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Tuesday, March 14, 2006

The Economic Fallout From Dubai And Our Fiscal Irresponsibility

When I was a girl my father told me that I could distinguish really intelligent people from people with useless high IQs by watching to see how they interacted with other people. The really smart ones, he said, always are looking for other people who know what they are talking about. They are always interested in what other people have to say, and trying to figure out why they say it.

Two really intelligent people who write about the economy are Howard of Oraculations and Mover Mike.

Howard has been taking a cold, hard look at the Dubai deal's outcome. In this post, he discusses what some stock analysts at Merrill Lynch told him:
Both of them were appalled at what has happened, are furious that the gutless Republicans just caved, and are seriously concerned about many investments. Both told me that they were quietly recommending that Boeing stock be sold because it is a virtual cinch that the UAE will cancel their jet orders and the other Arab countries will follow. Both are in the process of finding out how much Arab money is in our stocks and will bail at the first bad day there as well.
If you can't spend dollars, why do you want them? Buying US assets and trading within the dollar market is one way to protect yourself from a declining dollar. As Howard points out, the entire reaction over the Dubai deal makes no sense. He discusses the security implications of having mob-controlled ports and why some politicians might have their own motives. Don't miss this post either, which should be read in conjunction with Mover Mike's post here.

Mover Mike has been writing about the dollar for over a year, and comments about the possibility of Arab nations dumping the dollar. As for our own fiscal situation, and our dependence upon foreign investment, do not miss this post.

Nobody is minding the fiscal store in Washington. Since we were already facing a bad hit from the RE bubble's deflation or collapse, the effect of Arab disinvestment and a possible flight from the dollar will be magnified. As Mover Mike has pointed out, tax revenues to the feds have been up. But this trend will not continue when the recession hits, and it will.

It seems as if we have idiots, demagogues and just plain crooks controlling Congress. These are the people, remember, who literally seemed to be unaware that the Social Security Trust Fund has no assets. They are that unable to comprehend fiscal reality! These are the people who are piloting the ship! The press follows their lead pretty mindlessly.

Watch the money - that will tell you what's really happening. As long as the US was considered stable and a safe place to invest, money continued to flow in from Asia and the ME. If we change that equation, we will abruptly hit the wall of deficit financing combined with negative trade balances.

Many banks shifted out of mortgage lending and moved to commercial lending over the last few years. Now the more cautious banks are drawing back on their commercial lending unless they can offload it. There are, to put it bluntly, too many banks chasing that business to make most of it a good stable bet. The Fed is worried too; it has proposed new rules about commercial lending concentrations. I can find no bright spots on the horizon. All I see are growing risks and growing overcommitments in the federal budget.

The best thing we can do to turn this around is to invest heavily in energy production facilities within the US. This would, long-term, help correct our staggering need to import goods without the corresponding ability to export goods. It would also create good jobs. Nuclear power - we need it. We need coal. We need to open ANWR desperately. We must generate new industries. We do need an alliance with India, but that's a 20-year bet.

I think we have elected too many lawyers to Congress and too few people from other industries and/or backgrounds. (But college professors are a no-no - see Pedro who exists in the heart of the academic beast.) We need who can add and subtract in Congress. Forget this myth of the all-powerful president. In most areas of public life, Congress rules the roost. Steve Forbes for president? It's not going to save us. Something's got to stop this bleeding. The era of funny money cannot last out another decade. Until we can get people in Congress who understand something about economic reality, and understand that you cannot generate cash flow by writing yourself a check backed by an IOU you write to yourself, we cannot dig ourselves out of this hole.

Many of the state budgets are unstable anyway, and some of them will be badly affected within a few years by declining revenues from property taxes and RE transfer taxes. So it is not just the federal budget that should concern us. The federal/state underfunded retirement and medical benefits are a real hazard. See City Journal on the horrible interaction between union interests and government policies:
Three union trustees of the New York City Employees’ Retirement System (NYCERS)—from the local chapters of the American Federation of State, County, and Municipal Employees (AFSCME), the Teamsters, and the Transport Workers Union—recently issued a threat to six top Wall Street firms: if JPMorgan Chase and its competitors support private Social Security accounts, or keep contributing to lobbying groups that do, the letter warned, the firms risk losing the hundreds of millions in fees they earn each year from managing public-pension funds.
It’s a free country—and unions should be free to raise money from their members to advocate for a political cause. But the unions don’t want to argue this one on the merits. They want to shut down the national debate before it really begins.
People have to understand that almost everything they read from government economists and newspaper economists is nonsense. The problem that the US has is that we are not generating wealth at home, and our inflating public sector sucks wealth out of the shrinking private sector. If this continues, we are in for economic collapse. Every policy responsible people are suggesting is being fought tooth and nail by organizations that can generate a considerable bloc of votes for Congressional and local candidates. The growth of public-sector unions and the shrinking numbers of private-sector unions has contributed to a disastrous economic public policy.

Thank you for the compliment. MOM. I am appalled at our Congress and I am appalled at the complacency of the American people.
Mover Mike
Well said, MOM.

In fact, if we cannot- or will not- keep our own house in order, to believe we can do elsewhere is both prepsoterous and hypocritcal.

I wrote early that the killing of the DPW deal would cost us a lot more than in cost them.

Even if the deal were resurrected, the horse is out of the barn.

We've been exposed in trying to stack the deck in our favor, all to satisy a few politicos.
Complacency is the problem, Mike. But a big reason for that complacency is that you can read several major newspapers and never encounter a realistic discussion of current fiscal realities. The economic journals are much better, but they have a much, much smaller readership (and are often quite expensive).

SC&A, it's not that we were trying to stack the security deck - it's that we have been talking about measures that really make no sense.

More bluntly, we have been exposed as hypocrites.

You are totally correct that if we can't summon the moxie and the pragmatism to put our own house in order than we can't help others effectively.
The problem that the US has is that we are not generating wealth at home, and our inflating public sector sucks wealth out of the shrinking private sector.

This is called "The Service Based Economy" and is veh-ry tren-dy.

I have seen an example of the totally Service Based Economy (TM). You probably have, too. Did any of you ever watch Max Headroom?
Yes, but as the EU countries are finding out, it turns out that those jobs go to the lowest bidder too.

I never watched Max Headroom, but I have been watching the growth of the medical-clinics-serving-foreigners industries in India and Mexico. Heart surgery at one-tenth the price!

When we start outsourcing legal positions, maybe we'll see some action from Congress.
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