Squaring the circle, packing your bags

In Britain, there are 28.89 million employed - 72.5% of the "people of working age"; median earnings approach £25,000.

In China, the average urban wage in 2006 was 1750 yuan per month, or (at today's exchange rate) slightly less than £2,000 per year.

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In Britain, there are 3 million homes where no-one works, with an average household benefit payment level of over £4,000 p.a. This doesn't factor in the cost of other benefits provided by the State, such as health and education. For example, State schooling costs something like £6,000 yearly per child.

In China, the official urban unemployment rate at the end of 2008 was 4.2%, or nearly 9 million people. This statistic does not include unemployed not eligible for benefits, or migrant workers - about 20 million out of 130 million migrants have no job. In industrialized Guangdong Province, for those who qualify, unemployment benefit for the first 24 months is 688 yuan per month, or £757 per year.

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In Britain, the 27.5% of the "people of working age" that might be employed but are not, number approximately 10.96 million.

In China, estimates Eric Janszen of iTulip, there are 20 million officially unemployed and the real tally should be 40 - 50 million.

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China has over 1 billion people and is desperate for land, and natural resources such as wood, water and arable soil. Despite restrictions on family size, her population continues to increase, largely because her people are getting to live longer (and will one day incur the high additional costs of growing old). She has industrialized at high speed and has built a massive skill base. She is continuing to acquire technological and scientific know-how, and is sucking in the world's steel and a panoply of key African and Australian minerals and rare earths. She sits on vast reserves of coal. The ruling Communist elite have not spent a long lifetime climbing the exceptionally dangerous slippery pole in their country, to see their beloved nation sink into chaos and their equalitarian beliefs defeated.

You are a British (or American) politician. You know all the above - or your handlers will tell you just before you go on "Question Time" or some other grill-the-pol show. (1) What will you say to your voters? (2) What private plans will you make for yourself, your family and your friends?

Unemployment a good thing? For economists?

A thought-provoking piece from Mark Thoma, in which he argues that many jobs that have gone deserved to go; it's the creation of new ones that should occupy our minds.

There is a pipe-smoker-in-a-leather-chair comfortableness about this (I'm not sure what the unemployment rate is for economists; should the 10 - 15,000 who failed to predict the credit crunch all be sacked?), but he may be right.

However, the allegedly self-righting mechanisms of the market may not operate quite so efficiently in a single nation's economy when there are other major causes of disequilibrium at work in the world, including quarrelsome international politics and sharp disparities in global wage rates.

An image: picture a man in his study, happily using a tiny screwdriver to adjust the mechanism in a carriage clock, while a block of frozen waste hurtles silently towards him from a passing jet liner.

PS:

Coincidentally: "... if you fail to heed the roar in your ears and fail to look up what will inevitably come, while it may surprise you, does not surprise anyone who has passed sixth grade math." - Denninger

Social implications of advancing technology

... the economic problems of the future will not be about growth but about something more nettlesome: the ineluctable increase in the number of people with no marketable skills, and technology's role not as the antidote to social conflict, but as its instigator.

The battle will be over how to get the economy's winners to pay for an increasingly costly poor. ... In a future with higher taxes, the divide between rich and poor would be the central economic challenge.

- Economist's View

We're in for a big theoretical debate with highly practical consequences. Liberty, individualism, redistribution of wealth, where the wealth comes from in the first place, what is the Good Life... There must be somewhere between Goldman Sachs and Karl Marx. I don't like the two-party State (cosy-cosy) and I don't like bipolar philosophy.

North Dakota? Or New Mexico?

Interactive WSJ diachronic unemployment map here. (htp: Tim Iacono)

Toll me back from thee to my sole Self

Just caught a minute of BBC1's Question Time, chaired by the garrulous and self-regarding David Dimbleby. Self-regarding literally, this time, as he watched Will Self lay into the career-crazy fascists of New Labour, who now propose to persecute the unemployed after a decade of encouraging them to remain on benefit. As he says, they had the time, the money and the ideology to sort it out, and they didn't do it; and in some damningly characteristic way, they're slapping people who are down already. Lethal. I may have to start liking the white-nosed sleazebag, after all.

His target is the type who may not have realized that they were driving David Kelly to suicide, but probably don't much care that they did, so long as the trail was brushed. My only concern is that the public generally may be starting to feel as I do, in which case we are entering dangerous territory.

Survivalism

Michael Panzner finds another useful article, this time by Laura Coffey on making contingency plans for losing your job.

I sent a circular to my clients in the late 90s, urging them to take out redundancy insurance, because I thought the coming stockmarket crash would be followed by recession; but of course I didn't anticipate that the government would use monetary inflation to defer the reckoning (and, I now fear, make it worse). Articles like Coffey's are straws in the wind, I think.

Unemployment B-L-S---

Market Ticker: The Recession of 2008

Karl Denninger reports that the US unemployment rate has hit 5%. He thinks - and it's certainly plausible - that we're already in a recession. Especially if Rob Kirby is right, and the Bureau of Labor Statistics (BLS) is lying about the scale of job losses in the financial industry.

Ta-ta industrial wages, hello Mcjobs

India's leading car-maker Tata seems likeliest to take over Jaguar and Land Rover. The fiddle plays, Rome burns.

Consequences

Michael Panzner turns his attention to the human implications of recession, as I have been doing for some time, most recently here, here and here. At least America is a democracy and so politicians must have some incentive to clean the Augean stables; I don't know about the UK.

"It's good news week"

... as the ironic (though barely intelligible) Hedghoppers Anonymous song went.

For while Japan and China are selling down their holding of US securities, the UK is gobbling up even more, according to Matt's graphs at Discursive Monologue. Maybe we want to be second in Uncle Sam's hierarchy of foreign creditors, instead of third.

And US employment is holding up, according to the official October figures - but not if you use a different measure, says Chris Puplava.

Sovereign wealth funds and national prosperity

I have had a comment (on an earlier piece about sovereign wealth funds) from a Shromon Das, who gives his view on SWFs here and a follow-up today here.

Without pretending to technical expertise in this area, I can envisage implications for a growing ownership of equities by governments. One effect may be to reduce volatility in large-capitalisation stocks, since national treasuries can take a longer view than the individual investor.

But there must also be concern about the possible use of ownership for political purposes. For example, I wonder at the UK's having allowed foreign enterprises to take over some of our energy and water supply companies.

I began this blog for investors, but increasingly I think the real story is not about how some may make (or protect) their fortunes, but about the implications for ordinary citizens.


Today I drove past the site of the former Rover car plant in Longbridge, Birmingham. The firm was on its way out years ago and a venture capital company called Alchemy offered to take it over, cut its size and specialise in a line of sports cars. The rest of the land could be redeveloped - housing and retail. The surplus workers would have their pension rights and redundancy payouts honoured, and some could still look around for employment in other plants.

But there was an election coming (2000), so the government chose to encourage a management buyout instead. Thousands of jobs were saved, supposedly. Besides, it was said (I seem to recall) that the site was too polluted for residential development, anyhow.

Well, Rover did go bust anyway (after a £6.5 million "bridging loan" to prevent its collapse immediately before the 2005 General Election). The workers didn't get the redundancy payments they'd have had from Alchemy in 2000, and their pensions were hit too. Anyone still interested in car work elsewhere would then be five years older, in an industry that some believe discriminated on the basis of age prior to new legislation in 2006.

A Chinese firm, SAIC, has picked over the carcase, with special attention to any designs and other paperwork that might help with setting up an alternative in the Far East. And now the site is being cleared - for residential and retail development.

There is a big, shiny new building on the Bristol Road in Longbridge - a JobCentre Plus.


Where, in all this, were the working people's long-term interests really considered, even by their political representatives?

Risk avoidance leads to stronger dollar

That's the analysis of Kathy Lien at DailyFX.com yesterday:

These days, cash is a valuable commodity since a liquidity crisis means a lack of cash. The sharpness of recent moves and the lack of liquidity have probably pushed more traders to liquidate positions than to add funds. Flight to safety continues to send the dollar higher against every major currency with the exception of the Japanese Yen as more victims of the subprime and liquidity crisis surface.

There's a possibility of an interest rate reduction:

...the biggest question on everyone’s mind is when the Federal Reserve will cut interest rates. The market is current pricing 75bp of easing by the end of the year. There has also been speculation of an intermeeting rate cut.

But:

Like many central banks around the world, the Fed has been reluctant to lower rates because they feel that the markets need to be punished for their excessive risk appetite. Furthermore, they have said that they need to see market volatility have a “real impact” on the economy.

This, she thinks, is becoming apparent:

With major losses and bankruptcies reported throughout the financial sector, we expect companies to layoff staff left and right. [...] For the people in the “real economy,” their 401ks have taken a harsh beating while their mortgage interest payments are on the rise. It is only a matter of time when we see economics reflect that. The bad news is already pouring in with housing starts hitting a 10 year low and manufacturing activity in the Philadelphia region stagnating. Since the beginning of the year, the weak dollar has provided a big boom to the manufacturing sector. Now that the dollar has strengthened significantly, activity in the manufacturing sector should also begin to slow.

Marc Faber on the world bubble and his own investments

I have already referred today to Faber's interview on Minesite.com and would like to pull out one or two strands:

Faber thinks "...all real estate markets around the world are in cuckoo land and that they will all correct at some stage meaningfully even if you print money".

Asked whether he has real estate himself, he says, "I own properties in Asia, in New Zealand and in Vietnam in particular and in Thailand, and Indonesia and some in Switzerland; but ... I never borrow money to buy my properties, I pay cash ... I also own gold, and I also own some shares of course, I’m just diversified; but in general, I am very liquid at the present time... I’m holding a lot of cash at all times."

Re precious metals and inflation: "I tell you, the US has no other option but to print money. And they’ll go down like the Roman Empire in a huge hyperinflation. " He is bullish on silver and gold (especially gold), though he notes the danger that in a crisis, the government may simply expropriate investors' holdings of precious metals, as has happened in the US before.

Faber also notes that the expansion in the money supply in the West is not matched by increases in GDP, which is why we have speculative bubbles and a stalled standard of living: "...in the 50s and 60s and 70s if you increased your debt in the United States by $1 you got essentially also a dollar's worth of GDP growth. Now in the last 5 years, total credit market debt in the US has grown by $13 trillion but GDP by just $2.3 trillion." By contrast, in the East, living standards have risen: "I moved to Hong Kong in 1973. When I came, Taiwan, South Korea were very, very poor countries, as well as Singapore was like a dump at that time. Today, Singapore is the richest country in the world and, you see that the standards of living of people, has over the last 30 years, improved very dramatically in these countries. Whereas in Switzerland I go there, back, a few times a year I don’t see any meaningful improvements in the standard of living."

I think I have to speak personally now. What worries me, since I'm not rich and live in a large ex-industrial city, is not how to profit from the crash, as Peter Schiff advises, but what my life is going to be like when my neighbours and their children are strapped for cash, unemployed (or in Mcjobs) and increasingly resentful. Shouldn't we get our noses out of the financial press and start to become concerned about the social cost of the folly and cynicism of our banks and governments?

Globalisation and economic depression - some strategies

China has its problems. Monsters and Critics, quoting UPI, says that 3.5 million jobs could go if the yuan appreciates much more against the dollar. But if it doesn't, the trade imbalance continues and the economy and stockmarket carry on overheating. So China too is between a rock and a hard place.

In the long run and given free global trade, surely low-wage economies will take work from the higher-wage ones, until we reach equilibrium. It's the rate of change that makes it messy. For people like the Chinese, they have to work out how to take over our manufacturing capacity without bankrupting their biggest customers; for the West, how to lose all this work and wealth and remain democracies.

Richard Duncan thinks it can't be done without some original form of intervention - he suggests a steadily rising minimum wage, to give the worker in the developing economies enough money to take over the job of buying things, a job that we in the West thought was ours for life.

But the implication for us seems clear - we must become poorer. The winners among us will be those who are able to extract capital out of their possessions and preserve it. Marc Faber says that there are bubbles everywhere - property, shares, commodities - but I guess that in a deflationary world there must be something that will increase in value relative to most other things.

Cash seems obvious - the deflation of the Thirties was such that in the UK we had the Geddes Axe, actually cutting the wages of public servants to maintain a steady relationship between money and things (UPDATE: I got Geddes wrong - see HERE - sorry). So public servants who had accumulated savings would have done well - if they had saved. For many others, it was unemployment and poverty. To get an idea of the process and consequences, read "Twopence to cross the Mersey" by Helen Forrester, a real-life story about the economic descent of her middle-class family, which had (typically) lived on credit before the Crash.

Some fear that our governments will shudder at the thought of repeating that period and will try to buy their way out of the jam by printing money, in which case we could go from deflation to hyperinflation, and this is where the gold-bugs raise their voices.

On this analysis, I should think the strategy is clear. First, get out of/avoid debt. Then, live simply, and if possible convert unnecessary assets to cash - which you may partly invest in whatever you think will hold its value. And look for the steadiest job you can find?

America's inflation causes China's inflation

A thoughtful article by Thomas Brewton yesterday here explains that US inflation is also causing inflation in China. While America sheds jobs and lives on credit, the Chinese economy is becoming overheated. When the pop comes, the result may well be bankruptcies and unemployment in both countries, as well as in others. Richard Duncan's book "The Dollar Crisis" explains the mechanisms in detail.

If the yuan is allowed to appreciate against the dollar gradually, Chinese business will start to suffer, but starting now may mean less pain overall. The USA will also undergo painful - and politically unpopular - adjustments. Can the crisis be managed without a crash?

US immigration and the poor (continued)

Altough immigration can keep down the living standards of poorer workers, it's not possible to undo what has happened so far, as this source reports:

President Bush defended the bill as a comprehensive approach that will fix what most Americans believe is a broken immigration system through which millions of illegal immigrants have entered the United States.

"If anybody advocates trying to dig out 12 million people who have been in our society for a while, you know, it's sending a signal to the American people that's just not real," Mr Bush said.

US poor getting poorer

Following my earlier comments on Alan Greenspan's enthusiasm for immigration, yesterday's Daily Reckoning gives Martin Hutchinson's view:

"The immigration bill brought forward and apparently likely to pass demonstrates an unattractive new political trend in the United States: the end of the classless society for which the U.S. has been famous [...] the rich really are getting richer in the US...the poor really are getting poorer [...]

The economic effect of large amounts of unskilled immigrant labour is very clear: it drives wage rates down to rock bottom levels [...] for the lower classes, it is hell...Instead of the well-paid factory jobs their fathers had, making physical products in which they could take pride, they are now reduced to competing with infinite numbers of illegal immigrants for personal service, retail and construction jobs that have not been mechanised or out-sourced.

Theoretically, they could get more education and turn themselves into brain surgeons or computer-aided designers; in practice, these possibilities merely make them mourn that they hadn't paid more attention in math class. Thus the social gulf grows ever wider."

Small progress in US-China talks

The Strategic Economic Dialogue talks have concluded, to be resumed in another 6 months. Judging from Business Week's report, not much was gained by the US; but then, China is negotiating from a position of considerable strength. She's only doing what we would do in her place. Interesting that there were extra talks afterwards.

But America's indebtedness is also a challenge for China and the rest of the world, in a different way. Richard Duncan's book makes it clear that making too much money in international trade is perhaps as big a problem as losing it. More about this soon.

US-China "Strategic Economic Dialogue" resumes

We're waiting to hear much from the Western side on the talks, but see here for a Chinese-angled general background to the series. However, this one from China View is more frank about the differences between the two sides.

Pakistan's Daily Times gives useful detail on the economic issues: US manufacturers are calling for further appreciation of the Yuan against the dollar, but "an international think tank, Oxford Economics, estimated that even a 25 percent revaluation of the yuan against the US dollar would decrease the total deficit by only 20 billion dollars after two years."

For the American side, it must be like an uncomfortable meeting with your bank manager.

China goes shopping for the world's resources

China is taking in $20 billion a month of foreign capital, according to this 9 March article from the International Herald Tribune. It has set up an agency to decide how to invest its (now) $1.2 trillion in foreign currency reserves.

There are many implications, some contradictory. Diversification could mean less demand for US Treasury bonds, and if China lends less to America, interest rates could rise in the USA. On the other hand, increasing its holding of other currencies will make it less disruptive for China to let the dollar drop against the yuan.

A stronger yuan will affect some Chinese businesses that trade with America, as previously noted. In a thread discussing America's trade deficit on China Daily, "tradervic" from Chicago says: "Mexico thought it had the cheapest labor market, welcoming all the American companies they could get. Then China showed up with their workforce, and those same American companies left Mexico, leaving the Mexicans running into America looking for jobs. It will be interesting to see what happens when the American companies start pulling out of more factories out China for Vietnam, Bangledesh, and other countries. It is like I told my cousins-in-law in China what happened to my cousins-in-law in Mexico and my immediate family in Detroit: Do not get too used to the jobs - they will not last forever."

I have previously suggested that China may be willing to accept these consequences, to some extent, as part of a strategic economic plan. Just as the Chinese in light industry should not take their jobs for granted, the US cannot rely forever on its bargaining power as one of China's biggest customers.

A Bloomberg article today explains how China is trying to manage the currency appreciation so as to limit the damage in employment terms. It also has a stockmarket bubble on its hands. Did China ever expect that wealth and success could be such a problem?

Now it can also start buying the world's assets. The IHT article quotes Jing Ulrich of J.P. Morgan: "They're not going to be looking for financial assets, but energy assets and natural resources, minerals — things China desperately needs." So bears who look to buy commodities as a hedge against US inflation, may be doubly motivated when they see a big player enter the same market.