What's this World Coming To?

First of all, having traveled quite extensively in Asia over the last couple of years, I can assure you, there is no Chinese 10 year old working for a nickel.  The Chinese are quite happy about their rise in the world and the job's they have. For our economy's situation, the question isn't whose to blame, but if blame has to go around, yes it's the policiticans mostly.  But the unions are second or maybe third.   In general, the collective policitians (both sides) at state and federal level don't understand economics and neither do the unions.  However, none of it really matters because this is what's going to happen. The global situation has arisen so fast, politicians have been caught completely unaware of the competitive environment everywhere and the US just will no longer be competitive due to the welfare state we've created.  Union pensions are just part of it (but they are a considerable part of it). 

For example, in Portugal, Ireland, Italy, Greece and Spain (the PIIGS) what happened is govt payrolls grew so that 25% to 30% of the workforce were govt employees.  The US is currently at 20%.  In this last recession, the unemployment went to the private sector.  Govt payrolls did not decrease nor did govt employee retirement benefits and pay.  Essentially govt workers haven't experieced the recession like the private sector and on top of that the number of people employed by the govt grew.  This is well documented and the WSJ published the data recently.  This is the truth and has nothing to do with one person there or one person here you personally know who may have lost a govt job.  In the private sector it's much worse!  

So, just like in Paris now with labor strikes, Athens, Madrid (Spain's unemployment is over 20%!!)  and these other European welfare states, they are having to go through great pains to have cuts in govt payrolls and benefits.  There is no other way.  There is no more money.  Moreover the larger picture involves right now where the US debt is almost $15 trillion dollars.  The US GDP is also ~$15 trillion.  That means our debt to GDP is 100%.  In Greece it was %129, Spain %100.. essentially the US is just like these countries.  The saving grace is that we can print our own currency. Those countries cannot print the Euro.  Very soon, the US currency will lose it's reserve status because we keep printing and the growing clout of other nations.  When that happens, the Chinese and Asia will stop buying US treasuries.  

 

A side note, when we purchase goods made from China (and btw, if we didn't our standard of living would be way lower than it is now, because the cost of producing goods here would mean they'd cost 3 x what we pay for them at Walmart) in dollars, the Chinese govt buys those dollars from Chinese companies with Yuan and than takes those USdollars to buy US treasuries.  They own $1.8 trillion of our $15 trillion in outstanding debt currently.

 

When China and Asia stop bying our debt, we'll have to raise the interest rate we offer to incent them and others to buy that debt.  What do you think the debt service is on $15 trillion?  4% of $15 trillion is $600 billion, the same amount as our defense budget!  We pay interest equal to our defense budget each year to service that debt.  What happens when we have to pay 8%?  $1.2 trillion/year just to service the debt.  Where will money come from for govt pensions, social security, welfare etc.  You get the point?  

The state situations are also similar.  Right now govt pensions and wages are above or equal to the private sector.  When college graduates are wanting to go work for the govt rather than taking private sector jobs, your economy is gone. There is no more democracy or capitalisim.  This is where we've gotten too.  The solution is very painful and involves govt employee cuts to employement, wages and benefits and also tax increases for everybody.  There is no other way out of it.  

 

It's not a question of unfair trade with the Chinese, that's just a diversion and people saying that (union presidents and politicians) don't understand the history of economics.  Let me tell you the story.  After WWII our economy was very good and the US was the world's manufacturer.  Why?  Do you think it had to with American ingenuity?  Hardly, it had to do with fact Europe was bombed to smithereens as was Japan and Asia was still in the dark ages.  That's why GM grew revenues and market share, not because they had superior product, it was simply because nobody else could build anything.  Then came the 60's and 70's and Germany and Japan rebuilt themselves and started creating things at the low end of the innovation scale.  The low end of manufuacturing moved to Japan then due to labor costs (which is the largest cost in any manufacturing) and in the 70's Japan made things cheaply and the stories of China today we heard about Japan then.  Japan and Germany also began to do more than copy, they also began to innovate.  In the 80's, Japan started out-sourcing to the Tiger countries (HKong, Singapore, S. Korea) for cheaper manufacturing and they moved up the food chain in innovation. This is where Toyota, Sony, Honda grew.  In the mean-time the US was still a creditor nation because we still exported more than we imported, but the gap was closing as the world became competitive, as the world rebuilt themselves after WWII. 

 

Then came the 90's and the tigers shifted manufacturing to China, Indonesia, Phillipines and Vietnam where labor costs were cheaper.  S. Korea's chaebols and Samsung grew then and the tigers realized they could innovate too and stopped copying and started designing.  In the US, this is where our imports crossed our exports and we started to become a debtor nation.  A partial cause of this is because the US. consumer are the most materilistic people on earth and we kept buying stuff feeding demand and when you go into a store and see a US made TV for $1000 in 1992 and a Japanese designed, Korean built TV just as good for $500, which are you going to buy?  So to continue, the new century came (2000's) and all the Asian tigers and Japan were now having everything built in China due to cost.  But since China has so many people, the manufacturing keeps moving inland so it'll take 20 more years before the Chinese start moving manufacturing to latin american and africa.  They're building ties with these countries now by the way. 

 

So every decade from the 60's to now moved manufacturing to the lowest cost provider WORLDWIDE.  This is not a US phenomena, all companies every where do it.  Countries like Germany and Japan do it to. BUT they still are exporters not importers like the US, why do you think that is?  Because the German and Japanese people are FRUGAL that's why.  I lived there I know.  They just will not run out and buy the latest and greatest TV, iPhone, clothes, car etc.  This is how they maintain their competitiveness on a global scale.  They innovate and design and don't buy and turn the lights out when they walk out of a room.  The freakin German's don't even shower every day!  The save every penny they make.  Our cultural difference is why we run a trade deficit and these two modern countries run a trade surplus.  But, they both outsource manufacturing to China too in a big, big way.  

 

So there you have it with many runon sentences, but the problems in the US today have very little to do with Chinese labor rates and their cheap Yuan.  By the way, no country on earth has ever devalued their currency into prosperity, the Chinese know this and is why they continue to let their Yuan rise.  It's rising for sure, I keep track of exchange rates just not at the rate US politicians want it to.  Again, they think that if the Yuan rises, we'll somehow fix our export/import problem.  It won't, that's naive.  You can let your currency devalue like the dollar is now, for a little while and boost exports but you cannot do it in perpetuity for then confidence in the dollar will fall, nobody will buy it and US debt (resulting in loss of reserve currency status, high interest rates to incite borrowers of US debt and high debt service and default) and you'll create runaway inflation at home.  So by 2020-2025, Chinese GDP will equal the US.  The US is like Great Britain in 1900.  They were the world power and economic power (2 different things).  But by after WWI, the UK lost that status.  By 2030, the US will be a has-been nation and frankly, there's not stopping it, because of people's reaction like what's going in in Wisconsin right now.  The govt workers, just really do not understand the greater pickle were in.  Nor do the policitians.

 

I hope this clarifies some of the confusion.  You will not get the true story listening to union leaders and watching CNN or NBC.  Start reading Barrons, the Economist and the WSJ every day for the next 6 months to get the real picture, for union leaders and politicians just don't know exactly what it is.