Ian Welsh

The horizon is not so far as we can see, but as far as we can imagine

Category: Trade Page 12 of 13

Yes, Canada has Dutch Disease

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On June 1, 2012

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Or at least, the Bank of Canada thinks so, though they’ll never call it by that name:

Nonetheless, Canada’s current account was in surplus for many years before the crisis, and is now expected to remain in deficit indefinitely.

The main reason? A currency at parity with the U.S. dollar means Canadian exports are at a disadvantage and will be for some time. Indeed, until companies do more to improve their efficiency to offset the effects of the higher loonie, they’ll remain at a competitive disadvantage. Bank of Canada Governor Mark Carney has highlighted this point for more than a year.

No, really, the oil sector is killing non-oil jobs.  And the Conservatives are bringing in foreign guest-workers to do oil jobs.

This is how the prosperity of a country can be destroyed.

Core CPI is exactly the wrong thing to watch

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On April 16, 2011

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Our lords and masters (h/t Americablog):

Those trends came as real income dropped 0.5 percent for the month.

The Labor Department said its Consumer Price Index increased 0.5 percent after rising by the same margin in February. That was in line with economists expectations.

Core CPI is vindication for officials at the Federal Reserve who have viewed the recent energy price spike as having a temporary effect on inflation.

Food and gasoline rose 0.8 percent, the largest gain since July 2008, after increasing 0.6 percent in February.

When thinking about inflation, think of individual’s (or companies) surplus income, that is, how much income do they have left to spend after their necessities.  Necessities include food, housing, heating and transportation.  To a lesser extent, clothes, though most people don’t need to buy clothes every month.

Goods inflation, that is to say, core inflation, is mostly in items that you don’t have to buy. Sure, you might want to, but you don’t have to have a new toaster, or TV, or computer.  Food, on the other hand, you have to have.  If you live off rapid transit, and most Americans do, then fuel for your car is something you have to have otherwise you can’t get to your job: you must buy it, at whatever price it is selling for.  Heating oil is something you have to have, freezing to death is bad.

If you earn $2k a month and your fixed bills come to $1,600, your expendable income each month is $400.  If oil and food rise enough that you have to spend an extra $50 you’ve lost 12.5% of your income.  If they rise enough to cost you $100 a month, 25%.  That margin is what matters to most people.  And for people close to the line, the extra money they must spend may kick them from surplus into a personal deficit, at which point they have to start borrowing money, usually at usurious credit card rates of over 20%.

The day laboring class is particularly vulnerable to this.  A bit of drying up of work, an increase in the price of food, and they can reach the point where they can’t afford to eat enough every day.  When that happens you either get a revolution, or you get famines.  This was particularly a factor, by the way, in Egypt.

Inflation in what people must have is what matters to most of the population.  But it isn’t what matters to your lords and masters.  Food costs and fuel costs, are, for them, roundoff errors.  If  you’re really rich, spending $1,000/day on food doesn’t even show on the scale.  So, by and large, goods inflation is what matters to them, personally, though they may have business concerns about fuel inflation (and note that inflation in oil leads to food inflation very directly.  Modern agriculture is how we turn oil into food, essentially.)

So when someone talks about core inflation being the most important form of inflation, check your wallet, it’s likely lighter than it used to be.

An update on the effect of the price of shipping oil and tax on exports

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On April 12, 2011

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From Skuppers, in comments:

In February, the Fuel Surcharge (FSC) on shipments was 26%. It is now 31%. It keeps climbing with no end in sight. It’s not always a straight formula though, as I saw an invoice from the steam line the other day, where the customer’s freight rate is $1400, but the added FSC was about $1800. Adding a margin? Lol. But really what I want to add here could be best captured by this title: Cynical, naive, or just dumb?

In July 2010, the government instituted a tax incentive to businesses to get exports moving. I would guess their motivation was to encourage exports to increase profits to get companies to hire more workers. You know, work on that unemployment thing. So they give a tax break to exporters, and reduce their tax on profits from 35% to 15%.

My customer in Australia imports a lot of pork. They are owned by a U.S. company that supplies about 60% of their product. They got their product delivered FAS Long Beach, meaning free along side. The supplier paid for all expenses up to the side of the ship; rail to long beach, transloading, and delivery to the ship. My customer paid for everything from that point on – I acted as their agent, and so I was “technically” the exporter. Starting in August, the supplier wanted to sell the product, in order to take advantage of the tax incentive, DES – delivered ex-ship. Meaning they paid for all expenses up to the point that the ship tossed the container overboard at the foreign port. The supplier was now the exporter, in name, where they hadn’t been so before.

Was there any increase in exports? No; same business being done as before. Did the supplier hire new staff to handle the “new business?” No, in fact they let staff go; I’m still managing the shipments and getting my same ‘cut.’ So on paper, it looks like the supplier increased business by about 700 containers a year, and get a reduction of 20 points in those profits, but they haven’t really increased business, they just get the tax break.

This is just ONE business in the U.S. How many others are doing the same thing? So is the administration cynical, naive, or just dumb? Didn’t they do their homework on this? It took me about 5 minutes to figure this scheme out. How come the geniuses at Department of Commerce didn’t see this coming? Or did they? Is this just another way to get around the repatriation of foreign earned profits taxes by ‘reimbursing’ them at home (after all, money is fungible isn’t it?)?

A bit more on the oil trap

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On February 27, 2011

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People will not ship or produce if the cost to produce+ship is higher than what they can recoup.  There is a bottom on prices despite what the idiotic supply and demand curves in textbooks show.  Contrary to what they tell you in economics 101 supply and demand is not a law, there are significant exceptions.

In fact, if the price of shipping increases enough to make production uneconomic, then people will be laid off.  When this is occurring throughout the world, you get a ripple effect.  It’s not self-reinforcing in the sense that it increases the price of oil (in fact, it decreases it), it is self-reinforcing in the sense that it does make the economy worse, because it reduces demand for a wide variety of goods, whether shipped or not.

What happens then is what we’ve seen before, the price of oil drops and you get a “recovery”, which is to say a pendulum from shitty economy to sucky economy and back again.  The current economic juggling act is about making sure the economy stays sucky, and doesn’t get to shitty, and you do that by keeping the price of oil from exploding.  When it does, you lose.

There can be no good global economy right now. There is not enough oil in the world to do it under current economic models.  Cannot be done.  You may be able to have a few places doing well, but only a few.  The solution to this is to GET OFF OIL, but no one is willing to allow that to happen, because old money wants to control the new economy and isn’t sure they can do that with current technologies.  That’s why you have idiots talking about shale oil, or using natural gas, or anything else which keeps an economy where a small group of people provide the energy for everyone else, and make a killing doing so.

So instead you have revolutions, you have unions being crushed and so on.  At its base this is all related to the price of oil.  Oil in Saudi Arabia costs about $7/barrel to produce.  Think about what that means in terms of profit, especially in a country where those profits stick to the hands of a few people.  Think about the fact that with all that money they could buy anything, unless the US has rich as rich as Saudi Princes and companies which are so large in terms of market capitalization that they can’t be bought.  (Well, or they could do ownership controls, but strangely, they prefer to be stinking rich.)

The rich MUST be kept rich.  If they aren’t, the oilarchies buy up everything.  That’s not exactly true, but it is true enough because that’s the way the people at the top think.  They know that they either stay so big they can’t be bought, or they’re bought.

Of course there’s more to this.  We could discuss regulatory and environmental (and labor, but labor is the smallest part of it) arbitrage to China (who refuse to allow outsiders to buy anything that matters, period.)  We could talk about the structure of the suburban economy, which is both profoundly unproductive and based on oil, so that any nation which embraces suburbanism can’t boom without driving up oil prices and, at this point, causing oil price spikes.  We could talk about financialization, but financialization is just a side-effect of needing lots of rich people and having less and less to sell to the world, which is about suburbanization, which is what the rich bribed the middle class with – you can have your little castle and your unearned unwarranted wealth increase in your unproductive suburb away from brown and black people, in exchange we get to be really, really rich.  Like all deals with the devil, of course, most people get cheated, but then when you decide you deserve money you didn’t earn and that being away from black people is important to you, you’ve already sold your soul.  The rich will find this out as well.

One way the price of oil hurts the economy

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On February 27, 2011

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Promoted from comments:

I work for a small freight forwarder. How small? My boss, and myself – that’s it. Last year we shipped over 61,250 million tons of beef, pork, and chicken; mostly to Australia and Hong Kong, but several smaller markets too. You pick up the product, stuff the container, and off it goes. At each point in the transport, whether it’s rail from Chicago to Long Beach, or Long Beach to the actual port, or port to destination, fuel is used and it adds to the total price. Never mind the fuel used in the production of the meat.

In addition to the cost of the space on freight, there is something called FSC – fuel surcharge; on ocean freight it’s called Bunker, or BAF. It was about 18% 2009-2010. Then 21% last quarter of 2010. 23% in January 2011. 26% this month and expected to go up next month from there. So, if your freight rate is 3500 bucks Long Beach to Sydney, you add another 900 bucks for fuel; on every shipment. As the railcars come in to Long Beach, they need to be unloaded and the product transloaded into containers, then dreyed to the ship – that’s about 800 bucks/container – most of that is fuel. So when the P of oil goes from sub-$100 to over $115/bbl (and don’t forget that everyone along the chain is adding their margins), it adds a huge cost. At a certain point the cost of doing business becomes unprofitable to continue doing business – that point is not far off in the shipping world. Have you noticed that the price of a tasty Rib-eye has gone from about $5/lbs to over $10/lbs recently? Most of that is fuel.

In a nut-shell you have the price of product rapidly increasing, resulting in lower demand, resulting in lower quantities ordered/shipped, resulting in product scarcity, resulting in higher prices yet, resulting in lower demand…resulting in lower revenue and therefore workforce reductions…ad naseum… That’s how the price of oil plays out.

I would add, as an aside, that in the longer term this is why I think the big box stores may be a lot less big and you may see a return to more local production.  This is especially true the farther you get from the coast, navigable rivers and canals, as ground transport sucks a ton more energy than sea transport.

Is America past the point of no return economically?

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On October 1, 2010

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This, from Numerian, is the sort of thing I was talking about when I noted that:

If you can build a factory overseas which produces the same goods for less, meaning more profit for you, why would you build it in the US?

Until that question is adequately answered, by which I mean “until it’s worth investing in the US”, most of the discretionary money of the rich will either go into useless speculative activities like the housing and credit bubbles, which don’t create real growth in the US, or they will go overseas.

Numerian notes:

We rescued the automakers so they could move to China. GM is a shadow of itself before the 2007-2008 crisis. It has shed plants and workers in the US, along with their ongoing health and other benefit obligations. But in its newly-shrunken state, its emphasis is not on the US, which rescued it from bankruptcy. GM is putting investment money in China almost entirely. Like so many other manufacturers before it, the company has ceased to be American, in the sense that its manufacturing is no longer done here and its workers no longer live here. Instead, its corporate headquarters is here, and little else. Even its profits are kept overseas to avoid paying US taxes.

He goes on to do discuss the debt trap, and notes that the US has lost its technological advantage, meaning there is no way to fix the problem now except through brutal austerity.

I don’t think this is quite true, but it’s damn near true, and it seems to be the assumption the elite is operating on.  And by the time we get rid of this bunch of loser Dems, suffer through the Republican government to come and then get another shot at someone competent, it may well be too late.

The future doesn’t happen in America any more, and that means America’s just a place with too high costs and a lot of guns.  There’s no damn reason to invest in the US except in leveraged scams, and until the US figures out a way to change that, things aren’t going to get better. Right now the US’s elites seem to think the way to fix it is to reduce wage costs till they’re competitive with China’s.

I’ve said this before, I’ll say this again: if you can get out of the US, GO!  If not hunker down and fight, and fight smart.  More on that later.

Tax Cuts for the rich create jobs outside the US

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On September 19, 2010

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The standard right wing talking point that tax cuts for the rich and for corporations create jobs is true: Tax cuts for the rich create jobs overseas.

The tax cuts’ two bills, in 2001 and 2003 – changed laws so that personal income tax rates were reduced, exemptions for the Alternative Minimum Tax increased, and dividend and capital gains taxes also cut.

Yet in the debate, it seems of no moment to either side whether the tax cuts were effective in achieving their goal of spurring business investment and making the US economy more competitive.

Our own examination of US non-residential investment indicates that the reduction in capital gains tax rates failed to spur US business investment and failed to improve US economic competitiveness.

The 2000s – that is, the period immediately following the Bush tax cuts – were the weakest decade in US postwar history for real non-residential capital investment.

Not only were the 2000s by far the weakest period, but the tax cuts did not even curtail the secular slowdown in the growth of business structures.

Rather, the slowdown accelerated into a full decline.

The logic of this is simple enough.  If you have money to invest, you’re going to invest it where it’ll return the most.  Right now and in the past couple decades that is either in leveraged financial games, or it is in economies which are growing fast and have low costs.  The US does not have high growth compared to China or Brazil or many other developing countries.  It has high costs compared to those countries as well.

If you can build a factory overseas which produces the same goods for less, meaning more profit for you, why would you build it in the US?

Until that question is adequately answered, by which I mean “until it’s worth investing in the US”, most of the discretionary money of the rich will either go into useless speculative activities like the housing and credit bubbles, which don’t create real growth in the US, or they will go overseas.

There are a number of ways this question can be answered.

  • You could slap taxes on foreign capital flows;
  • you could slap tariffs on foreign goods produced in low cost domiciles so that companies have to produce in the US to have access to the US market;
  • you could push industries which are hard to outsource but don’t actually decrease American competitiveness.  The housing bubble increased the cost of doing real business in the US by inflating real estate costs.  A massive buildout making every building in the US energy neutral or an energy producer would increase US competitiveness.
  • you could try and do what America once did: have a tech boom.  If the future is being produced in a country then everyone has to invest there and when things are changing fast you can’t offshore production, because speed matters and offshoring is slow. This is why real wages increased during the tech boom of the 90s.

There are other answers as well, but the point is simpler: you must answer the question “why invest in the US instead of a low cost, high growth country?” Until you answer that question tax cuts will not only not do any good, but in a sense will do harm, by increasing the speed at which jobs are offshored out of America.

Greek and European Insolvency

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On April 28, 2010

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Haven’t commented much on this, but let’s cut to the chase.  Greece is going to default.  Period.  The only question is when.  The Europeans can hold it off a year or two if they get their act together.  All of the PIGS (Portugal, Italy, Greece, Spain and arguably Ireland) are probably going to default eventually unless the rules by which the Eurozone, which state you can’t run too high deficits, are overturned.  All of the countries in the Eurozone, all of them, have been playing shady financial games to hide the real state of their budgets.  Every single one.

Oh, and Germany needs to put a cork in it.  Trade and balance of payments are ZERO SUM.  Every nation cannot run surpluses, it is mathematically impossible.  The more countries that do, the less Germany’s surpluses will be.  Germany’s surpluses are only possible because other countries run deficits.

When the Greeks get crammed down, hard, either through readjustment packages or because they go off the Euro and default (what I would do, but my by European friends inform me this is unthinkable to all good Eurocrats), when Spain, Ireland, Italy and Portugal get crammed down, that’ll lead to a nice demand collapse, which means less imports and worse balance of payments.  Which will make things worse for everyone else—because while balance of payments and trade are zero sum games in the sense that it has to come out to zero, prosperity is not.  If overall demand drops or grows very slowly, everyone is hurt.  Refusing to deal properly with these problems by putting Europeans and American to work by using deficit financing properly (as opposed to wasting it on tax cuts, bank bail outs and badly designed “stimulus” measures) would help everyone and pay itself back, as long as it was done in a way which also dealt with the oil bottleneck at the same time.

But that ain’t happening.  So at best we get a lousy few years economic cycle where over 80% of productivity gains go to corporate profits, wages stagnate and unemployment doesn’t recover anywhere near pre-crisis levels—or we get a second downleg of this financial crisis when China and Europe both crash out.  (It ain’t about America, babes.)  I’m waiting till the end of the summer to see where I’ll put my money (literally).  In the meantime, hold on tight.  I’d tell you to pray, but I’m not sure if crashing out or stumbling around with a bloody bandage on the stump is preferable.  I suppose the bandage.  I doubt even a second crash would be enough to make the powers that be understand they need to make fundamental changes.

Meanwhile, in the US, the strongest part of the recovery comes in medical, insurance, finance and construction.  As I said long ago, the fundamental Obama play was to try and reboot the bubbles.  Yay.

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