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

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by: Enzio von Pfeil

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 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, 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.