Drop in GDP reflects significant problems in the world economy

[BanglaBhoot]

If you wonder why the machinery maker Caterpillar is laying off more than 20,000 of its workers, the answer comes through loud and clear in the latest report on America’s gross domestic product.

Americans’ production of goods and services fell at a 3.8 percent annual pace in the final quarter of 2008, and one of the steepest parts of the slide was in exports.

The global economic downturn means that Cat, which not many months ago was one of corporate America’s big stories of industrial success, is selling a lot fewer excavators and pipe layers.

For years, US exports grew faster than GDP. But in the most recent quarter exports fell much faster than the rest of the economy, declining at a 20 percent annual pace.

It’s a sign of how a recession that began with trouble in American mortgages has gone global, and now that global impact is bouncing back at the US.

“That’s a huge decline in what has been … the fastest growing sector of our economy,” says Ken Mayland, who heads ClearView Economics, a consulting firm near Cleveland. Any pullback from globalization and trade “threatens to dull and tarnish the overall world prospects for growth.”

The GDP report, released by the Commerce Department on Friday, also unveiled sharp weakness by consumers at home – but the overall decline in economic activity was not as big as economists had forecast.

One reason was that business inventories rose more than expected, placing a temporary mask on the overall weakness. Consumer spending fell at a 3.5 percent annual pace for the quarter, similar to the retrenchment a quarter earlier.

Deflation for the first time since the 1950s

Since all these numbers are on an inflation-adjusted basis, it’s worth noting that in the fourth quarter an unusual thing happened: The gauge of overall prices used to adjust the GDP numbers showed deflation for the first time since the 1950s. The deflationary pressures spread beyond oil to affect the prices of holiday retailers.

Durable goods including big-ticket items such as automobiles have been hit particularly hard by the consumer slowdown.

President Obama focused on the economy’s troubles again Friday, unveiling a task force to focus on strengthening the middle class. He urged quick passage of his economic stimulus plan. But he also said the economy needs more than just more jobs, it needs better ones that offer average Americans “a way forward and a way up.”

For now, hard times for Americans are being felt not only at home but abroad. Imports to the US declined at a nearly 16 percent annual pace.

“A lot of the burden of the US slowdown is being borne by foreign producers,” Mr. Mayland says.

Since GDP measures goods and services produced at home, exports add to GDP, while imports are subtracted out. In the most recent quarter, the sharp drop in exports and imports essentially cancelled each other out in terms of their effect on the nation’s growth rate.

But that doesn’t mean that sharp drop is unimportant.

The sharp plunge reflects significant problems for the world economy. In recent years, the world economy overall has seen its fastest growth in modern times. The expansion of commerce has meant expanding productivity rates and jobs, allowing most nations to grow faster than they could without such ties.

Now, the globe could see its first overall decline in the volume of trade in many years.

On Friday, Caterpillar announced it plans to cut another 2100 jobs, on top of some 20,000 layoffs announced earlier in the week.

“[Caterpillar] must drastically reduce our production levels and cost structure to remain competitive for the long run,” Bob Williams, a company vice president, said in a statement. Cat has 113,000 employees worldwide.

New worries about protectionism

Some economists worry that the recession could cause nations to focus more on self-interest — with the risk that measures designed to protect domestic jobs could backfire by deepening the global downturn.

So far, this remains more a risk than a reality. The danger is that modest actions could end up provoking larger ones.

“The latest versions of the US fiscal stimulus package contain provisions regarding ‘domestic content,’” Richard Bernstein, chief investment strategist at Merrill Lynch, said in a note to clients Thursday. “The protectionist trend is gaining strength much faster than we thought even just a few weeks ago.”

The delicate US-China relationship — with China relying on huge exports and America being the largest importer — faces new tension. As a presidential candidate, Barack Obama pledged to take a tougher line on trade issues with China. Beijing reacted angrily last week when US Treasury Secretary Timothy Geithner told senators at his confirmation hearing that China was manipulating its currency.

Vice President Joe Biden said on Thursday the Obama administration had made no determination on whether China was manipulating its currency and would not make a unilateral attempt to block its exports.

In a phone call Friday, Chinese President Hu Jintao told President Obama that he wanted to strengthen cooperation between the two countries to fight the global economic slowdown, China’s Xinhua news agency reported.

Of course, one man’s “protectionism” can be another’s bid to correct abuses of current trade law. But economists generally say that a recession is a risky time for trade relations to fray. In the Great Depression, rising trade barriers deepened the downturn.

Drop in GDP reflects significant problems in the world economy | csmonitor.com

 

[BanglaBhoot]

The stimulus just keeps looking worse and worse

Fri, 01/30/2009 - 3:32pm

By Phil Levy

In today's New York Times, we read this:

“The U.S. needs to show some proof they have a plan to get out of the fiscal problem,” said Ernesto Zedillo, the former Mexican president who helped steer his country through a financial crisis in 1994. “We, as developing countries, need to know we won’t be crowded out of the capital markets, which is already happening.”...

“People are not stupid,” Mr. Zedillo said. “They see the huge deficit, the huge spending, and wonder what comes next.”

I erred in my earlier post on the international aspects of the stimulus bill. I was excessively optimistic. I said we might get away with lots of governments borrowing lots of money all at once for a while, since the private sector isn’t doing anything with the money at the moment. In fact, as Ernesto Zedillo goes on to note in the Times, developing countries are already finding it hard to borrow, as lenders flee to the perceived safety of the U.S. bond market. I’ll stand by my prediction that trouble would eventually come; it’s just coming sooner than I had thought.

The trouble is not restricted to the developing world. The United States just had some difficulty marketing 5-year Treasury notes and 10-year bond yields have been rising sharply. These are not the very short rates that the Fed sets; they are the longer, market-determined rates that drive borrowing costs for businesses and home-buyers. As the crisis unfolded, global investors foresaw doom and piled into U.S. government bonds as a safe haven. The result was a plunge in interest rates and upward pressure on the dollar.

In the past few weeks and particularly in the last couple days, demand for Treasuries has fallen off and interest rates have been rising. There can be many causes, but one concern is how the United States will pay for all its borrowing.

There is a substantial risk here. Bloomberg today quotes a trader from China’s biggest bank as predicting that the "rout" in the Treasury market will deepen and rates will rise. Imagine, for a moment, that he believes what he’s saying. The story notes that Treasuries have lost almost 3 percent this month. The trader thinks more losses are soon to come. Unless he or his international colleagues think the dollar will appreciate, they would be safer selling their holdings and keeping their money in another currency (even if their own bonds have very low yields). If they do all sell their Treasuries, that will drive interest rates up and the dollar down, thereby validating their decision to sell (bubbles are nasty that way). A weaker dollar might help U.S. exports, if only we weren’t launching a trade war. The higher interest rates won’t help at all in reviving the economy.

But wait, it gets worse! Cognizant of this threat from excessive borrowing, both Jeff Sachs (in his academic capacity) and Larry Summers (in his official capacity) have argued this week that the new spending means we will need tax hikes in the near future. While it is very difficult to see how spending in 2011 stimulates the economy now, it’s easy to see how raising taxes in the future could slow things in the present. From the perspective of any entrepreneur brave enough to invest and create jobs right now, high taxes could create a case of “heads, the government wins; tails, I lose.”

All of this is to say: there are some reasons besides partisan rancor why Republicans might hesitate to support the $819 billion stimulus bill.

The stimulus just keeps looking worse and worse By Phil Levy | Shadow Government

 

[BanglaBhoot]

Worst US economic contraction in quarter century

By Peter Symonds
31 January 2009

More grim figures released by the US Commerce Department yesterday provide further confirmation of the severity of the economic contraction in the US and globally. The US economy shrank at an annualised rate of 3.8 percent in the fourth quarter of 2008—its worst result since 1982. The decline followed a contraction of 0.5 percent in the third quarter—the first successive quarterly GDP declines since 1990-91.

A survey of 79 economists by Bloomberg.com had predicted that the result would be worse for the final quarter of 2008 at 5.5 percent. The latest statistics offer little cause for comfort, however. The main factor in the lower-than-expected decline was a sharp rise in inventories—that is, the piling up of unsold goods in warehouses. Without the rise in inventories, the contraction would have been 5.1 percent.

Nigel Gault, chief US economist at IHS Global Insight, told the New York Times, "My only explanation is that companies could not cut production fast enough." Other commentators warned that the rise in inventories foreshadowed further production cuts, more job losses and another sharp contraction in the first quarter of 2009. Insight Economics analyst Steven Wood commented in the Wall Street Journal, "This suggests that the [first-quarter] GDP will also contract, probably more sharply than it did in [the fourth quarter of 2008]."

President Obama lamely declared that the figures represented "a continuing disaster" for working families and urged Congress to pass his administration's $819 billion stimulus package. But few economists believe that the measures will have any significant impact. The Financial Times noted that federal government efforts to boost the economy were less effective in the final quarter of 2008 than in the previous one, contributing just 0.4 percentage points of economic growth.

At the local and state level, governments in the US are in severe financial crisis and as a result are cutting jobs and services. Economic consultant Joshua Shapiro explained to the Financial Times, "States and localities are busy slashing spending to try to balance budgets that are hemorrhaging red ink, so this will partly offset the federal government's upward impetus."

The avalanche of job losses is continuing. Target announced that it would slash 600 existing jobs and 400 vacant positions, mainly in its hometown of Minneapolis, and close a distribution centre in Little Rock, Arkansas, later this year, with a further loss of 500 jobs. PPG Industries, the world's second largest paint maker, foreshadowed a cut of as many as 4,500 employees, or 10 percent of its workforce.

Analysts were uniformly pessimistic about future prospects. Commenting on the December quarter figures, Mickey Levy, chief economist at Bank of America, said, "It's a severe contraction. No sector of the economy is safe right now." Speaking from the Davos World Economic Forum, Stephen Roach, chairman of Morgan Stanley Asia, told Bloomberg Television that this was "a severe, steep, broadly based recession" and warned there would be "no quick fix."

Virtually every sector of the US economy recorded a sharp decline. Consumer spending, which accounts for two thirds of the economy, fell by 3.5 percent in the final quarter, on top of 3.8 percent in the third quarter—the first time that purchases have declined by more than 3 percent in two consecutive quarters since records began in 1947.

Spending on durable goods such as vehicles, furniture and domestic appliances plunged far faster—by 22.4 percent—the largest fall since 1987. This followed a third quarter fall of 14.8 percent. Purchases of food and clothing dropped by 7.1 percent—the steepest quarterly decline since 1950.

The residential housing sector continued to decline, with investment falling by 23.6 percent in the final quarter on top of a fall of 16 percent in the third quarter. Business spending plummetted by 19.1 percent—the largest drop since the first quarter of 1975. Business investment in structures fell by 1.8 percent, while purchases of computers and software decreased by 27.8 percent.

Sharp falls in US trade figures reflected the rapid contraction of the global economy and declining world trade. US exports fell by 19.7 percent in the final quarter and imports by 15.7 percent. Speaking to the New York Times, Josh Bivens, economist at the Economic Policy Institute, described the trade figures as "distressing." "That's been the real key strength to the economy. They were punching above their weight for a couple of years, but they have really collapsed."

The US statistics come on top of the International Monetary Fund (IMF) economic outlook released this week, once again revising global growth forecasts for 2009 downwards. The overall prediction for world growth was just 0.5 percent—far less than the 2.2 percent predicted in November. All the major economies are predicted to contract—the US by 1.6 percent, the Eurozone 2 percent, Japan 2.6 percent and Britain 2.8 percent.

All the signs point to falling world trade in 2009. The IMF forecast a contraction of 2.8 percent for 2009, after an overall rise of 4.1 percent last year. The International Air Transport Association reported this week that international air freight traffic had fallen by 22.6 percent in December compared to a year before. Speaking at Davos, Australian trade minister Simon Crean warned that falling global trade would compound the economic downturn. "If trade is a multiplier in growth, it has the potential to be a multiplier in reverse," he said.

The latest data from Japan, which is heavily dependent on exports, underlined the unravelling of world trade. Factory orders slumped in December at an unprecedented annualised rate of 9.6 percent, surpassing the previous record—set in November—of 8.5 percent. The IMF prediction of a 2.6 percent contraction in Japan for this year would be the country's worst since World War II.

NEC, Japan's largest personal computer manufacturer, announced this week that it would cut more than 20,000 jobs at home and abroad—the largest layoff in Japan since the economic crisis began to hit last year. Hitachi reversed its previous predictions of a 15 billion yen profit to a loss of 700 billion yen ($7.78 billion) and indicated that it may slash 7,000 jobs. Other major companies that posted quarterly losses this week included Mizuho Financial Group, Daiwa Securities Group, Nippon Oil and Honda Motor.

The jobless rate in Japan has climbed to 4.4 percent from 3.9 percent. While the figure may appear low by international standards, the official statistics utilise a very strict definition of unemployment. Noriaki Matsuoka, an economist at Daiwa Asset Management, warned, "The jobless rate could rise to around 5 percent, giving us reasons not to expect consumer spending to support the economy."

Economic and Fiscal Policy Minister Kaoru Yosano told the media on Thursday: "We're in a very grave situation. Japan is being hit by a wave of weakening global demand." Junko Nishioka, an economist at RBS Securities Japan, was even blunter in comments to Bloomberg.com: "Japan's economy is falling off a cliff. There's really nothing out there to drive growth."

The air of despair and desperation openly expressed in the US, Japan and Europe testifies to the bankruptcy of all those defenders of capitalism who foresaw nothing, urged the public to place its faith in the anarchic workings of the market, and whose only solution to the economic disaster is to attempt to impose the burden on working people through savage cutbacks in jobs and living standards.

Worst US economic contraction in quarter century

 

[maximus]

That's good. I hope that they don't have any room left for warmongering.

 

[BanglaBhoot]

Spat with China raises fears of a trade war

The new American Treasury secretary uses a Senate hearing room to accuse the Chinese of manipulating their currency, and the Chinese premier uses the Davos gathering of the moguls to accuse America of wrecking the world financial system. Not an auspicious beginning for Sino-American relations in the new era of the great believer in softly, softly diplomacy, Barack Obama.

Tim Geithner has settled into his new job at the Treasury. It no longer matters that Geithner was the Fed’s man on Wall Street while the excesses and chicanery reached their peak. Or that he failed to pay his income taxes despite routine notifications from his former employer, the International Monetary Fund. Or that it was Geithner, along with his predecessor, Hank Paulson, who decided to let Lehman Brothers go under, bringing the financial system to the verge of collapse. That’s all behind him.

What might be ahead is a trade war, triggered by Geithner when he told the Senate during his confirmation hearings that he believes China is “manipulating” its currency to maintain it at a low value so as to stimulate its exports. “Manipulate” is the word that upsets the Chinese, and imports are the things that most upset the trade unions and congressional Democrats who see them as destroying jobs in America – never mind the benefits to consumers.

There are three reasons to believe that this was not just another blunder by Geithner. The first is that the administration rushed out a statement that Geithner was saying no more than Obama had said on the campaign trail.

The second is that Geithner was reading from a prepared statement, not merely making some remarks in response to a question. “President Obama, backed by the conclusions of a broad range of economists, believes that China is manipulating its currency,” wrote the then-nominee. Premeditation matters, and the use of the inflammatory word “manipulation” clearly was a carefully considered act.

The third is that Geithner is well aware of Chinese sensibilities. He and his family have a long association with, and knowledge of, the politics of Asia and China. It would have been unusual in past years for any important Chinese official to visit America and not have a private tête-à-tête with Geithner, who has studied Chinese and Japanese, and lived in India, Thailand and Japan, as well as in China. His father is director of the Asia programme at the Ford Foundation. They know just what will set Chinese leaders’ teeth on edge.

Which Geithner most certainly did. China’s communist leaders, lacking democratic legitimacy, know that unless they can keep job losses down as their economy cools, they will face even more social unrest than has been bubbling to the surface in recent years. They know, too, that the recession in America and Europe is cutting into their exports, causing factory closures and layoffs. The last thing they want is to see the yuan appreciate further against the dollar, reducing the competitive advantage that made-in-China goods have in America.

Then along comes Geithner to bring smiles to the face of Chuck Schumer, the China-bashing New York senator who has been calling for high tariffs on Chinese goods to offset the advantage the Chinese gain from manipulating the yuan, rather than letting it float. “This is a big step,” Schumer announced with unconcealed glee.

Geithner’s charge is not without substance. China has indeed kept its currency undervalued to stimulate its exports, and although Paulson’s trips to Beijing in pursuit of a strategic dialogue did produce a bit of a rise in the yuan, that stopped abruptly when the Chinese economy ran into strong headwinds.

With the American economy in recession, and the taxpayers about to spend perhaps $1 trillion to get it moving, the notion that tax cuts and government spending will end up buying goods made in China by Chinese workers is increasingly unpalatable. That’s why the stimulus package includes “buy American” provisions.

In the past, free traders could cite history, arguing that the Great Depression was prolonged by the protectionist wave that rolled across the world. Or they could cite the great Adam Smith, who demonstrated the benefits of free trade. But voters are neither historians nor economists: few have ploughed through the volumes on the Great Depression, or Smith’s Wealth of Nations. Besides, the long-term inefficiencies created by protectionism pale by comparison with the jobs lost here and now, especially in the minds of trade-union leaders and the Democrats they have helped to elect.

Robert Cassidy also has his doubts about the benefits of our trade relations with China. Cassidy, President Bill Clinton’s assistant US trade representative for the Asia-Pacific region, is the man who put together the deal that persuaded Congress to normalise trade relations with Beijing and allow China to join the World Trade Organisation (WTO). Now, regrets he has more than a few. Last week he told an audience at the liberal Economic Policy Institute in Washington that Beijing’s manipulation of the yuan was making American goods uncompetitive in China, and inducing American companies to close factories here and move production to China.

For the past decade China has shipped us goods, and we have shipped China bits of paper with pictures of American presidents. China has shipped those dollars back to us to buy the IOUs our deficit-ridden government is selling. Now the Treasury is about to step up its borrowing to fund the stimulus, the car industry, the banks, a partial government takeover of the healthcare industry, and myriad items on the wish lists of long-frustrated congressional liberals. If China decides it doesn’t want to buy the new IOUs, interest rates in America will climb, offsetting the effects of much of Obama’s stimulus package. Secretary Geithner might then find that he can’t peddle the billions in IOUs he will soon be issuing, and regret emboldening the Schumers of the world to believe that the Obama administration intends to replace talk, talk, with war, war – trade war, that is.

Spat with China raises fears of a trade war - Times Online

 

[BanglaBhoot]

Out of Gaps In Treaties, First Salvos Of Trade War

By Anthony Faiola
Washington Post Staff Writer
Sunday, February 1, 2009; Page A01

The world may be on the brink of a gentler kind of trade war.

In 1930, Congress fired the first shot in a protectionist battle that prolonged and deepened the Great Depression. After passing a bill aimed at saving American jobs by effectively barring 20,000 imported goods, including French dresses and Argentine butter, other nations retaliated by raising their own barriers on U.S. products, effectively bringing global commerce to a halt.

In the aftermath, organizations like the World Trade Organization sought to ensure that never happened again. Nations agreed to put on economic straitjackets permitting them to raise tariffs within hard-fought limits. That is likely to help prevent a repeat of the devastating and overt trade wars seen during the Great Depression, since it is now far harder for nations to increase tariffs on a wide array of imports at once.

But there remains a surprising amount of wiggle room in international trade and commerce treaties, and that, analysts say, is where the battle is now being fought as leaders worldwide face intense pressure at home to protect domestic jobs in the deepening financial crisis. They are engaging in a more subtle form of protectionism that often skirts those rules.

This weekend at the World Economic Forum in Davos, Switzerland, the annual event drawing the world's leaders, luminaries of industry, commerce and philanthropy, a host of dignitaries raised a crescendo of alarm over growing economic nationalism. "We will resolutely fight protectionism," Japanese Prime Minister Taro Aso told reporters there, giving voice to the general sentiment.

Yet even as leaders call for nations to do the right thing on the international stage, actually doing it at home is proving far tougher.

British Prime Minister Gordon Brown, for instance, delivered a particularly impassioned plea for nations to remain on the path of free trade yesterday. "This is not like the 1930s. The world can come together," he said. However, back in Britain, the government is directing British banks with global operations now being rescued with taxpayers' dollars to boost lending to British businesses and citizens first.

Although that may violate the spirit of globalization, current laws regulating financial commerce remain far behind those regulating manufactured goods. It is leaving countries where British banks did big business in the past -- particularly in Eastern Europe -- facing fewer and fewer options to cope with the global credit crunch.

"You're going to see a lot more rhetoric out of leaders against protectionism, but what really matters is their policies," said Simon Johnson, former chief economist at the International Monetary Fund and a professor of economics at MIT. "And there are worrying signs right now that they may not be so serious about stopping protectionism."

Additionally, the European Commission is reinstating subsidies on some dairy products to protect its farmers, targeting an area of trade law that remains highly contentious, open to interpretation and potentially damaging to developing countries. Analysts are also bracing for nations to make excessive use of the legal tools now available to them to fight unfair trade, such as filing anti-dumping cases before the WTO.

The nations that signed a Nov. 15 agreement at the G-20 summit in Washington promised to refrain from imposing "protectionist" measures for at least 12 months. Since then, however, a large number of signatory nations have broken that promise.

Current trade law is more strict on rich countries, granting more flexibility to developing nations to raise tariffs. Many are exercising those rights with gusto now. Indonesia last month raised new trade barriers on electronics, garments, toys, footwear and other imports. That is happening at a time when the IMF and World Bank say that global trade is set to shrink for the first time since 1982.

In the United States, a move to greatly expand Buy American provisions as part of the $819 billion fiscal stimulus package has generated shock waves in other countries, with Canadian and European officials in particular rising up in protest. The provision, passed by the House on Wednesday, would mostly bar foreign steel and iron from the infrastructure projects laid out in the stimulus package. A Senate version still being considered goes further, requiring, with few exceptions, that all stimulus-funded projects use only American-made equipment and goods.

Yet depending on how the language on a Buy American provision may ultimately read, experts on trade law say it remains unclear whether it would categorically violate a WTO agreement on government procurement the United States signed in 1996.

"There are lots of institutional firewalls to prevent trade wars that exist today that did not exist during the Great Depression," said Gary Hufbauer, senior fellow with the Peterson Institute for International Economics. "That could help now. But there is still a lot of room for damage, maybe pretty bad damage, that can be done in the gray area of the rules."

Although the legality of the Buy American provision may be in question, that might not prevent a potentially dramatic series of countermeasures by America's trading partners if it is passed and signed by President Obama. For that reason, analysts are seeing it as a major test for Obama, arguing it could signal that the United States may be changing course from a decades-long embrace of free trade because times are now too tough to maintain that path.

"I hope the senators will be wise enough . . . to make sure the U.S. complies with its international obligations," said Pascal Lamy, the head of the World Trade Organization, in Davos yesterday.

washingtonpost.com

 

[BanglaBhoot]

US-China trade tensions set to escalate

By John Chan
3 February 2009

From the outset, the Obama administration has signalled a more confrontational approach to Beijing. Last month, President Obama's nominee for Treasury Secretary, Timothy Geithner, testifying before US Senators, accused China of keeping the yuan, or renminbi, artificially weak in order to undercut its foreign rivals. On January 26, the Senate confirmed Geithner's appointment by a vote of 60-34, suggesting strong support in the Congress for his aggressive stance.

If Geithner designates China a "currency manipulator" in an international currency report due in April, it will allow the US administration to demand that Beijing end its tight control over the yuan. If Beijing failed to do so, Washington could introduce punitive tariffs and other trade measures against China, possibly leading to a full-scale trade war.

Under mounting international criticism over the provocative US stance, Obama called President Hu Jintao last Friday in an attempt to defuse the tensions. Despite a reportedly cordial exchange about the importance of the US-China relations, Obama stressed the need to correct global imbalances, a phrase that refers to the huge US trade deficit with China. Hu, in turn, emphasised the need to oppose protectionism, a warning directed at the US.

During the US presidential campaign last year, Obama declared in his China policy statement: "Central to any rebalancing of our economic relationship with China must be change in its currency practices. Because it pegs its currency at an artificially low rate, China is running massive current account surpluses. This is not good for American firms and workers, not good for the world, and ultimately likely to produce inflation problems in China itself."

Apart from representing a more strident foreign policy, Obama's protectionism partly reflects the fears of less competitive US companies in industries such as steel, auto and textile that are vulnerable to global competition, and the associated trade union bureaucracy. Obama's Republican rival, John McCain, was more in line with the Bush administration's policy of avoiding a direct confrontation over China's currency, primarily out of a concern to protect American business interests in China.

China officially ended its decade-long yuan-dollar peg in 2005, due to pressure from the Bush administration for more "flexible" exchange rates, but continued to maintain tight control over the currency in order to keep Chinese exports competitive. At the same time, the yuan's gradual revaluation of 20 percent over the past three years generated enormous pressure on Chinese exporters, even before the collapse of the foreign orders in recent months. Amid escalating job losses and the prospect of social unrest, there are mounting calls within China for the government to devalue the yuan. By last November, 20 million rural migrant workers in China had already lost jobs, with new estimates pointing to 40-50 million more in 2009. These figures do not include millions of unemployed urban workers.

At the World Economic Forum in Davos last Wednesday, Chinese Premier Wen Jiabao blamed the US for "excessive expansion of financial institutions in blind pursuit of profit" and "lack of self-discipline among financial institutions and rating agencies" for the present global economic crisis. While not naming the Obama administration, Wen declared: "Protectionism serves no purpose except to worsen and prolong the crisis."

Leading economists at the conference expressed deep concerns about the US threat to list China as a currency manipulator. Stephen Roach, the Asia chairman of Morgan Stanley, said: "I have never seen an economy entering recession raise the value of its currency. It would be an economic suicide." Roach estimated that the Chinese economy was actually contracting in the last and current quarters. He observed that as many as 45 pieces of legislations had been proposed in the US Congress in recent years, mainly by the Democrats, threatening to impose trade sanctions on China.

The US-China tensions have raised fears that Beijing could dump its US assets of more than $1 trillion, precipitating a devastating collapse of the dollar. A Financial Times editorial on January 26 said Geithner "was playing with fire" by accusing China of being a currency manipulator. "It could provoke China into a sudden and dramatic readjustment of its exchange rate and foreign reserves management—up to and including its willingness to hold US sovereign bonds." The Bloomberg web site warned: "It's hard to believe that Geithner hasn't stressed the dangers of a trade war with the largest holder of US government debt. Federal Reserve Chairman, Ben Bernanke, a Great Depression scholar, is sure to advise against policies that inhibit growth."

Significantly, the Wall Street Journal on January 26 defended China's currency regime: "The dollar-yuan link [established in 1994] allowed a real price system to arise in China and created a single economic fabric stretching across the Pacific. Before long, the whole region had adopted what Stanford economist Ronald McKinnon calls the East Asian Dollar Standard. The opposite of currency ‘manipulation', this dollar standard was a victory for free trade and global growth. But the US economists missed its portent."

Many Asian countries peg their currencies to the US dollar in order to maintain export competitiveness. Recalling the boom prior to the current meltdown, when China enabled major US corporations to gain "most of the world's profit and wealth", with US consumers "benefiting" from low-cost imports, the Wall Street Journal insisted that the US trade deficit with China "was perfectly natural".

The newspaper criticised the Bush administration and former Fed chairman Alan Greenspan for implementing an easy money policy with low interest rates, leading to debt-driven economic expansion and its collapses. This argument simply ignores the fact that the Wall Street financial plutocracy created and profited from the vast and unsustainable growth of fictitious capital. The Bush administration resisted the pressure from the US Congress to name China as a currency manipulator in order to defend the same business interests, which stand behind the Wall Street Journal.

A significant proportion of Chinese goods is manufactured on behalf of US corporations, boosting their profit rates and temporarily sustaining the consumption of American workers despite declining real wages. More importantly, China's expanding trade surpluses became a major source for buying US Treasury bonds, helping finance the US trade and balance of payment deficits. China and Japan alone hold a quarter of the $5.8 trillion outstanding US government debt. The flow of cheap credit and low-price goods from Asia helped the Federal Reserve Board maintain a low interest rate policy, thus providing the basis for Wall Street to create ever bigger debt and credit bubbles and creating an expanding market for industries in China, including those run by US firms.

The opening up of China as a giant cheap labour platform over the past 30 years was vital for world capitalism to counter falling rates of profit and force Western workers to accept lower wages. Four million manufacturing jobs in the US were destroyed during the past eight years, largely due to the brutal exploitation of labour in China and other developing countries by the transnational corporations. The mirror opposite in the US was the vast expansion of financial parasitism and industrial decline, which ultimately led to the crash of 2008, and the loss of another 2.6 million jobs so far.

Now, in order to make China a scapegoat for rising unemployment in the US, Washington has attacked Beijing in the World Trade Organisation (WTO). Last week, the US claimed a victory over China after the WTO ruled that China had violated its obligations to protect US intellectual property rights in movies, software and other branded items. In another case filed in December, the US accused China of violating global free trade by operating a "famous brand" program to promote Chinese exports, with more than 70 subsidies, giving them "unfair" advantages.

China's own protectionism is rooted in the fear that its dramatically slowing economy will cause a social explosion. Beijing reintroduced tax rebates in November for some 3,000 export items in order to expand China's share in the shrinking global markets. Amid falling rural incomes, Beijing also moved to restrict agricultural imports, which must exacerbate tensions with other countries, especially the US.

Russell Leigh Moses, an analyst at the Beijing Centre for Chinese Studies, told the Christian Science Monitor last month: "The leadership here is under enormous pressure from manufacturers and local officials to do whatever it takes to save jobs and maintain stability. There are some voices within the bureaucracy who are concerned about this ‘China first' strategy, but they are being overwhelmed by these domestic cries for help."

This "China first" strategy will inevitably drive Beijing into conflict with Washington's "Buy America" push and similar protectionist measures in other countries. As in the 1930s, the trade tensions between the major capitalist powers have the potential to trigger more dangerous forms of conflict, including full-scale war.

US-China trade tensions set to escalate

 

[BanglaBhoot]

Big Three Bloodbath: Chrysler Down 55 Pct., GM Down 51 Pct., Ford Down 39 Pct. In January

4:13 P.M.: UPDATED WITH CHRYSLER, SMALLER AUTOMAKERS:

It was a terrible month for all automakers but especially for Detroit's Big Three, which saw sales drop by an average of nearly 50 percent compared to January 2008.

Chrysler was the grim "winner," watching sales drop 55 percent compared to last January.

Sales of Chrysler cars dropped 64 percent, according to Autodata. The company simply can no longer make a passenger car anyone wants to buy, it seems.

General Motors's January sales were down a staggering 51 percent compared to January 2008 and Ford sales plummeted 39 percent.

Almost all automakers continued to struggle with a global recession: Toytota's January sales dove 32 percent, while Honda's were down 30 percent.

The bright spots: Light-selling Subaru, which saw an 8-percent sales bump in January, Hyundai, up 14 percent, which is offering to take back newly sold vehicles for no charge if buyers lose their jobs, and Kia, up 4 percent.

GM's sales were driven downward by a 80-percent decline in fleet sales, added to a 38-percent drop in sales to consumers.

Ford sales to individual customers in January were down 27 percent while fleet sales plummeted 65 percent, to arrive at the 39-percent drop, the company said.

Ford said its January sales were in-line with its assumptions.

Ford sold 93,060 cars, small trucks and SUVs in January, compared with 155,832 in the same month of 2008. Toyota sold 117,287 vehicles, down from 171,849.

The January report for other automakers:

-- Volkswagen was down 12 percent.

-- Porsche was down 36 percent.

-- Daimler was down 36 percent.

-- Mazda was down 27 percent.

-- Audi was down 26 percent.

-- Mitsubishi was down 35 percent.

Ford is the only Big Three automaker that has said it doesn't need federal bailout money -- yet. If sales conditions deteriorate to a "worst case" scenario, chief executive Alan Mulally has said, the automaker may need to tap the federal aid.

For January, Ford sold 90,596 Ford, Lincoln and Mercury vehicles, putting it on a pace to sell 1.09 million vehicles in 2009.

By comparison, Ford, Lincoln and Mercury sold 1.78 million vehicles last year. Of course, sales vary by month.

The Ticker - Big Three Bloodbath: Chrysler Down 55 Pct., GM Down 51 Pct., Ford Down 39 Pct. In January - Economy Watch

 

[BanglaBhoot]

The World Is Bumpy

Rising protectionism and the U.S. stimulus bill, particularly its requirement to 'Buy American,' could hurt trade and foreign policy.

Walter Russell Mead, an award-winning historian, says the backlash against free-market capitalism being embraced in the United States and elsewhere right now endangers America's standing in the world. He says these protectionist fears are most significant in relation to China: "The key political question of the twenty-first century is, 'How does the U.S.-China relationship develop?'" Relations with China have steadily improved, Mead says, but if China thinks the United States is shutting its doors to Chinese exports, the potential for bitterness and rivalry could dog this planet for decades to come.

In the Great Depression, most countries looked inward to solve their economic ailments, and at the same time, there was very little worldwide cooperation to stem the growth of fascism and Nazism. What's the outlook today? There's clearly much greater worldwide cooperation in economic affairs than there ever was before, but countries, including the United States, are beginning to look inward and are inclining toward protectionism. In the United States, can the Obama administration handle its rather far-reaching foreign policy goals and also deal with the economic problems at home?
Economic cooperation didn't collapse in 1929. In fact, from 1929 through most of the first four years of the Depression, there were a lot of efforts which ended up not being successful. There were strong efforts to try to put together some kind of a united front on economic issues. Unfortunately, in some ways, protectionism on trade undermined everything else. And when Franklin Roosevelt came in [in 1933], he torpedoed the London Economic Conference, which was portrayed as the last grand effort to get some kind of currency agreement, because he wanted the freedom to try to raise U.S. prices without regard for other countries. So, what happened really was that economic cooperation was the first thing that people looked to as the Depression began to break out, because it was obviously an international crisis in many respects. But the long, grinding pressure of the downturn drove countries more and more inward. So, if you wanted to be a pessimist, what you would say is, at this stage we're all still talking very brightly about the need for cooperation and so on, but if things continue to worsen, you might well see, as you did before, an erosion of the cooperation, which would then deepen the depression and which would then lead to further erosion in international relations and cooperation. That for me is the nightmare scenario.

When they campaigned in the primaries, Democrats were often skeptical about free trade, and apparently the House bill that passed on the stimulus plan includes provisions such as "buy American steel." How damaging is this?

We're going to have to see what emerges from the Senate. This is one of those times where I'm grateful that we have a bicameral legislature, because there has been a real public outcry over the protectionism of the House bill, and let's hope that there are enough senators who can deal with some of these things. Now, to some degree this will cause a big problem, because we've signed treaties like the WTO [World Trade Organization] agreement, which actually allows countries to retaliate against us. Provisions like "Buy American" in these infrastructure projects --we'd have to look at the technicalities--are likely to systematically violate agreements that the United States has signed. The consequences of giving other countries the right to discriminate against American goods, or charge higher tarrifs on American imports, would amount to shooting ourselves in the foot.

Obama's first trip overseas may very well be the next G-20 meeting in London on April 2, to be followed by a NATO summit on April 3 and 4 honoring the sixty years of its existence. He's going to want to talk about cooperation in both forums.

One of the problems I've noticed about the way Americans approach foreign policy is that to a certain extent we're all unilateralist under the skin. I'm a member of the Episcopal church, where we've been having a lot of battles. A lot of my Episcopal friends here in the United States were always attacking the Bush administration, often rightly so, for being unilateral and arrogant. But then in the fight over the ordination of a gay bishop, you would say to them "Well, you know the African bishops don't like this and it's causing a huge international problem in the church." They'd say, "Yes, but it's the right thing to do. It'd be wrong for us to not do the right thing just because there isn't an international consensus for it." And that's a very American attitude, that we have to follow our sense of what's right. There's a Democratic unilateralism as there is a Republican unilateralism, and some of it is exactly this suspicion of free trade, and a willingness to sacrifice free trade on the altar of domestic recovery or domestic equity. And there's something to be said for it. I'm not saying that it's an inherently immoral approach. But how do you reconcile the commitments that we've made to other countries and the need for hundreds of millions and billions of people around the world to raise their living standard by selling goods in our market with our own concerns about our own workers and so on. This is a very difficult problem for any society to face, and America's instincts in times of crisis tend not to be very multilateral.

To be fair, individual countries in the European Union, like France, take very protectionist approaches, particularly on agricultural products.

You're right. We need to look at how this is going to affect China's view of the world and China's view of us. Because in many ways, the key political question of the twenty-first century is, "How does the U.S.-China relationship develop?" And basically, anti-Americanism in China has been declining, and China's approach to America has been becoming much deeper and much more integrated with the kinds of goals that we have for the world. But that is all based on the idea that the open trading system is going to allow China the opportunity to achieve affluence and greatness through cooperation. If at this time of crisis we slam the door in China's face, or China thinks that that's what we're doing and the Europeans are doing, that is a foreign policy blunder far more dangerous than anything George W. Bush did. Alienating Asia and China and setting up the potential for bitterness and rivalry could dog this planet for decades to come. That is probably the most dangerous thing we could do.

Is it necessary, do you think, for the president to preach free trade and the advantages of it from his pulpit?

The president is going to have to talk about the global economy, and how we're in this together, and we cannot as the United States be an island of prosperity in a global sea of poverty. That will not work in the twenty-first century. Our fates are linked. That does not mean that the average American family needs to be sacrificed in order to create prosperity overseas, but it does mean that the United States has a duty to keep the promises that we've made about open trade and to work with other countries to keep the doors of opportunity open for the global poor.

And I guess the president should try to influence the same attitudes in Europe.

Yes. In Europe the protectionist instincts can be stronger than they are in the United States. On agriculture they're very strong, but manufacturing is actually where America's been more open than Europe. And it will be a difficult thing, but American leadership here is really important. It's clear that in the long term, Asia has to move away from an export-oriented growth strategy, because the problem for a country like China is that you can't grow three times faster than your market forever. That is to say, China would like to grow at 10 percent for the next thirty years while America is growing at 3 percent. It's a nice concept, but if China ultimately depends to a very large degree on American consumption of Chinese exports, that will not hold. So for China to continue to grow, its development strategy has to change. And again, America needs to be helping China figure that out and working with China on that adjustment. We need a middle course. And that's what President Obama and his administration are going to have to chart.

And that doesn't leave them much time to deal with those crises like the Middle East, which of course are crying out to be dealt with in some way.

One thing about being president is that your inbox is full every day. Yes, the United States faces a number of crises. We're very, very fortunate, maybe more fortunate than we deserve, that in Iraq things seem to be continuing to get better. And in Afghanistan, the early signs that the administration is looking for a way to improve the security situation short term while coming up with an intelligent political agenda for moving toward an end to the war is very encouraging and is good. You know, there are other hot spots that could become much hotter. If the financial crisis should disrupt Ukraine more than it already has, given the sort of state of Russian relations with Ukraine and some of the rivalries there, you could see a crisis very suddenly erupt. In some ways, it may be that the economic crisis is going to help us with Iran because President Mahmoud Ahmadinejad has a lot less money to throw around than he used to, and the fallout from the drop in the price of oil may encourage the Iranians to move toward some kind of a reasonable accommodation and arrangement with the West.

And the Russians seem to have softened a bit too.

The Russians have a way of giving out mixed signals, but the Russians are aware that they may have misjudged the high price of petroleum for a recovery of the Russian economy. Russia probably now does not have the financial resources to adopt the kind of military strategy that the leadership was hoping to do. So yes, Russia is open to looking again at its relations with the United States.


And coming back to the Arab-Israeli confrontation, most people I've talked to are rather gloomy about the prognosis.

This problem has been going on for a very long time, and it would take a bigger optimist than I am to think that we are just a few short months and a couple of smart ideas away from settling this problem. To me the root problem, in some ways, is that on the one side, for a lot of the Palestinians, the two-state solution just isn't a viable solution. It will leave them poor, it will leave them refugees, especially in Gaza. Being told that now it's going to be under your own flag as part of a state is not nearly as exciting as we would like it to be. So we have to come up with a strategy, a political and economic agenda, that makes more Palestinians feel genuinely enthusiastic about what a compromise two-state solution would look like. And unless we can do that, we're just going to continue to find ourselves trapped in this cycle of hostility.

What should the Israelis do?

The Israelis and the Palestinians are in a situation where neither one can be happy unless the other is happy long term. So they both have to make sacrifices to enable that to happen. But from the Israeli point of view, they say, "We withdrew from Gaza, and what happened, rockets come over the border." Now they're saying, "We make peace with the Palestinians, and now rockets start coming over from the Palestinian state? What are we supposed to do?" And again, from the Israeli point of view, a peace that doesn't satisy Palestinian aspirations can't really be trusted. And what are those aspirations and how can we satisfy them within the framework of a two-state agreement based on UN Resolution 242? That is the nut of the problem, and we have to spend more intellectual energy and programmatic creativity to begin to figure out what that might look like.

http://www.newsweek.com/id/183030

 

[Abhiras]

The india & china rose in these difficult year & that too in great style