign against corruption (especially among his political opponents) and dissent against the Communist Party.  Browne writes about Xi’s campaign, that, “it goes hand-in-hand with his efforts to purify modern Chinese society by infusing it with old-fashioned socialist values (rejecting Western values) and Confucian ethics.”

Other relics of Mao’s socialist era have made a comeback, among them the iconic Lei Feng, “a selfless soldier who darned socks and carried manure” until his death.

It so happens that I was a Chinese language student at Hong Kong University from March 1, 1963, through January 16, 1964.  My arrival in Hong Kong was six months after Lei Feng died (August 15, 1962), after supposedly being hit by a falling wooden pole.

My focus was on contemporary Chinese politics.  My principal texts were People’s Daily and Red Flag (the Chinese Communist Party theoretical magazine, which was renamed Seeking Truth, to focus on current developments, in 1988).

In July I decided to translate several poems to get a first hand impression of Chinese realist literature.  The following is my translation a poem in the spirit of Lei Feng, which appeared in People’s Daily on July 16, 1963.  (I verified the translation with several of my teachers.  I left Chinese punctuation intact.)  I have no knowledge of the poet’s whereabouts or if he is still alive.

Ode to a Manure Basket:  Dedicated to the Commune Leader

Oh manure basket,
Is it worthwhile reflecting on your virtues?
Your manure basket on the contrary,
Is unusual!

Its bottom has often been changed,
And its sides repaired so frequently?
That everyone cannot but know
That the handle has been worn slick?

When you were an ordinary commune member,
It always followed you,
Every day winding through the big streets and small alleys,
Every hour reaching the village and riverside.

When you became a commune leader,
Whether busy in the wind or rain,
The manure basket, however, never left your hands,
Accompanying you to meetings, joining you in the harvest.

You need not waste talk,
Urging the accumulation of manure like the collection of grain;
The manure basket is your link with the masses,
Erecting a bridge of corresponding will!

Times have changed in the past 53 years.  Confucius had made a full recovery.  Is the manure basket just over the horizon?

(WSJ article is gated)

Thursday, February 4, 2016

The Pharaoh Dreams Anew in 2016. Thoughtful Ideas Interprets His Dreams

Bear with me.  This will be a long and high-powered post.

Genesis 41 tells the story of Pharaoh’s dreams and Joseph’s interpretation of them.  Updated for 2016, Pharaoh dreamt that he stood by the river and suddenly there came out of the river seven fine looking and fat bulls, and they fed in the meadow.  Then seven ugly and gaunt bears came out of the river and ate the seven fat bulls.  He had a second dream with seven weak stalks of grain eating seven healthy stalks.

So Pharaoh summoned your friendly proprietor (me) to interpret his dreams.  I told him that seven fine looking and fat bulls represented the gain in equities following the financial crisis of 2008.  The DJIA increased from a low of 6,594 on March 5, 2009, to a high of 18,312 on May 19, 2015, a gain of 178%; the S & P 500 increased from 735 on February 25, 2009, to a 2,131 on May 21, 2015, a gain of 190%.  This was the great bull market in the seven inclusive years 2009-2015.  Pharaoh’s 2016 dream portends seven lean years in equities.

In Genesis 41, Pharaoh put Joseph in charge of economic policy.  He collected a fifth (a 20% flat tax) of the harvest in the seven years of plenty that was used in the following seven years of famine to save Egypt from ruin.  Instead, in 2016, President Obama has piled up another $7 trillion in debt since 2009.  Instead of saving 20% of revenue during the bull market to meet public expenditures in bear market years, he squandered it all.

Why will seven years of a bear market in equities follow seven years of a bull market?

The central bank, the Federal Reserve System, is at sixes and sevens.  Its members do not know what to do.  They are lost at sea.  They disagree on what works and what doesn’t.  Monetary economists disagree on what strategy and tactics the Fed can and should now employ.  The massive expansion of the Fed’s balance sheet through purchases of a variety of securities to expand bank reserves has not restored growth to the pre-crisis rate.

The steady growth of regulations over the decades weighs on the economy like a heavy anchor.  Federal regulatory authorities are incorrigible and recalcitrant bureaucracies, constantly adding new rules and rarely discarding old ones.

The federal government continues to spend more, not less, money, borrowing trillions to make up what it does not collect in taxes.  The rate of annual increase varies, but the amount never falls.

Barring an indictment, Hillary Clinton will be the Democrat nominee for president.  If she wins the general election in November 2016, she will increase taxes and impose new regulations, further choking growth.  Her emphasis on redistribution of income and wealth will reduce incentives to work, save, and invest.  If a Republican wins, who knows?  The last Republican president led the U.S. into two costly Middle East wars and presided over the onset of the Great Recession.  Tea Party-elected Congresses in 2010 and 2014 failed to reverse the direction of economic policy.

The era of supercharged growth in China is over.  Nine–ten percent growth a year for three decades is slowing to 4-6% growth, reducing demand for commodities and other imports.  Growth will slow in countries that prospered selling raw materials, agricultural products and other inputs to China.  Slowing growth will reduce profits and equity prices of private enterprises around the world.

Oil is likely to remain below $50 a barrel for the seven bear years.  Whenever the price of oil rises much above $40 a barrel, shale producers will immediately expand output.  In addition, wind and solar are rapidly becoming cost competitive.  Hybrid and electric cars are using less fuel.  Driverless cars available on call will reduce the purchase of privately owned vehicles and petroleum products.

Investors will stop searching for positive yield.  Instead, they will pay banks and governments a percentage of their deposits and purchases of bonds just to preserve capital.  Negative interest will be routine in the new financial order.   Free money will fuel unproductive speculation—can you hear the sound of bubbles popping?

Free money will encourage more government borrowing.  Whoever wins the presidency has promised to take a leadership role in the world in defeating ISIS, protecting Eastern Europe’s NATO members from Russian aggression, expanding U.S. military presence in East and Southeast Asia, and venturing deeper into African’s ethnic and religious wars.  In seven years, Americans will look back to the good old Obama days of merely trillion dollar annual deficits.

Why only seven years of bear markets?  By 2023, every institution (e.g., universities, operas, museums, etc.) will suffer a marked decline in the value of their assets and difficulty in paying operating expenses from withdrawals of endowment.  Donors will reduce giving.  American industry will be less competitive than it is today.  The labor force participation rate will continue to fall while dependency on government handouts will rise.  Technology will enrich the few, but not the many, and won’t be able to prevent the fiscal and economic decline, or at best, stagnation.

In 2023, the people will say “Allons enfants de la Patrie” (Arise, children of our Nation) and this time the entire political establishment will run for its life.  The U.S. will realize a turning point.  America’s new leaders will do the right thing in restoring economic freedom and opportunity and ending disastrous military adventures abroad.  The bear market will end after seven hungry years.

In 2023 we will know if your friendly proprietor’s interpretation of the Pharaoh’s 2016 dream is correct.