When a thread gets over 100 comments, it's hard to take it in as a whole. I am preparing a (typically long text) diary about many of the things discussed in that thread, but I'm not ready, and so rather than kill myself jumping around from comment to comment, I've decided to use a diary to respond to comments I made notes on.
It's obvious that the People's Daily statement from the CCP has sparked some interest in what for me is a major danger to Democratic plans to take control of the US government in 2006-2008 - that is, the recession we are already in.
Obviously, this diary is mostly aimed at people who commented on zenbowl's diary (at least the first 100 or so). I guess I'm pimping his (her?) diary as much as I am whoring my own soon-to-appear diary. I hope this use of a diary doesn't generate a lot of meta-criticism, but the fact is that I just have not been seeing enough discussion of these things on Daily Kos - and I think that's a mistake, because unless we work these economic realities into our political platform, unless we start leveling with people about what's happening, Democrats stand to get control of the government just in time to get blamed for everything going to hell.
And Karl Rove knows it.
zenbowl linked to a CCP press release that was a little on the snotty side. But it's far from the only one. The CCP made a nice gesture last year when they let their currency float a couple of percent. But the attitude they are copping is related to the fact that they not only supply a massive percentage of American consumer goods in every sector, they have done so during the Era of Low Prices.
In other words, when the CCP snaps at George Bush, what they really mean is: stuff it, cowboy; we take enough shit from the vampires from Wal-Mart and Dell already.
We all should know the big-box business model by now (I want to stop talking about Wal-Mart all the time because it's only one example):
1. Move production to China. Build factories there and take advantage of labor costs 1/20 - 1/30 of what American workers make.
2. Use incredibly low-priced consumer goods to build up business in big-box stores, killing off American small retailers.
3. Threaten new Chinese production lines by constantly demanding lower prices from the Chinese supplier factories.
4. Rinse and repeat.
If you want to see where this has gotten us, check out builtinchina.com or any of the thousands of similar web sites. ANY American capitalist who thinks he has a retail outlet for goods can order them up from a non-name Chinese factory. No employees, no pensions, no insurance - no responsibility. It's really the same thing Tom Delay was talking about when he said the Marianas Islands were "perfect capitalism". No downside.
However - and many of you realize this - the US is and has been running huge trade deficits with China. This is made worse by the fact that so much of our former manufacturing capacity is now in China. The CCP does not want anything Americans are selling, except for high-tech hardware the US refuses to sell on national security grounds.
The CCP is not about to allow the American service economy to reorganize the Chinese economy, so the only thing China can do with the dollars it earns is plow them back into T-bills. The US economy requires billions in such foreign investment every month in order to keep interest rates low.
The party, however, is ending now. The American consumer has been spending money he doesn't have - just like his government. To coin a phrase, Americans have been spending their houses. The long, long rise in the housing market (the "housing bubble") has provided people with a source of cash other than savings or income (since wages have certainly not gone up, and the jobs numbers are imaginary).
That bubble was extended even further by sophisticated financial instruments, including ARM mortgages. But the people who took out these mortgages were all betting on continued appreciation in the housing market.
That rise in house prices is OVER. Foreclosures are up, and ready to rise further. Ameriquest (a subprime lender) laid off over 3,000 people. I guess they see the housing market cooling off. Other such companies have already gone bankrupt. The supply of houses and condos (in terms of months) is already climbing, and there are thousands of housing units in the pipeline.
Builders kept building because that is what they do, and because our ever-rising housing market allowed home construction to get streamlined and consolidated so that a relatively small number of enormous national building companies, which are publicly traded and thus subject to stock price pressures like other companies, is now responsible for a large percentage of construction activity.
What are those companies doing? They are running one-day fire sales and writing off excess land purchases. If you bought a house in a development for $400,000 and the developer comes around and starts offering the same house for $325,000, you not only just lost $75,000 - if you are in an ARM you just went upside-down on it.
This is primarily a coastal phenomenon right now, but there are signs that the central states are not going to escape. Yes, there are over 50,000 units for sale in Miami, which can't sell 5,000 a year. Yes, 40% of recent California mortgages were adjustable-rate. But what about this? Indiana and Colorado are among the national leaders in foreclosures. A major Indiana lumberyard recently announced it was goin to lay people off. Is that connected to the housing market?
As far as the idea that jobs might lead us out of the wilderness goes - a large percentage of new jobs are in construction, and still more are connected with home supply, remodeling, repair. When housing prices are falling, you cannot expect to do improvements and get your money back for them when you sell. And in case it didn't occur to you - foreclosures mean even more supply of housing coming on the market, because banks will not carry housing. They will sell it at auction. Which way do you think that moves the price?
We have a crisis shortage of low-cost housing in this country, and the hell of it is that none of the housing I'm talking about can be converted to meet that need - although eventually we may see McMansions refitted for apartments. But I don't think it will be easy, because McMansions are not built as solidly as the old houses that used to get cut up for student apartments.
Back to China for a minute. The reason why they are being a little snotty is because we have double-tracked our relationship with them. On one hand, our wingnut government wants to talk tough about freedom and democracy; on the other hand, there has seldom been an economy more dependent on one foreign supplier. The CCP thinks we ought to be a little more respectful. And they think this because they are lining up oil supply all over the world. In Africa, in South America, and now with Russia, the CCP is angling for long-term energy supply contracts. Meanwhile, we have Big Time blowing snot at the Russians for no apparent reason except that they are the Russians. And in a textbook example of suicidal statecraft, our wingnuts refuse to bargain respectfully with people like Chavez - who, truth be told, would rather deal with the US than anybody else IF HE THOUGHT HE COULD TRUST US. But our government would have to apologize for supporting his enemies, and possibly for trying to kill him. And this example goes for every country in the Western Hemisphere. We pushed Mexico to take NAFTA, and then we put up no resistance when corporate interests fled Mexico for even cheaper labor in China (Mexico 1/5 - 1/6 of American labor costs, China 1/20 - 1/30). We haven't done Brazil any favors either - and they are accumulating a dollar surplus like China. China has 700 billion dollars on ice, but if you take the BRIC countries (Brazil, Russia, India, China) the dollar overhang blows way over a trillion.
Many of us probably look at Chavez as untypical. He is typical, in the sense that he is obviously trying to address the problems of his country's poor, and he has to go against certain corporate interests to do it. Every country south of the border is in the same position, more or less. Our arrogant diplomacy and suicidal statecraft lets them know that we have no intention of helping them, even if they could help us.
Some of zenbowl's commenters seemed to think that this was just a global shift toward Chinese ascendancy. If that were true, we would at least know where to ask for help. But China has its own problems. First of all, if the American consumer finally decides to quit buying and face the debt he owes, China takes a hit. The hit is not necessarily fatal, because China is more diversified than you might think. They sell more than a third of their exports to Europe, and almost a third to Japan. But when American consumption tanks, Europe and Japan will also take a hit, and we might drag them into our recession.
Another thing - I'm not sure about this, and I throw this out to the people who commented on zenbowl's diary who live in China. I have been hearing that there is an American-scale housing bubble in south China, and that people who contracted for the construction of houses and condo buildings in that region are now walking away from big pre-construction deposits in the expectation of prices falling - just like people in many regions of the US. If that's true, then the CCP bitching about the US government being a "spoiled child" may express fear as much as irritation. The CCP does have most of the high cards, but you can't win money from somebody in a poker game if they throw it away first.
In other words, and this also responds to another set of commenters, the real fear is not that the Bernanke Fed would start inflating the dollar and eroding China's dollar holdings. No, the scary scenario is one in which the Fed changes course and starts cutting the interest rate again in order to keep homeowners afloat. And then, as in Japan, we could see the interest rate cut to zero AND NO STIMULUS. The Japanese have been suffering through a long recession in which property values fell and continued to fall. Their stock market went down and stayed down. They inflated their currency, and they now have a very high external debt - but at least what they got for it was a flood of infrastructure and construction projects sponsored by the central government.
We got a lost war for ours. This is not an inflation scenario, it is a deflation scenario. Deflation is the destruction of money and credit. When people go bankrupt and lose their houses, that is deflationary.
Some of zenbowl's commenters asked what we could do to get out of all this. Some mentioned increasing US manufacturing and industrial production. "But that would take years." Yep, but that doesn't mean we don't have to. The addiction to Chinese goods will have to be limited over time. Although I believe certain kinds of protectionism are warranted in some cases, Republican saber-rattling about tariffs on Chinese goods are really dangerous for everybody.
We have to take some chances on policy here, comrades.
First, we should pull out of Iraq and stop the bleeding. As for Afghanistan, we should ask China what they think about it - and I mean really, because they are our partner-economy for years to come. The idea that China and the US would suddenly start screaming at each other scares everybody to death and should scare us.
Second, we should ask the Europeans what they think we should do, and I mean really, because Europe is headed in the right direction. They are growing their economies by allowing immigration to gradually revitalize their populations.
Third, we should GROW. I don't mean grow the money supply. I don't mean grow debt. We have to GROW THE POPULATION. And that means recognizing that the economic pressures that are sending immigrants toward the US are NORMAL. The invisible hand is pushing them this way because we need them.
Inflationist economists seem to assume that the US government will do something. What can it do? The choice will be between letting people get screwed in "the new bankruptcy", or screwing creditors. But there MIGHT be a middle way, in which we open the border, but direct more people toward the construction of the very low-cost housing they themselves will need, that is also needed by millions of poor Americans already here.
Fourth, we should completely change our diplomatic structure. Instead of a military-based diplomacy that tries to project power, we should have an economic-based diplomacy focused on United States leadership of the economy of the Western Hemisphere. Consider it an updated Monroe Doctrine, if you like: but we need an American Common Market that allows economic forces to dictate what happens in a trading zone from Baffin Bay to Tierra del Fuego, allowing free movement of goods, money, and people. We need to be involved in a constructive way in the economies of all the countries south of the border, sending them all the technical and scientific help they will accept, and getting back from them the ready-to-work population that will allow us to grow our way out of the deflation-or-inflation dilemma.
If it takes 50 years or more, we MUST reduce our dependence on foreign imported goods, especially when those imports come from the other side of the world. They have energy other places than Saudi Arabia, you know. Our South has gas and oil, and more than that it is gaining experience with non-corn-based ethanol (using things like tapioca and switchgrass), which is something we're going to have to use.
I don't want to close this diary without a word in recognition of the electoral dilemma all this poses. Let me just put the question this way: do you think recession-talk is overblown? Do you think oil prices will fall and housing prices keep going up? Do you think that there is no possibility that Asian countries will switch to the Euro as a reserve currency, no possibility that a Euro-based oil bourse will be created? (Listen: oil does not care what currency it is paid for in.)
Do you think there is no possibility that the Democrats will win elections, only to find that the US economy is caught in a liquidity trap, for which both parties will get equal blame?
How much do you want to bet?
I sometimes get the feeling, listening to talk about the "sheeple" on lefty blogs, that as a group we no longer think that telling the American people the truth about the economy is possible. We have to just win the election and then see what we can do.
But what platform do you run on? Sure, if the Democratic platform warns that the sky is falling, the Republicans will accuse you of wanting it to fall.
Do you think that we can never convince Americans of the truth? Well, economic pain will convince them of something.
There could come a moment, and it might not be far off, when everybody in the entire electorate agrees with Democrats about what to be AGAINST. The question, then, will be: is there anything to be FOR?
And does the Democratic Party have any credibility on those issues? the worst-case scenario is one in which Americans don't trust either party. The Republicans will find a way to win that one. And people will be holding more than their nose if they have to vote for them again.
They'll be holding their guts in.
In the interest of disclosure, a lot of the arguments and anecdotal evidence I cite comes from Michael Shednick's blog, globaleconomicanalysis.blogspot.com. Mish is a bit of a gold bug, and he doesn't think there is any way out of the deflationary dilemma. The idea of an American Common Market, as far as I know, is a product of my own fevered brain - but I honestly think that South American and Latin American countries (as well as Canada) would still accept American economic leadership if they thought we meant it this time. The problem is that in all our history we have never done anything but turn our backs on them.
I really think that we either change that attitude now, or the invisible hand will be giving us the finger for a very long time...