Monthly Archives: February 2012

Election Year

No ifs, ands, or buts, this year’s presidential election is critical to say the least. If anyone is happy with our current economic and political climate in this country, by all means vote for Barack Obama again. I just don’t think many people are happy with our current state of affairs. Remember we lost our prized AAA credit rating from the rating agency Standard & Poors back in August of last year. The move by S&P reflected their negative outlook on the government’s budget deficit and rising debt burden. If we continue on the path we are on, the government’s tax receipts, the vast majority of their revenue, will be entirely devoted to servicing interest on the government’s debt. Individual income taxes and payroll taxes accounted for 82% of the Federal Government’s revenues in 2010, while corporate taxes accounted for another 9%. Altogether the government collected $2.2 Trillion in 2010. Could you imagine a figure similar to that going all to interest payments on our government’s debt burden?

This is similar to an individual paying the minimum balance on their credit card. It would take forever to pay down the principal with the minimum payments. At the current pace of government spending and budget deficits this is where we’re heading.

The Review and Outlook section of the WSJ today paints a pretty dismal picture of our current President’s fiscal record as “the worst in modern American History.” Here’s some quick stuff on Obama’s four years:

  • He will have presided over the four highest spending years since 1946
  • Four years in a row of budget deficits above $1.29 trillion. That has never ever happened !
  • Government revenues at lows due to a lackluster “recovery” and temporary tax cuts that really don’t stimulate economic growth. White House Budget Office estimates revenues below 16% of GDP for the fourth year in a row. Last time they were below 16% for any year was 1950.
  • $5 trillion in debt has been added just during President Obama’s term.
  • He wants to raise tax rates on anyone making more than $200,000 as an individual and $250,000 as a couple. This would impact small businesses in a big way. A small business is defined as having fewer than 500 employees, and guess what? Small businesses represent about 99.7% of all employer firms, employ about half of all private sector workers in the US, and were responsible for 65% of the net new jobs created between 1993 and 2009.

Bottom line is, we all have to do our homework in selecting the right candidate for the next term, because I’m not lying when I say, our future depends on it. Never before has this been more true !

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The Bifurcated Economic Recovery

Bifurcated by definition means divided into two parts and happens to be a great way to describe our economy’s supposed recovery. The National Bureau of Economic Research announced on September 20, 2010 that the 2008/2009 recession ended in June 2009 – making it the longest recession in this country since World War II. I’m sure a lot of people would disagree that the recession has ever ended because millions of employable people still don’t have jobs, many have exhausted unemployment benefits, some are working multiple part-time jobs, and some are just off the radar for a number of reasons. But the S&P 500, a major gauge of the US Stock Market, is up over 98% from its March 2009 low. What’s happening here? Why are so many Americans still having problems? Housing is still a drag on the economy for sure. Many businesses that are tied to housing are still struggling and it sure doesn’t feel like this so called recovery is very widespread.

To be sure, and I’d mentioned this in my post of Feb. 2, 2012, the senior executives of many public companies are doing well, consistent with the returns of the S&P 500, because their compensation packages are tied to their stock, and perhaps large shareholders of these companies are doing well, but, 83% of the wealth is owned by the top 20% income percentile. All the liquidity that the Federal Reserve has put into the economy with stimulus and QE1 and QE2, (2 rounds of quantitative easing was basically the government buying its own treasury securities to keep long term interest rates down) has buoyed the stock market, but as you might ascertain from what I’m writing, only high income earners with exposure to financial assets (stocks and similar securities) are participating. Mainstream America continues to struggle.

Jobs, Jobs, Jobs

I can bore with you details until we’re all blue in the face, but suffice it to say we are losing domestic jobs to outsourcing abroad, and on a large scale. The example I used with Apple in an earlier post illustrates this well. Everyone has been affected in some way by this economy. If it hasn’t been you directly, it’s been someone close to you – family or friend. The indisputable truth is that outsourcing is hurting us. It would be one thing if these foreign countries we buy massive amounts of things from and whose factories we keep humming to produce things for the U.S. market, patronized our U.S. made goods, and it was quid pro quo, but the story is so one-sided. In my post from February 6 I indicated that for every $4 the US spends on Chinese goods, China spends $1 on our goods. This equation is not working for Americans.

There was a bright spot in the Wall Street Journal Today that energy mining, extraction, services, and ancillary businesses that benefit from these areas are humming right here on our US soil – hallelujah ! One, this will decrease our reliance on foreign energy, it’s helping jobs in these areas, and the article reports we haven’t produced as much oil since the 1970s. Also natural gas prices are at a ten year low from our activity. More money in our pockets!

In the WSJ’s article US Market Shines Brighter the article mentions some companies are boosting domestic production and spending.  Job seekers sharpen your pencils 🙂 http://online.wsj.com/article/SB10001424052970203315804577209511105401168.html?mod=WSJ_hp_MIDDLENexttoWhatsNewsForth

More than 2/3s of the measure of our economy called GDP (for simplicity’s sake, all goods and services produced in the U.S.) is from consumer spending. How can GDP improve from its anemic levels unless we have jobs and can afford to live and have some discretionary income afterwards.

We’ll talk more about jobs soon. Stay tuned.

Our Own American Companies Are Contributing To Our Economic Demise

Research shows that America’s largest corporations: Wal Mart, Caterpillar, GE, Merck, United Technologies, Caterpillar, Cisco, Chevron, Intel, Oracle, etc., over the last decade shed over 2.9 million workers, while hiring 2.4 million workers overseas. This is in stark contrast to the late 1990s where these same companies created more jobs in the U.S. than overseas. Ironically, the recession that began in 2008 exacerbated the outsourcing abroad. In a 2009 Outsourcing Conference attended by representatives of many of the nation’s most powerful companies, 57% of the companies interviewed indicated they increased their outsourcing in response to the economic downturn. 46% of the respondents, when asked why they outsourced, indicated it was to save operating costs. These same companies want to bring their overseas profits back with tax breaks. What a slap in the face America !

In 2010 the U.S. Trade deficit with China (the amount of goods and services that we import from China versus export to them; a trade deficit means we import more than we export) was 27 times as large as it was back in 1990. For every $1 China spends on our goods, we spend more than $4 on theirs. Now there’s a losing proposition if I ever saw one ! If we stay on this path folks, we are inevitably doomed to a lower standard of living – guaranteed.

What can we do you might ask? We can turn our noses to products made elsewhere, and let representatives of companies know you want to buy American. If enough people start doing this, Corporate America will have to listen. Remember, they march to the beat of the profit drum. If Americans stop buying their products, where are they going to sell them, China ? Ha !

I welcome everyone’s feedback to make this blog a success and to fulfill its mission to educate and bring a critically needed change. Let’s share ideas and stories and spread the word.

 

How on Earth Did We Ever Lose So Many Industries To Offshoring?

Apple  happens to serve as a good example. Nearly all of the 70 million iPhones, 30 million iPads and 59 million other products Apple sold were made overseas. Why you ask? Cheap labor is one part of the equation, but at a dinner affair with Steve Jobs and other Silicon Valley top guns back in Feb. 2011 President Obama had asked “why can’t that work come home?” Jobs’ answer was pretty grim, but highlighted the superior skills of the foreign workers, the flexibility and large scale of the factories abroad, and clearly stated “those jobs are not coming back”.  More than two thirds of Apple’s approximately 63,000 employees work in the U.S., while one third work overseas, but of the nearly 700,000 people that work for Apple’s contractors – the builders, assemblers, engineers, etc. of all of Apple’s products, almost none of them work in the U.S.. Instead they work for foreign companies in Asia, Europe and elsewhere. Apple’s story is not unlike many other tech companies and other industries as well – finance, accounting, banking, auto manufacturing, pharmaceuticals just to name a few.

The Contrived China Advantage – Continued From Prior Post

Consider this: let’s say China’s price advantage in so many categories of goods is aided by their Central Bank, keeping their currency weak. American factories simply can’t compete, on price anyway, more and more American factories are shuttering their facilities, China continues to gain market share in all these areas where their price is superior and American factories can’t compete and you have a recipe for a global monopoly going to the Chinese. Once the monopoly is established and there isn’t any significant competition, what can the Chinese do? Anything they want! They are the victors, and to the victors go the spoils!

Another way of looking at this though is, while so many Americans are losing their source of income from the lost factory, service and other jobs subject to the foreign competition, our ability to purchase goods and services, domestic or foreign is compromised. We are losing our standard of living, the ability to buy the goods and services we want and need. So again, as I said in my original post What’s happening to America, and what do we need to experience a resurgence of our country ?, “Has anyone, namely our politicians and corporate leaders really weighed the true cost of outsourcing abroad though?”

In answer to this I suspect our corporate leaders turn a blind eye to the greater good of the American public, and instead keep their eye on the prize of profits. After all, increasingly, executive bonuses and stock options are tied to the performance of the company. The fat cats pad their pockets, and what do they care of the increasing disparity between them and, not only the other employees in the company, but main stream America. Wall Street can be partly to blame as well, with analysts’ orientation toward increasing profitability in the short run, often at the sacrifice of the big picture – and corporate America heeds the dinner bell.

Apparently, our political leaders have taken notice too. The George W. Bush and Barack Obama administrations have both had discussions with China about exchange rate issues and fair trade. China has repeatedly denied manipulating its currency and repeatedly refutes that their yuan is undervalued. Much of China’s industrial might is from state-owned enterprises (SOEs) that are protected and subsidized by the Chinese Government.  About 40% of the value of all goods and services produced by China on their own soil (GDP) is attributable to these SOEs. Essentially when a U.S. company is competing in China with a Chinese company that is an SOE, for all intents and purposes, it is competing  with the Chinese state that calls all the shots, and who do you suspect emerges victorious on Chinese soil – not our companies. China makes sure of that !

The Contrived China Advantage

We all know what’s it’s like to have the odds stacked against us. Go to a casino, play a game when one of the players is cheating, marked playing cards – you get the picture, and you know what usually happens – you lose. This is exactly what’s happening with our trade with China. The U.S. is in a losing position. There is such a huge imbalance of what China exports to us and what we export to them, hence the large trade deficit with China that we hear about pretty regularly. In 2011 the deficit with China was nearly $300 Billion, 40% of our total deficit, and Apple’s ipads alone, assembled in Chinese factories, accounted for nearly $4 billion of the deficit, estimates The Economist.

Given, China has a cost advantage largely due to its cheaper labor, and this is a topic unto itself, the way the free market and supply and demand economics is supposed to work is: the more demand there is for a widget (be it a good or service) the higher the price should go until a new equilibrium level is found where supply and demand find a new balance at the higher price. Higher pricing, instituted sequentially, is meant to curtail demand until the point where a new balance of supply and demand is reached. What China has been doing for a long time is keeping their currency – the yuan, also called the renminbi artificially weak, bucking the natural forces of supply and demand, to perpetuate the Chinese price advantage relative to the U.S.. Cheaper prices for Chinese goods equate to a persistent pricing advantage of their goods, services and labor. This spells persistent and or growing trade deficits, more Chinese goods flooding our shores, less exports to China leaving our shores, and more challenges to the American workforce.

How does China do this? Let’s say a U.S. company buys assembled goods from a Chinese factory. The U.S. company pays in U.S. dollars. The Chinese factory receives U.S. dollars, but has to convert the U.S. dollars to their local currency the yuan, also called the renminbi. Off the factory goes to their bank and exchanges the dollars for yuan at the prevailing exchange rate. At this writing each U.S. dollar fetches about 6.3 yuan. Now the Chinese factory has their local currency and they’re happy, and the Chinese bank is holding dollars from the conversion transaction. Multiply this event exponentially, considering the enormous imbalance of goods we buy from China versus what we sell to them, as indicated from the huge trade deficit mentioned earlier, and this provides some insight into why China has nearly $3.2 trillion dollars – yes trillion – in U.S. dollar reserves! This is a simplification because there are other parties to this like the Chinese Central Bank where the reserves are actually held, but let this suffice to make my point.

Where China’s manipulation comes in is when China sells its own currency, the yuan (creating supply) and buys U.S. dollars, (demand for dollars) and the forces of supply and demand create an artificially weak yuan relative to the U.S. dollar, that is buffeting the natural forces of supply and demand on the currency that by all rights, considering the huge demand for China’s goods and services, not only from the US but the Euro Zone (China’s largest trading partner representing 20% of China’s exports) and many other countries as well, should be appreciating at a much faster clip than it is. Remember what that Chinese factory we used as an example is doing when they receive U.S. dollars for payment. They are selling U.S. dollars to buy their local currency the yuan creating demand for the yuan over and over again. If China’s currency appreciated relative to other currencies as the natural forces of supply and demand would dictate, China’s price advantage would be eroding, relative to its trading partners. We all know that China’s price advantage is still significant enough to be perpetuating the huge trade imbalance with us and its other trading partners.

To be continued

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