Archive for March 2009

Whither the Volt

Via Jim Kingsdale:

Since PHEV's [plugin hybrid electric vehicles] can have so much impact on both the energy investment outlook and national security, I follow with some interest the news about their likely availability.  Recently a picture is starting to emerge.  It is not positive for American car companies, of which G.M.'s Volt is the poster child.  This is not totally surprising given G.M.'s proven history of incompetence.

We know that the Volt's battery is so expensive that G.M. proposes to sell the car for $40,000 - a price that would eliminate most buyers.  And even with such a high price G.M. promises they would lose money on every vehicle.  So, as I've previously written, the Volt may well be more of a political strategy for G.M. than a likely transportation solution.   Now a new study by Carnegie Mellon University says the design of the Volt's propulsion system is inherently sub-optimal and uneconomical - "not cost effective in any scenario" in the words of the study.

The reason is quite obvious once you think about it.  G.M. designed the Volt battery to go 40 miles on a charge because, they "reasoned", some 90% of all drivers go no more than 40 miles in a day.  What Carnegie Mellon points out is that the average driver goes less than 20 miles in a day.  Therefore the Volt's battery is twice as large as necessary for some 50% of drivers .  Since battery weight and cost are the prime determinants of a PHEV's cost-effectiveness, the Volt battery is about twice as large as is economically practical for most drivers.

Here's how the report put it: "The Carnegie Mellon study, conducted by engineers from three different departments, constructed computer simulation models to determine the impact of additional batteries on fuel consumption and cost and greenhouse gas emissions over a range of charging frequencies.  It found that small-capacity plug-ins that get less than 20 miles per charge are more efficient than conventional hybrids. And it said that large capacity hybrids like the Volt that go 40 miles or further on a charge are never cost-effective, because the batteries cost and weigh too much.  A car with the Volt's range, according to the study, would also be extremely uneconomical traveling fewer miles as it hauls around battery capacity it doesn't need."

So much for the Volt.  Ciao - and lets hope the U.S. govt. is smart enough not to fall for the Volt's fools-gold as an excuse to keep G.M., a chronically mismanaged company, from enjoying the cleansing benefits of bankruptcy.  Among which benefits might be new management.

Affordable Housing

Thomas Sowell, via Carpe Diem:

The current political stampede to stop mortgage foreclosures proceeds as if foreclosures are just something that strikes people like a bolt of lightning from the blue-- and as if the people facing foreclosures are the only people that matter.
What if the foreclosures are not stopped? Will millions of homes just sit empty? Or will new people move into those homes, now selling for lower prices-- prices perhaps more within the means of the new occupants?

The same politicians who have been talking about a need for "affordable housing" for years are now suddenly alarmed that home prices are falling. How can housing become more affordable unless prices fall?

The political meaning of "affordable housing" is housing that is made more affordable by politicians intervening to create government subsidies, rent control or other gimmicks for which politicians can take credit. Affordable housing produced by market forces provides no benefit to politicians and has no attraction for them.

In the wake of the housing debacle in California, more people are buying less expensive homes, making bigger down payments, and staying away from "creative" and risky financing (see chart above). It is amazing how fast people learn when they are not insulated from the consequences of their decisions.

Mark Perry has a graph showing fully twice as many homes were sold in California in January of 2009 than in January of 2008.

Government Hypocrisy

Tigerhawk asks:

If the CEOs of banks that take federal money, including those who took federal money only after Hank Paulsen essentially ordered them, have their salary capped at $500,000, under what principle do we allow universities that request federal funding to pay their own presidents much more money? Is there a rational basis for the distinction, or is it simply that the Democrats do not want to go after one of their most important constituents?

Forget about the university presidents, what about the football coaches?  One Hundred Billion dollar banks can't pay their CEO's or deal-makers more than $500,000, but state-run football programs can pay their coaches $ 4 million dollars?

Reformation, 21st Century Edition

I have been taking a series of courses on reformation-era Europe. Having just completed a general course on the Reformation, I am now completing a course on the Tudors and Stuarts in England, a period of time whose history is highly colored by the Reformation.

One of the issues that Protestants had with the Catholic Church (and later with the Anglican Church) was the church hierarchy. Of course, the Pope always came in for criticism (this probably being too mild a word for burning in effigy) by English protestants, but bishops and other elements of church hierarchy also came in for attack. In fact, the Presbyterians, probably the largest non-Anglican Protestant sect in 17th century England, took their name from the presbyters, who were essentially a council of laymen or elders who ran the church (as an alternative to Popes and bishops and such).

One of the difficult issues for the modern American mind to wrap around is the state involvement with religion on these times. Taking just this one issue of church organization and hierarchy, we see a dizzying back and forth in the Anglican Church as a result of swings in religious affiliation and outlook of the monarch and the Parliament. Bishops get tossed from the Anglican Church, then Bishops are reinstated, then they get tossed, and then they get reinstated.   All this punctuated by the occasional execution or locking in the Tower of the odd bishop.  It was deadly serious at the time, but seems a silly pursuit for government today.

Except, I guess, in Connecticut, where the spirit of Oliver Cromwell and the Roundheads is alive and well. Because, apparently, the state legislature has introduced a bill to remove priests and bishops from the management of Catholic Church corporations and insist on a council of laymen instead. Weird how history repeats itself, even when you thought it was most unlikely to do so.

Disclosure: I am not Catholic, nor Presbyterian, nor particularly religious.

What Happens to Crash-Test Vehicles?

They get sold here.

Also, don't miss the chance to own your own 727 jet for just $45,000.

Arizona: Visionary

Why?  Because we don't have daylight savings time.  I have argued for years that DST may have made sense when electricity demand was driven by lighting, but air conditioning actually reverses the equation, putting people at home during more of the cooling hours.   The Liberty Papers links to a study with similar results:

Our main finding is that"”contrary to the policy's intent"”DST increases residential electricity demand. Estimates of the overall increase are approximately 1 percent, but we find that the effect is not constant throughout the DST period. DST causes the greatest increase in electricity consumption in the fall, when estimates range between 2 and 4 percent. These findings are consistent with simulation results that point to a tradeoff between reducing demand for lighting and increasing demand for heating and cooling. We estimate a cost of increased electricity bills to Indiana households of $9 million per year. We also estimate social costs of increased pollution emissions that range from $1.7 to $5.5 million per year. Finally, we argue that the effect is likely to be even stronger in other regions of the United States.

The Bottom

I am not an economist, so anyone who invests any money on my prognostications is insane.   But here is my prediction, just for fun.

I think that if you fly down below the hysteria, there is good reason to believe that somewhere in February or early March we passed the bottom, in terms of the rate of job losses and output reductions.  Job losses will continue for several months, but at a declining pace, with the low point in employment occurring sometime in the late 2nd or early third quarter.  I am about 50/50 as to whether the unemployment rate will peak in the high eights or low nines.  We will see real recovery beginning in the third quarter.

I am a tad less confident in this only because we have dragged out a number of reckonings (e.g. GM, some banks, some mortgages, etc) which should have occurred last year, which may delay the recovery somewhat vs. if we had just taken our medicine sooner.  The big wild card, of course, is what effect massive government borrowing and tax increases will have on the speed of the recovery, and, now that I have seen this chart, on inflation.

Just to show I am putting my money where my mouth is, I moved much of my savings to equities last Thursday.

Equal Pay for Equal Risk

It is a well-known fact that women, on average, make less than men in the US work force.  Whether that appalls you depends a bit on your political motivation, as well as your facility and honesty with data analysis.  The raw numbers tend to show a large gap, while numbers corrected for things like years in the work force, education, and industry selection tend to show a smaller gap.

A big driver of gender wage disparities is the industry in which males and females tend to work.  Male preference industries like construction and heavy manufacturing tend to pay more than female preference industries like health care and education  (yes, I know we could argue all day as to whether these industries are truly a preference or the result of some implicit cultural direction, but I am not going to touch that today).

But one thing I have never thought about, or heard discussed, is the issue of risk.  When we discuss securities and investments, we often talk about income in the context of risk -- the more risk one takes on, the higher the average returns one typically gets.  It may be, though, that we should talk about employment income in the context of risk as well.  After all, if one were looking at two fairly similar jobs, except the chance of layoff or job loss were much higher in one than the other, then one would expect the job with more job loss risk to pay more.

In this context, recent job loss numbers by gender are interesting  (a story, by the way, Mark Perry has been on for months but the MSM is only just now waddling in to notice).



Holy *$%&#%

This graph of the US monetary supply is un-freaking-believeable.  Someone please tell me that this is a data error or something.  I guess this is one way to bail out borrowers -- if you create enough inflation, then the real value of principle owed drops.  Sure looks like it is time to borrow long at fixed rates.  Are real interest rates about to go negative?


Via Phil Miller

By the way, this really gives the lie to the whole government stimulus effort.  They may be moving large amounts of money around, but they can't create value, and in the absence of real value creation all they are doing is inflating the currency.

Who Do You Know Who Has Said All This?

Via Reason:

Obama has promised that no family earning less than $250,000 per year will pay one dime in higher taxes. But the companies that have to pay for permits will pass that cost on to consumers in the form of higher prices for electricity and other products. So these families will pay $645 billion, only some of which will be returned in the form of lower income taxes, for a system that is terribly inefficient.

The solution, of course, would be a straight-forward tax on carbon, the proceeds to be refunded through the payroll tax system. But unlike the hidden tax of cap-and-trade, a carbon tax is out there for the voters to see. And given the choice between a stealthy tax and a visible tax, politicians will pick the former every time.

Absurd Regulation

I found out today, the hard way, that Arizona has a law specifying exactly how a pool contract is to be paid for a pool construction or renovation job.  Yes, we sure would not want to leave it to individual choice and negotiation to determine contract terms.  The craziest part is that I am required, by law, to pay 100% of the cost of the job to the pool contractor before the gunite or finish coat of the pool is shot.  In other words, I must pay all of the contracted price before the job is complete with no hold back.

This is absolutely crazy.  I have never in my life not had a hold-back in a construction contract.  Three times  (all with my company) I have had contractors go bankrupt or disappear before the job is complete, in at least two cases leaving so much work unfinished that even the hold-back was not enough to cover the loss.   Typically, contractors bolt before the punch list is complete, and only the hold-back keeps them focused at all on finishing the job to my satisfaction.  I am not happy, particularly since Phoenix pool contractors are going bankrupt right and left in this economy.

This is yet another example where "regulation" in fact means "in the tank for favored industries that make campaign contributions."

So, Monopolies are OK As Long As They Are Run By The Government

From a post at the Mises blog on inauguration ticket distribution:

Senator Dianne Feinstein passed legislation through the Senate that criminalized the sale of inaugural tickets. In addition, Feinstein secured voluntary agreements from online auction websites such as eBay to ban ticket resale.

"These tickets are supposed to be free for the people," said Feinstein. "Nobody should have to pay for their tickets."

However, many did pay for a ticket, but the payment was to the government. The Presidential Inaugural Committee (PIC), of which Feinstein is a member, distributed tickets in exchange for up to $50,000 in inaugural contributions.

Senator Feinstein's double standard is clever if you're a politician. If free people were able to sell their inaugural tickets, then they might not go to the politically appropriate authority, as deemed by Feinstein and her political cohorts.

I am sure it will come to a shock to all my readers that thousands of tickets meant to be distributed gratis to average citizens in fact were routed by Congresspersons to large donors, lobbyists, and political wheels.

Interesting Comparison

Which of these spent more political contribution and lobbying money in the last election cycle:

  • Two largest defense contractors
  • Four largest oil companies
  • Two largest teachers unions

Yes, it was the teachers.  I am sure it was for the kids, though.  This actually understates the teacher's efforts.  The corporate donations of the oil and defense companies are spread pretty evenly between both parties.  They are simply trying to buy access.  The teachers gave their money almost entirely to the Democrats.

Government and the Environment

Somthing that all-too-seldom gets attention -- when it comes to water pollution, most of the worst private offenders were brought in line decades ago  (at least for point sources, like a particular factory;  agriculture and runoff are still issues in some areas).  Many or even most of the worst water pollution offenders in the US are actually municipal authorities, who dump raw sewage into open waters.  I remember that when I lived in Boston, there was this digusting spot in the bay where the sewer pipe ended.  They sort of fixed the problem ..  by making the pipe longer to dump further out into the bay.

Even in the Bay Area in these environmentally sensitized times, some egregious environmental practices remain in place, with little public scrutiny.

It's bad enough that there are cancer-causing chemicals in the bay. And Marin recently had a 500,000-gallon sewage leak into the body of water. But did you know that when it rains, the area's sewage treatment plants are designed to overflow into the bay?

The leaky pipes in drainage systems take in more than the system can handle. In last week's storms, Richmond loosed 890,000 gallons of untreated water into the Bay, about 10 percent of which"”or 8,900 gallons"”was pure, unadulterated sewage.

You mean government exempts itself from its own rules?  No way!

Prices Matter

The other day I was having a discussion with a smart, well-informed woman who tends to be a bell-weather for Democratic talking points.  When asked about the recession, I said something like this:

The story for banks, corporations, and people are all the same -- everyone has too much debt, everyone took on too much in expectation of things going up and up.  With flat or even down expectations, everyone is now trying to clean up their balance sheet.  They are spending less, building equity and reducing debt.  And the economy is going to slow as a result, no way around it.   I went on to say that I was not only opposed to the stimulus bill in particular, but I was offended that the government would try to interrupt this deleveraging process.  The government had essentially made the decision that if individuals won't spend, then the government will take their money in the form of taxes and spend for them.  And if no one wanted to have debt, the government would go about and take debt on in the name of everyone.

She responded that she thought it was ironic that after the government had worked so hard for so many years to tell people to save more, and that they are only doing it now when it was counter-productive.

Forget for now the whole Keynsian "saving is counter-productive" argument, and focus for a minute on the government communication effort around individual debt.  There is no doubt that to the extent that the government has verbally communicated on individual debt, is has generally been to encourage savings and not take on expensive consumer debt.

But verbal communications are generally the least effective form of communication in the economy (Ralph Nader and his theory that we are all zombies to corporate marketing notwithstanding).  In fact, markets don't communicate via words.  They commucate with price.  Prices are the giant semaphores of the free market, and they are extraordinarily powerful communication tools.  Do people drive less or turn down their thermostats after Jimmy Carter gives a fireside chat about energy conservation in his little cardigan sweater?  No.  People conserve more when prices go up.   When gas prices go up, prices are telling consumers that gas is now scarcer vis a vis demand, and it may be time to conserve.  The same goes for every other thing we buy.  In fact, the only things we actually run out of  (water in a drought, electricity during summer brownouts, gasoline in the early 1970s) are all commodities where the government interfered with and/or severely restricted the ability of retail prices to move with demand.  In these cases, the government tends to substitute public exhortations for pricing signals  (for example, you can't escape water use guilt ads in California).  But these never work as well.

It is the same with personal savings.  The government in its verbal communications may have been saying to save, but what were its actions saying?  The Federal Reserve followed a long-term policy over the last decade of keeping interst rates artificially low.  Low interest rates send a clear and powerful dual message -- save less (because the returns are low) and borrow more (because borrowing is relatively cheap).  Federal tax breaks from mortgage debt and  Federal programs to provide looser credit with lower down payments to less qualified buyers made debt even more attractive vs. savings.  And numerous federal programs helped encourage home buying, while local government zoning and anti-growth ordinances helped keep home prices going up and up.  Every action the government took said "save less, take on more debt."  Is it any wonder their actual verbal communication was ignored?

They Are Different Freaking People

Why is this concept so hard to get across - averages do not reflect individuals.  Individuals move up and down through the averages all the time, such that the "rich" and "poor" today are often circumstantially different people than they were 10 or 20 years ago.  But Kevin Drum and the left will never get it

Over the past three decades, these families have seen their incomes double and triple while the rest of the country stagnated.

Repeat after me -- the families in the 1986 rich are NOT the same families in the 2006 rich.  Some overlap, of course, but many do not.

Even if all the averages were stagnant, it could be very possible for every individual in the average to be doing better year over year but have the averages stagnate.  For one, individuals typically gain income as they age and gain experience.  The reason the averages don't move with them is that new workers, both teenagers and poor immigrants, move onto the list from outside, often at the bottom.  If you look at the same group of people today and ten years ago  (therefore leaving out new entrants into the work force over that period and what they do to the averages) you will find them doing much better.

And I thought this was funny:

by getting the centrist optics right, Obama has been able to move more boldly than he otherwise could have.  Republicans who paint him as the second coming of Karl Marx just look like idiots these days.

Note that he is not arguing Obama is not acting like Karl Marx, just that he is successfully avoiding being percieved as such.  Boy, that sure must be a real communications achievement for a man who gets so much tough scrutiny and skepticism from the media ;=)

By the way, does anyone else find it weird that the Democrats have decided to do battle with Ruch Limbaugh, rather than any actual, real Republic elected official.  Is this a Democratic strategy, to find someone they can safely demonize without political power to strike back, or a Republican strategy to use Limbaugh as a stalking horse to save them from taking tough opposition positions?

It's Time To Discuss Subchapter S, In Relation to Obama's Income Tax Proposals

Once upon a time, most entrepreneurs organized their business as what is called a C-Corporation.  Most of the publicly traded corporations you can think of, from Avon to Zenith, are essentially C-Corporations.   Such corporations had any number of advantages, but they had (and still have) one big, big disadvantage.  C-Corporations paid federal income taxes at the corporate tax rates.  And then, if after-tax profits were dividended to owners, those dividends would be taxed again.  This double taxation of earnings is something Congress talks about all the time, but never does much about.  And the implicit government tax subsidy for debt over equity does a lot to explain various waves of merger and LBO activity we have seen since the 1980's.

Now, entrepreneurs were not stupid.  No one wants their hard-earned income taxed twice.   So, entrepreneurs who owned C-corps would do one of two things.  One approach was to have the owner pay himself a large salary, thus reducing corporate income and converting the dividends to more tax-advantaged wages.  The other approach was to have the company issue the owner loans rather than dividends.  I have seen many closely-held C-corps with huge accumulated corporate loans to their owners, which may only be unwound years or decades later when the company is sold or liquidated and profits can be taken out a lower capital gains rates.

Over the last 20 years or so, a new corporate vehicle called the sub-chapter S or S-corp has become popular.  With a few limitations, the S-corp offers all the same liability protections as a C-corp, with a big tax advantage:  S-corps are not subject to corporate taxes -- corporate profits of the owners flow straight through the corporation to the owners' 1040 personal returns, eliminating any double taxation  (Limited Liability Corps or LLC's operate roughly the same, but with slightly different rules).  For this reason they are also sometimes called pass-through entities.

It is interesting to note something I never hear mentioned when discussing aggregate personal income data, which is that the switch over time from entrepreneurs using the C-corp to the S-corp creates something of a discontinuity in the income data.  Thirty years ago, much of the annual corporate earnings, and all of the retained earnings, of business owners would not show up in the IRS personal income data  -- it shows up as corporate income, but not personal income.  Today, nearly all of that corporate income of small business owners shows up as regular income on personal tax returns.  Absent any other changes in income trends, business owners as a group will appear to have large increases in taxable income, when in fact economically nothing may have changed save the corporate structures of their businesses.

But the real point I want to make is that all of the retained income and potential investment capital of a small business using S-corps or LLCs (which is nearly everyone nowadays)  shows up on the owner's personal income tax returns.  Let's hypothesize an entrepreneur whose S-corp earns $250,000 in profits after-tax.  Let's say he typically puts $150,000 of that to savings and living expenses, and the other $100,000 is reinvested in the growth and/or productivity of the business.  Now let's look at proposed increases in upper income tax brackets.  With these higher proposed rates, the business owner will have less than $250,000 in after tax income.  Let's say it goes down to $220,000.  Odds are that the owner will retain his lifestyle (he will as a minimum still have the same size mortgage and school and other payments).  The slack, then, comes out of the retained earnings.  Essentially, higher taxes result in less investment capital.  In fact, we can see an increased tax rate on wealthier entrepreneurs and business owners could easily result in a dollar for dollar reduction in business investment among small businesses, acknowledged to be the place where most all new jobs are created.

I think readers know that I don't fully accept the Obama administration's analysis of this recession.  However, let's take them at face value for a moment.  They are concerned that savings of average people won't currently translate into more business investment, as they fear the credit crisis causes banks to hold the savings rather than re-lend it.  If this were the case, then it would mean that as a policy, we would want to preferentially route tax savings to entrepreneurs and business owners who invest their own money directly, because their is no intermediary of a bank to interfere with the process.  But in fact, this is exactly opposite of what the Obama administration is doing through tax policy, instead taking away the investment capital and retained earnings of entrepreneurs through higher taxes.

This is the European-style corporate state in a nutshell.  In Europe, entrepreneurship is made extraordinarily difficult.  This is part of the deal that the political elite have with the largest companies in their countries -- we will protect you from potential new competitors, we will bail you out when times get tough, and you in turn will support us politicians.  One only has to look at the turnover of the top 30 companies in the US since 1970 vs. the top 30 in Germany or France to see this at work.  Political turnover is even slower, as an elite group of ministers run the country, almost no matter the party voted in office.  The economy as a whole suffers, but for the top 1000 or so men in power, the system works to protect their position, be it in government or in the largest industries.

And now we bring this system to the US.  Small business owners and entrepreneurs are punished with higher taxes in order to bail out politically powerful but failing companies like GM or Citicorp.  Welcome to America, the new corporate state.

Postscript: A lot of folks erroneously associate corporate states with right-wing governments, and certainly that was the case in Mussolini's Italy.  But the closest brush the US has ever had with such a system (prior to today) was implemented by leftish FDR via the National Industrial Recovery Act, and governments of both left and right have supported the corporate state approach of France and Germany.  In Britain, it was the left that built the corporate state and the right, under Thatcher, who tore it down.

For Those Who Still Thought the Stimulus Bill Was About Infrastructure

I demonstrated a while back from the CBO report that less than 7% of the 2009-2010 spending was infrastructure in the stimulus bill.  In fact, this percentage barely increases past 2010.  Below is a piece of a Washington Post graphic (whole chart here).  I have colored orange the areas that include infrastructure.

I have generously included all of the highway, transportation, interior, energy, water, Corps of Engineers, school renovation and parks spending, though my bet is that a bunch of that never turns into steel and concrete.  I have also included some of the rural and urban development money.  I have excluded facilities that are by bureaucrats for bureaucrats, such as improvements in federal office buildings.  I have tried to keep things proportional, but note, as always, actual spending does not match the rhetoric.  For example, you might think that the school spending, from Obama's speeches, was all infrastructure, but in fact only $20 out of over $90 billion is for school renovation.  The rest is for  ... something or other.


China As The New Japan

I am very glad to hear this from someone other than, uh, me:

China bashing during the past decade is reminiscent of the Japan bashing that occurred during the 1980s. It turned out that Japan's substantial export surplus with the US, its extensive accumulation of US Treasury bonds, and its purchases of assets in the US did not hurt the United States, but were for the most part foolish actions on the part of the Japanese government and businesses. I believe that similar conclusions will be reached about the parallel Chinese practices.

I have been saying this for years, that the Chinese trade and exchange rate policies everyone wanted to bash were doing nothing but helping us and hurting the Chinese people.  I wrote a hypothetical post from the Chinese persepective nearly 3 years ago:

Our Chinese government continues to pursue a policy of export promotion, patting itself on the back for its trade surplus in manufactured goods with the United States.  The Chinese government does so through a number of avenues, including:

  • Limiting yuan convertibility, and keeping the yuan's value artificially low
  • Imposing strict capital controls that limit dollar reinvestment to low-yield securities like US government T-bills
  • Selling exports below cost and well below domestic prices (what the Americans call "dumping") and subsidizing products for export

It is important to note that each and every one of these government interventions subsidizes US citizens and consumers at the expense of Chinese citizens and consumers.  A low yuan makes Chinese products cheap for Americans but makes imports relatively dear for Chinese.  So-called "dumping" represents an even clearer direct subsidy of American consumers over their Chinese counterparts.  And limiting foreign exchange re-investments to low-yield government bonds has acted as a direct subsidy of American taxpayers and the American government, saddling China with extraordinarily low yields on our nearly $1 trillion in foreign exchange.   Every single step China takes to promote exports is in effect a subsidy of American consumers by Chinese citizens.

This policy of raping the domestic market in pursuit of exports and trade surpluses was one that Japan followed in the seventies and eighties.  It sacrificed its own consumers, protecting local producers in the domestic market while subsidizing exports.  Japanese consumers had to live with some of the highest prices in the world, so that Americans could get some of the lowest prices on those same goods.  Japanese customers endured limited product choices and a horrendously outdated retail sector that were all protected by government regulation, all in the name of creating trade surpluses.  And surpluses they did create.  Japan achieved massive trade surpluses with the US, and built the largest accumulation of foreign exchange (mostly dollars) in the world.  And what did this get them?  Fifteen years of recession, from which the country is only now emerging, while the US economy happily continued to grow and create wealth in astonishing proportions, seemingly unaware that is was supposed to have been "defeated" by Japan.

We at Panda Blog believe it is insane for our Chinese government to continue to chase the chimera of ever-growing foreign exchange and trade surpluses.  These achieved nothing lasting for Japan and they will achieve nothing for China.  In fact, the only thing that amazes us more than China's subsidize-Americans strategy is that the Americans seem to complain about it so much.  They complain about their trade deficits, which are nothing more than a reflection of their incredible wealth.  They complain about the yuan exchange rate, which is set today to give discounts to Americans and price premiums to Chinese.  They complain about China buying their government bonds, which does nothing more than reduce the costs of their Congress's insane deficit spending.  They even complain about dumping, which is nothing more than a direct subsidy by China of lower prices for American consumers.

And, incredibly, the Americans complain that it is they that run a security risk with their current trade deficit with China!  This claim is so crazy, we at Panda Blog have come to the conclusion that it must be the result of a misdirection campaign by CIA-controlled American media.  After all, the fact that China exports more to the US than the US does to China means that by definition, more of China's economic production is dependent on the well-being of the American economy than vice-versa.  And, with nearly a trillion dollars in foreign exchange invested heavily in US government bonds, it is China that has the most riding on the continued stability of the American government, rather than the reverse.  American commentators invent scenarios where the Chinese could hurt the American economy, which we could, but only at the cost of hurting ourselves worse.  Mutual Assured Destruction is alive and well, but today it is not just a feature of nuclear strategy but a fact of the global economy.

I concluded in another post

Napoleon said to never interrupt an enemy when he was making a mistake.   I don't consider China an enemy, but it just flabbergasts me that the Chinese taxpayers and consumers see fit to subsidize lower prices for our consumers, and we feel the need to stop them.

More here

GM and Chapter 11

Remember that time, after the Enron bankruptcy, when gas trading and transportation came to a halt in the US?  Or when air transportation ground to halt after Frontier, ATA, Aloha, Delta, Northwest, United, and US Airways all filed for bankruptcy in a 3 year period?  Or when half of California lost power when PG&E went bankrupt?  Or when car production came to a halt when parts supplier Delphi went into Chapter 11?

Yeah, neither do I.  That's because we have a system, that works pretty well and is certainly well-rehearsed, for corporate bankruptcies.  And the number 1 design consideration of this system, the most important assumption behind the whole process, is that creditors will ultimately get more value if the company continues to operate.

GM has painted a picture that the US automotive industry will come to an end if they have to declare bankruptcy.  This is complete BS.  As I wrote the other day, this is an effort by management and certain other constituencies (labor, equity holders) to get the government to intervene not because it is better for the country or the industry, but because it promises to advance their interests at the ultimate expense of taxpayers and bondholders.  This is a power play.  Holders of the senior debt have the power and call the tune in Chapter 11.  If management can get Obama and Congress to substitute themselves for a Chapter 11 judge, then management can hold onto their power.

I feel like the press has done little to call BS on this whole argument, and has generally supported the auto company narrative  (don't discount the fact that auto dealers are the #1 advertisers, by far, in local TV stations and newspapers).  But I was happy to see this in the WSJ, via Carpe Diem:

GM continues to argue that it couldn't survive a Chapter 11 proceeding, but the truth is that bankruptcy could boost its ability to survive. As the Obama administration considers its response to GM's request for more cash, it should be mindful of the advantages of bankruptcy that haven't been highlighted -- certainly not by GM's management.

GM executives have been saying that in Chapter 11 its network of suppliers would collapse, dragging down the rest of the auto industry with their company. But Chapter 11 has well-established procedures to deal with this concern.

Bankruptcy may be the only way for GM to fully confront its operational problems, deal with its legacy costs, reconfigure its dealer network, and achieve a viable labor agreement.

But one issue that has not been discussed much is that bankruptcy usually leads to a sharp change in management. There are turnaround teams expert at restructuring troubled companies, and they may well be more effective than GM's current management. It's no surprise GM's management isn't advertising this fact, but taxpayers and the government should know about it.

In the end, the administration needs to keep in mind that vital elements in GM's restructuring -- recapitalizing its large bond debt and keeping what cash it has flowing to key suppliers -- are often dealt with successfully by bankruptcy courts. A bankruptcy could save GM -- though maybe not its management.