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The Good, the Bad, and the Ugly

12:00 AM, Jan 22, 2011 • By IRWIN M. STELZER
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The good, the bad, and the ugly. That about describes the state of play in America.

The Good, the Bad, and the Ugly

The good is the news about the economy. Good, that is, if you ignore the ticking time bomb that is the federal deficit. The government announced that the number of manufacturing jobs increased last year by 136,000, or 1.2 percent, the first increase since 1977. Economists are expecting another 330,000 factory jobs to be added this year, reducing that sector’s drag on the jobs market. Other good news on the jobs front: claims for unemployment insurance dropped in the first weeks of the new year.

Fourth quarter 2010 profits continue to come in at more-than-acceptable levels, with the exception of beleaguered Goldman Sachs: its bonus pool shriveled by 5 percent to $15.4 billion, or $430,000 per employee. Whether the generally good news on profits will carry into the new year will depend on whether cost pressures resulting from soaring commodity prices can be offset with productivity gains and price increases, no sure thing.

Banks are relaxing lending standards to businesses, and report a rise in consumer lending, suggesting that consumers are returning to the stores, if not in droves, at least in more normal numbers. Even the housing sector might, just might, be hitting bottom despite the continued drag on the market created by foreclosures: sales of existing homes spurted in January. Taking all of this better news on board, economists are upgrading their forecasts. The Economist Intelligence Unit, for one, has raised its expectation of this year’s GDP growth from the 2.2 percent it anticipated only last month to 2.7 percent, despite our politicians’ failure “to address structural weaknesses in the US economy.” 

The bad is the visit by Hu Jintao to Washington, a visit to a president who was awarded the Noble Peace Prize by a president who has clapped another winner into jail. Despite the fact that President Obama had been treated to serial discourtesies when he visited China, Obama upgraded Hu’s visit from merely official to a state visit, complete with red carpets, military honors, and a state dinner. To some this was merely a turning of the other cheek, to others it was a signal to the Chinese regime that creditors crawl, and that Obama had forgotten that America is a big customer China cannot afford to antagonize.

Worse still, the triumphant announcement of $45 billion in export deals conceals two key facts. First, the bulk of these deals had been agreed before Hu’s trip, some as long ago as 2007. Second, many of these sales require U.S. companies to turn over their technology to the Chinese, who will soon duplicate it and dispense with their American suppliers, as they have done in the past. The public relations advantage to Hu of this announcement is clear -- it helps dissipate criticism of his regime’s currency manipulation -- but why Obama would dilute his message that the renminbi is undervalued by announcing these export sales is something of a mystery.

Then there is the ugly -- the budget deficit, projected at more than (words fail me) $1,000,000,000,000 for the fiscal year ending September 30. Federal Reserve Board chairman Ben Bernanke keeps printing dollars so that he can buy some of these IOUs for what was once called “hard cash,” and is increasingly called by its real name, “fiat money”.

The visiting Chinese are aware of what Patrick Armstrong, fund manager at Distinction Asset Management, pointed out at a small private meeting in London: foreigners now own 40 percent of all U.S. Treasuries. These foreign investors know that U.S. policymakers, their eyes on the next election, have an incentive to pay them off with dollars worth less than when the money was borrowed. That would, in effect, be a large wealth transfer from foreigners who don’t vote to Americans who do. And within America, from relatively few creditors to far more numerous taxpayers -- a gambit not unknown to debtor countries throughout history.

So, concludes Armstrong, “The most important thing investors can do today is to position their portfolios against much higher future inflation,” which is already rearing its ugly (to creditors) or lovely (to debtors) head. Commodity prices are up, including copper and oil prices that have serious knock-on effects. With the economy still teetering between a second dip and a sustainable recovery, and the unemployment rate higher than the president wants it to be when he faces the electorate next year, the Fed is under pressure to continue its money-printing, inflation-producing monetary policy in the hope, forlorn say many experts, of stimulating the real economy.

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