The Chickens of Irresponsibility Come Home to Roost Under Obama's Reign

Excerpts from Dr. Enzio von Pfeil's November 10, 2008, appearance on CNBC Asia's Cash Flow:

1. What are your reactions to the jobs data out on Friday in the US?
   • Last week, 481,000 workers filed jobless claims – so the number of people staying on benefit rolls was the most since February, 1983.
   • All of this has to do with the worsening global Economic Time™: the excess demand for money is intensifying an excess supply of goods – so why hire? More importantly, why not fire?
   • Behind this is that America’s earnings outlook remains bleak: S&P 500-member companies have reported third quarter contractions of over nine percent, and analysts guess that for the full year, earnings will contract by eight percent. Based on what the Economic Clock™ is suggesting, “eighteen” is more likely than “eight” percent earnings contraction. After all, when you have an excess supply of goods, margins as well as turnover wilt, so what else can drive profits?
2. What are Obama's economic policies, and will they help the US combat the slowdown?
   • At least he has a fantastically deep pool of experienced talent to draw upon (e.g. Messrs Summers, Volcker, and Geithner, to name but a few) as well as leaving the very astute and erudite Dr. Bernanke at the Fed.
   • Nobody can change cycles: winter is a very useful cycle in that during it, the bad stuff is cleaned out and paves the way for Spring. This is how we view the current cycle, the Economic Time™ (see www.EconomicClock.com) in our jargon. It is characterized by an
     
     1. excess demand for money (banks won’t lend), and thus an
     2. excess supply of goods.
   • All that Pres. Obama can do is to alleviate/lessen/anaesthetize the pain: he cannot “skip” this part of the cycle. Reason: it is the commercial banks - NOT the Central Banks – that are creating an excess demand for money. They are regulating themselves and thus are choosing not to lend. That choice is based on profitability, and will take a long time to undergo transformation. Meanwhile, when Central Banks change policy they are driven by policy – NOT by profits – and thus they can choose to alter policy at one board meeting. Beware of holding money at your bank: time deposits are risky and the very fewest of bankers will have given you the full story about how unsafe your deposits and other "assets" with the bank really are...
   • I am afraid that he can do little to stop cost-push stagflation, which we identified “in the coming” back in Spring of 2006. Nor can he stem a spike in bond yields.
3. Obama made comments about China being a currency manipulator. How will that affect relations?
   • This is where things get truly dangerous: he must manage expectations.
   • My latest and very short book, Trade Myths: Globalization and the Trade Balance Fallacy (see www.TradeMyths.com), is designed to counter such a myth, namely that only exchange rates drive trade balances. Indeed, if this were the case, why do Germany and Japan – with every-strengthening currencies – have growing trade surpluses, while America, with an ever-weakening currency – has a swelling trade deficit?
   • Thus, his argument is misplaced and dangerous.
   • He would be wiser to focus on praising the successes of America’s Multinationals operating abroad: they not only are giving America a global trade surplus of nearly USD 3 TRILLION. If Obama uses this cheap rhetoric that China has to stop “manipulating” her currency, then there is very little to prevent Chinese officials, at a grass roots level, from impeding the operations of those American multinationals operating so successfully abroad.
   • Already America has fanned China’s ire by adamantly continuing to sell arms to Taiwan – just as she is angering Russia with the construction of her missile defence shield in the Czech Republic.
     • of course, China has picked precisely this moment to send her Taiwan envoy to Taipei to deepen ties between both places, precisely where the US is in policy limbo.
4. What about a more protectionist America?
   • This is precisely what happens – not only in America – when the Economic Time™ worsens: instead of looking at their own domestic failures such as failed education and tax policies, politicians anywhere chase the cheap vote by blaming the “bad” foreigner.
   • In my book, Trade Myths, I counter this by including the very successful roles of multinationals’ overseas operations – and show that America has a global trade surplus while China has a global trade deficit.
   • Obama has to manage expectations, and I am afraid that despite all of his “it’s time for a change” hype, this issue of trade, too, will be painted with lipstick – but remain a pig.
5. What is your reaction to all the interest rate cuts? Are they helping? Needed? Are we on the right track in tackling the credit crunch?
   • These are like ice water drunken after a night of heavy drinking: they only alleviate the pain, but they cannot cure anything.
   • The reason is that greedy banks got so carried away that now that they have swung from greed to fear.
   • The good news is that they are regulating themselves; the bad news is that this creates an excess demand for money, which in turn intensifies an excess supply of goods. The chickens of irresponsibility have come home to roost.
   • Stagflation, driving by cost-push inflation, is on the way. There are various sectors to be aware of.
   • So, lower rates only alleviate the pain, but they are not a sufficient reason for banks to resume lending.
   • Faced with lower turnover (by lending less), they now are supporting margins by not passing lower interest rates on to the consumer. Indeed, crazily enough out here in Hong Kong, banks are actually raising their mortgage rates, even though their funding costs are falling.

Comments

[socrateazz:]

I wonder if you think multinationals could bring that money they have earned in from over seas. countries will act like the banks did if they try. And would they want to? I think if you really looked into the last 20 years of financials, you would find that most production companies have moved from finacially well off to the brink of failure. The wealth has been redistributed form the producer to the money movers. Producers have little leeway now. They need to either earn money or fail. The failures will cause shortages that will allow those who survive to continue with more earnings. But the people will have less to spend because more company failures will take place. I think history will repeat itself in that the economy will become more like the dark ages than we have seen in 200 years. The pheasants of the dark ages went into fifedoms out of need. The kings showed them relative safety. What happened was those in charge started to expect more while giving less. Socialism is where we are heading. I expect a dark ages type pheasantry is where we may be if things continue on ther current path

2008 Nov 09 04:34 AM

[john s. gordon:]

since the banks have abdicated their function which is to lend to credit-worthy borrowers, it is time for the loan brokers to come in and perform that function for them.

we had a loan-brokerage industry in 1988-90 when the last credit crunch occurred. people or institutions with funds were able to make loans to projects thru a loan broker bypassing the banks. when the bank operations returned to normal, the l.b. industry went away.
> jack

2008 Nov 09 08:59 AM

[sorgmot:]

One always recognizes the worth of the orator by the questions she or he askes.

I'll take William Sheakspear who gave ansers, not questions, toe the ruling houses of his time.

"Neither a lender nor a borrower be for borrowing dulls the edge of husbandry and loan oft loses self and friend."

"There is a tide in the affairs of man which taken at the flood leads on to victory."

Bring back smaller states and tiny governments. They work toward prosperity and cooperation. 2008 states work toward stealing and war.

Good luck.

2008 Nov 09 09:15 AM

[David Martin:]

The 'fantastically deep pool of talent' Obama has to draw on includes most of the people who created this mess, and who are deeply implicated in the Ponzi schemes involved.
When he has people like Roubini who actually predicted this coming then perhaps we can make some attempt at a rational assessment of the situation.
At the moment banks are not even being made to be transparent on their holdings, and all is quiet whilst Paulson gets on with his job of the unsupervised and extra-legal looting of the economy to the benefit of his cronies and at the cost of the taxpayer.

2008 Nov 09 10:54 AM

[RLLH:]

I question how a country more oriented toward "fairness" and political correctness can compete with countries where people are willing to work because they know the alternative is starvation for everyone. I believe this country has to (and will) go through very tough times to go back to the days when we valued hard work and thrift, when CEO's were not raping their corporation, and when jobs were awarded on the basis of merit, not quotas.

2008 Nov 09 11:45 AM

[Zurina:]

I always wonder why the urge to bigger government argumentatively sounds so humane and draw so many supporters. The quote from HL Mencken says it well as far as the US history goes....
"The urge to save humanity is almost always a false front for the urge to rule it". H.L. Mencken

As we point one finger towards our "enemy", there are four fingers pointing towards ourselves. Every move/policy comes with blessings and blights, just more of one than the others. It's up to the smart ones and lucky ones to execute the right ones at the right times. Blaming games won't do. Good luck.

2008 Nov 09 03:08 PM

[Kunst:]

The root of America's economic distress is a greatly overvalued US dollar. Jobs go offshore because people in other countries can and will do the same work for considerably less money. I worked in software, which was an American monopoly for decades. Now it is an international market and competition has driven wages down.

You can't "fix" this by trying to shut out the rest of the world. Ultimately, the USD has to be devalued by at least half to make us competitive. That means a lower overall standard of living (get used to using a LOT less energy). It also has the side effect of quasi-defaulting on much of our debt.

2008 Nov 09 03:25 PM

[woodsey:]

Zurina, it's three.

2008 Nov 09 03:51 PM

[Jan Rogozinski:]

It's the enormous pink spot tend elephant in the room that no one notices because every eon is blind.

The trillion dollars or more that the US spends every year to maintain its military empire, with 700 bases in 110 countries (or something like that) and 18 separate spy agencies.

Whiteout even counting the spy agencies (some of which have secret, hidden budgets, the US already spends much more on the military than all the other countries in the world (including Russia and China) combined.

This has been going on since Kennedy got the US into the Vietnam War. So that's 48 years! With spending on the empire accelerating every year since Reagan.

The Republicans keep saying, "we believe in small government," while constantly increasing military spending and thus constantly swelling the size of the government. And Obama is going to be just as bad-- except that he isn't a hypocrite like the Republicans. I've read that he wants to add another 100,000 soldiers to the existing number.

Spending money on the military is like piling up 100 dollar bills and setting them on fire. Military spending is useless and contributes nothing to our welfare. The stuff we buy either is stored up until it rusts, or it is used and thus destroyed in the case of bombs, or consumed the case of ammunition.

But it gets even worse when all the trillions of dollars spent on the empire since Reagan in 1980 has been borrowed. Thus increasing interest payments very year.

Imagine where we would be if all the unneeded military spending over that last 50 years had been used to build infrastructure here at home. Or alternatively used to cut taxes by 50% while paying off the national debt.

2008 Nov 09 07:41 PM

[JOSEPH FOSTER:]

I 100% THINK THE ENZIO IS CORRECT ABOUT IMPROVING CORPORATE PROFIT WHEN YOU SEEK SLAVE LABOUR LIKE THE CHINESE TO BE PAID PERHAPS $100 PER MONTH PLUS A BOWL OF RICE.
OBAMA HAS CAPTURED THE IMIGNATION OF THE POPULATION OF THE WESTERN WORLD HIS ELECTECTION WILL SLOW THE PROCESS OF SELF DESTRUCTION OF CAPITALISM, IF NOT CHECKED IT WILL UTIMATEL SELF DESTRUCT AND WEHN YOU DESTROY ALL THE MIDDLE CLASS WHO CAN NO LONGER AFFORD TO BUY THE CHEAP GOODS MADE BY SLAVE LABOUR THAT CORPORATION WILL THEN AFTER MANY YEARS OF PROSPERTY HEAD FOR SELF DESTRUCTION.
FINALLY THIS WHAT OBAMA SAID.
IT IS GOOD FOR THEM AND NOT FOR YOU.
FORM THEM MEANS CORPORATE AMERICA OR WALL STREET,
YOU MEANS MAIN STREET.
WHTA HAS TO BE DONE IS MAKE IT GOOD FOR WALL STREET AND MAIN STREET. JOSEPH FOSTER A SUCUSSFUL CAPITALIST

2008 Nov 10 01:11 AM

[cyberman:]

So Dr P's argument is that Obama should not call a spade a spade when by any measure China is manipulating its currency by making it unrealistically cheap in order to help encourage exports and discourage imports because to be honest about it would hurt the ability of multinationals to make more money? This is the same logic that Pelosi and Reid gave for not impeaching Bush and Cheeney. They wanted to win an election at all costs regardless of the odoriferous murder of the constitution by these two and their henchmen. We have to have honest politicians and not let a myth like free trade, or the concept of profits or the uber corporate mentality that has just killed Americas economically for 10 years displace the honest actions that must be first spoken and then taken.

China is a communist country for goodness stake. Are we to pull our punches because they are the second largest foreign holder of American debt or a buyer of products made by U.S. based multinationals?

By the way Dr. P's use of the words 'American multinationals' might be a contradiction in terms. Once they become multinationals their economic loyalty is still to America? No, arguably their loyalty is to profits no matter where they are to be found or what impact their policies have on the U.S. morally or politically. If they can manipulate the system to buy or intimidate politicians and a presidency to facilitate their corporate power and profitability, that is just par for the game in the U.S.

Time for a change. A big change. A tilt away from the disastrous economic conditions brought about by a lack of regulation and presidential/corporate... stupidity, and back to a balance wherein our political and moral values are in harmony with a vital and confident economy.

2008 Nov 10 01:41 AM

[Homer II:]

JOSEPH FOSTER, step away from the bar and put down that drink. And, while you're able to, turn off the CAPS LOCK key.

2008 Nov 11 04:57 AM