My alternative proposal on trade with China

We can have BOTH low priced imports AND good jobs for all Americans

Attorney General Richard Blumenthal has urged US Treasury Secretary Geithner to take legal action to force China to let its currency appreciate. As stated by Blumenthal: “By stifling its currency, China is stifling our economy and stealing our jobs. Connecticut manufacturers have bled business and jobs over recent years because of China’s unconscionable currency manipulation and unfair market practices.”

The Attorney General is proposing to create jobs by lowering the value of the dollar vs. the yuan (China’s currency) to make China’s products a lot more expensive for US consumers, who are already struggling to survive. Those higher prices then cause us to instead buy products made elsewhere, which will presumably means more American products get produced and sold. The trade off is most likely to be a few more jobs in return for higher prices (also called inflation), and a lower standard of living from the higher prices.

Fortunately there is an alternative that allows the US consumer to enjoy the enormous benefits of low cost imports and also makes good jobs available for all Americans willing and able to work. That alternative is to keep Federal taxes low enough so Americans have enough take home pay to buy all the goods and services we can produce at full employment levels AND everything the world wants to sell to us. This in fact is exactly what happened in 2000 when unemployment was under 4%, while net imports were $380 billion. We had what most considered a ‘red hot’ labor market with jobs for all, as well as the benefit of consuming $380 billion more in imports than we exported, along with very low inflation and a high standard of living due in part to the low cost imports.

The reason we had such a good economy in 2000 was because private sector debt grew at a record 7% of GDP, supplying the spending power we needed to keep us fully employed and also able to buy all of those imports. But as soon as private sector debt expansion reached its limits and that source of spending power faded, the right Federal policy response would have been to cut Federal taxes to sustain American spending power. That wasn’t done until 2003- two long years after the recession had taken hold. The economy again improved, and unemployment came down even as imports increased. However, when private sector debt again collapsed in 2008, the Federal government again failed to cut taxes or increase spending to sustain the US consumer’s spending power. The stimulus package that was passed almost a year later in 2009 was far too small and spread out over too many years. Consequently, unemployment continued to rise, reaching an unthinkable high of 16.9% (people looking for full time work who can’t find it) in March 2010.

The problem is we are conducting Federal policy on the mistaken belief that the Federal government must get the dollars it spends through taxes, and what it doesn’t get from taxes it must borrow in the market place, and leave the debts for our children to pay back. It is this errant belief that has resulted in a policy of enormous, self imposed fiscal drag that has devastated our economy.

My three proposals for removing this drag on our economy are:

1. A full payroll tax (FICA) holiday for employees and employers. This increases the take home pay for people earning $50,000 a year by over $300 per month. It also cuts costs for businesses, which means lower prices as well as new investment.

2. A $500 per capita distribution to State governments with no strings attached. This means $1.75 billion of Federal revenue sharing to the State of Connecticut to help sustain essential public services and reduce debt.

3. An $8/hr national service job for anyone willing and able to work to facilitate the transition from unemployment to private sector employment as the pickup in sales from my first two proposals quickly translates into millions of new private sector jobs.

Because the right level of taxation to sustain full employment and price stability will vary over time, it’s the Federal government’s job to use taxation like a thermostat- lowering taxes when the economy is too cold, and considering tax increases only should the economy ‘over heat’ and get ‘too good’ (which is something I’ve never seen in my 40 years).

For policy makers to pursue this policy, they first need to understand what all insiders in the Fed (Federal Reserve Bank) have known for a very long time- the Federal government (not State and local government, corporations, and all of us) never actually has nor doesn’t have any US dollars. It taxes by simply changing numbers down in our bank accounts and doesn’t actually get anything, and it spends simply by changing numbers up in our bank accounts and doesn’t actually use anything up. As Federal Reserve Chairman Bernanke explained in to Scott Pelley on ’60 minutes’ in May 2009:

(PELLEY) Is that tax money that the Fed is spending?
(BERNANKE) It’s not tax money. The banks have– accounts with the Fed, much the same way that you have an account in a commercial bank. So, to lend to a bank, we simply use the computer to mark up the size of the account that they have with the Fed.

Therefore, payroll tax cuts do NOT mean the Federal government will go broke and run out of money if it doesn’t cut Social Security and Medicare payments. As the Fed Chairman correctly explained, operationally, spending is not revenue constrained.

We know why the Federal government taxes- to regulate the economy- but what about Federal borrowing? As you might suspect, our well advertised dependence on foreigners to buy US Treasury securities to fund the Federal government is just another myth holding us back from realizing our economic potential.


Operationally, foreign governments have ‘checking accounts’ at the Fed called ‘reserve accounts,’ and US Treasury securities are nothing more than savings accounts at the same Fed. So when a nation like China sells things to us, we pay them with dollars that go into their checking account at the Fed. And when they buy US Treasury securities the Fed simply transfers their dollars from their Fed checking account to their Fed savings account. And paying back US Treasury securities is nothing more than transferring the balance in China’s savings account at the Fed to their checking account at the Fed. This is not a ‘burden’ for us nor will it be for our children and grand children. Nor is the US Treasury spending operationally constrained by whether China has their dollars in their checking account or their savings accounts. Any and all constraints on US government spending are necessarily self imposed. There can be no external constraints.


In conclusion, it is a failure to understand basic monetary operations and Fed reserve accounting that caused the Democratic Congress and Administration to cut Medicare in the latest health care law, and that same failure of understanding is now driving well intentioned Americans like Atty General Blumenthal to push China to revalue its currency. This weak dollar policy is a misguided effort to create jobs by causing import prices to go up for struggling US consumers to the point where we buy fewer Chinese products. The far better option is to cut taxes as I’ve proposed, to ensure we have enough take home pay to be able to buy all that we can produce domestically at full employment, plus whatever imports we want to buy from foreigners at the lowest possible prices, and return America to the economic prosperity we once enjoyed.

high cost of groceries


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>   
>   (email exchange)
>   
>   On Mon, Jan 25, 2010 at 1:25 AM, Roger wrote:
>   
>   birds eye view: my son’s 1st weekend back at Google hq in Mountain
>   View after a visit home (he only buys food for weekends)
>   
>   can only get worse this year;
>   
>   the “costs” of financial policy, health burdens & healthcare all run
>   together yet few recognize one of Shewhart’s maxims about the statistics
>   of ANY complex system: “Tune the system, not the components!”
>   
>   we’ve apparently gone from LBJ’s “War on Poverty” to a war on poor people;
>   

I went to the store to buy two meals worth of food for myself. I don’t habitually look at prices when I buy food, I figure that’s the one place where I ought not to cut corners so I focus on the ingredients instead. I get to the counter, and the bill is $31.34 to my great surprise.

Broken down:

parmesan cheese 4.99
tortellini 4.69
tomato sauce 4.69
ravioli 5.49
salami 7.49
blackberries 3.99

That’s going to be supplemented with milk, juice and tea I already have at home, adding slightly to the cost.

Maybe I’m buying fancy stuff, but it doesn’t feel like it. In contrast, I can get a comparably complete meal with way more food than I need at a restaurant for less than $10 even now. Something is really out of whack with the cost of food. The only way to eat more cheaply at home is to buy less nutritious stuff. I didn’t check the price of other produce, but I’ll bet even vegetables are pricey. In even greater contrast, the last meal I ate at work must have cost a ton. Sushi, italian sausage, green salad with 3 kinds of greens and 5 kinds of nuts, lima beans, soybean sprouts, pomegranate kernels, carrots and beets, etc, etc.

If economic conditions are forcing people to eat more cheaply, I predict they’ll eat more McDonalds and wonder bread, while the wealthy will live well. Not good.

Yes, that’s what an export economy looks like you have a job and produce, but you only earn enough to eat and buy gas to get to work as your output gets exported.

We aren’t there yet, but on the way.


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China to Re-Export Copper as Stockpiles Mount, Xi’an Maike Says


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Interesting turn of events.

China to Re-Export Copper as Stockpiles Mount, Xi’an Maike Says

Nov. 10 (Bloomberg) — China, the top copper user, holds as much as 350,000 metric tons in duty-free warehouses and the metal may be re-exported as supplies outpace demand, according to Xi’an Maike MetalInternational Group.

“We can hardly find buyers for refined copper,” said Luo Shengzhang, general manager of the copper department at Xi’an Maike. The
company ranks among the country’s three biggest importers, according to the executive. “China’s got to export some copper from now and next year,” Luo said in an interview.

  Â
Copper, used in pipes and wires, has more than doubled in London this year as China’s 4 trillion yuan ($586 billion) stimulus spending,
increased state stockpiling and a lack of scrap material boosted imports to a record. That’s helped to drive Chinese prices below London’s sinceat least July.

Xi’an Maike has had to re-route some bonded copper to London Metal Exchange warehouses in South Korea because the company was unable to find buyers in China, said Luo, who spoke yesterday in Shanghai. The effect of the stimulus package was wearing off and local scrap supply was improving, he said.

  Â
Luo’s estimate of the bonded-zone stockpiles compares with 60,000 tons by Macquarie Group Ltd.  in July. It’s also more than triple the
inventory in Shanghai Futures Exchange warehouses, which stood at 104,275 tons as of the week of Nov. 2. A bonded zone holds imported goods before duty has been paid.

                     Copper’s Rally

Three-month copper in London traded today at $6,548 a ton compared with $3,070 at the end of last year. Futures in Shanghai have also more than doubled this year to a high of 51,580 yuan ($7,554) a ton today.

  Â
Still, buying the metal from overseas to sell in the Chinese market has not been profitable since at least July, according to Bloomberg
calculations. Prices in Shanghai were more than 1,300 yuan a ton lower than London yesterday, after accounting for China’s 17 percent value
added tax.

In addition to the bonded-zone stockpiles, China may also hold 150,000 tons in the Shanghai area, including in exchange- monitored
warehouses; 235,000 tons at the State Reserve Bureau, which maintains government holdings; and 200,000 tons with fabricators and private
investors, Luo said.

Refined-copper exports by China were 10,705 tons in September, 70 percent more than a month ago and the highest this year, according to data by the Beijing-based customs office. Refined-copper imports in the first nine months were 2.58 million tons, 165 percent more than a year ago.

Xi’an Maike’s inbound shipments of refined copper may total about 400,000 tons this year, ranking among the top three importers by volume, according to Luo. The country’s imports of refined copper may halve to 1.6 million tons in 2010 from an estimated 3 million tons this year, he said.


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Obama/Summers innocent subversion


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Further evidence of a deliberate policy that undermines our standard of living:

>   
>   (email exchange)
>   
>   On Fri, Oct 16, 2009 at 10:27 AM, Roger wrote:
>   

Larry Summers was just quoted on the morning news, as saying “We want the US to transition from a consumer-based to an export-based economy.” And he has the “complete agreement” of Obama and the G20.


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China Money Rates Drop as Central Bank Stops Pushing Up Yields


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Check out the last ‘house hunting’ story.

Looks like they are on to that angle of attack, directing
that form of ‘investment’ as a matter of public purpose,
much like we have done with our public policies over the years.

Also looks like the cut back in lending was to try to moderate
what they deemed to be ‘overheating’ and should only be temporary.

Seems the rate hike was only 26 basis points (not that rates matter very much in any case).

Very interesting note here:

Chinese banks usually “frontload” lending in the first half of each year.

China Money Rates Drop as Central Bank Stops Pushing Up Yields

August 18 (Bloomberg) — China’s money-market rates dropped after the central bank stopped driving up the benchmark bill yield for the first time in six weeks, fanning speculation it will ease availability of funds to stem a slump in stocks.

The People’s Bank of China said it sold 45 billion yuan

($6.6 billion) of one-year bills at a yield of 1.7605 percent, unchanged from last week’s auction. The central bank has let the yield rise 26 basis points since resuming sales of one-year bills on July 9, following an eight-month suspension.

“The authorities may want to ease the market panic after a big slump in stocks,” said Zhang Lei, a fixed-income analyst at Shenyin Wanguo Research & Consulting Co. in Shanghai. “The unchanged yield is a signal that the central bank will stick to its loose monetary policy.”

The seven-day repurchase rate, which measures funding availability on the interbank market, declined 12 basis points, or 0.12 percentage point, to 1.30 percent as of 5:30 p.m. in Shanghai, according to the China Interbank Funding Center. A basis point is 0.01 percentage point.

A government report showed on Aug. 11 that industrial production gained 10.8 percent in July, less than the 12 percent median estimate in a Bloomberg survey of economists. Urban fixed-asset investment for the seven months to July 31 climbed

32.9 percent, which was also short of analyst forecasts.

China’s Investment-Grade Debt Ratings Affirmed by S&P

Aug. 18 (Bloomberg) — China’s investment grade credit rating was affirmed by Standard & Poor’s Ratings Services, which cited the country’s “exceptional” economic growth potential.

S&P maintained China’s A+ long-term sovereign credit rating and its A-1+ short-term rating, according to a statement issued today. The outlook on the long-term credit rating remains stable, S&P said.

“Fiscal flexibility remains significant,” S&P said in the statement. “The Chinese government faces moderate risks of balance sheet damage if there is a steeper and more prolonged economic slowdown than currently expected.”

Banks report fewer new loans

August 17 (China Daily) — China’s new lending in July fell to less than a quarter of June’s level, as banks sought to limit credit risks and the flow of money into stocks and property.

Banks extended 355.9 billion yuan in loans, down from 1.53 trillion yuan in June, the People’s Bank of China reported on its website last week. M2, the broadest measure of money supply, rose 28.4 percent.

China Construction Bank Corp, the nation’s second-largest lender, said recently that it will cut new lending by about 70 percent in the second half to avert a surge in bad debt.

The government wants to avert bubbles in stocks and property without choking off the recovery of the world’s third-biggest economy.

A smaller loan number “is probably a good thing – we’re coming off this ridiculously high level of lending in the first half,” said Paul Cavey, an economist with Macquarie Securities in Hong Kong.

Premier Wen Jiabao reiterated in a statement on Aug 9 that a “moderately loose” monetary policy and “proactive” fiscal policy will remain unchanged because the economy faces problems including sliding export demand and industrial overcapacity.

UBS AG stated in a July 31 note that the scale of China’s new lending in the first half was “neither sustainable nor necessary.” New loans of 300 billion yuan to 400 billion yuan a month in the second half would be “more than enough” to support the nation’s recovery, the report said.

Chinese banks usually “frontload” lending in the first half of each year.

The credit boom and a 4 trillion yuan stimulus package drove 7.9 percent economic growth in the second quarter from a year earlier and helped General Motors Co to report a 78 percent increase in vehicle sales in China in July.

A record $1 trillion yuan in loans through June has also helped to drive this year’s 79 percent gain in the Shanghai Composite Index.

Central bank and finance ministry officials said on Aug 7 that they will scrutinize gains in stock prices without capping new lending. The Financial Times reported the same day that the central bank had told the largest state-controlled lenders to slow growth in new loans, citing unidentified people familiar with the matter.

Credit exploded after the People’s Bank of China scrapped quotas limiting lending in November and told banks to back Wen’s 4 trillion yuan stimulus package.

Zhang Jianguo, the president of China Construction Bank, expressed concern about loan growth last week, saying some industries are growing too rapidly and some money isn’t flowing into the real economy.

Housing prices “are rising too fast and housing sales are growing too fast”, Zhang said.

Property sales climbed 60 percent in value in the first seven months from a year earlier, the statistics bureau said.

China’s banking regulator urged lenders on July 27 to ensure credit for investment projects flows into the real economy.

Three days later, the regulator announced plans to tighten rules on working capital loans.

Stephen Roach, chairman of Morgan Stanley Asia, said on July 29 that surging lending and infrastructure spending worsened imbalances in the Chinese economy and “could sow the seeds for a new wave of non-performing bank loans”.

Instead of pumping up growth, the government should do more to boost private consumption, he said.

China goes house hunting to rev up economy

August 18 (Reuters) — The Chinese government is attempting to pass the baton of growth from State-funded infrastructure investment to the private housing sector, a risky but necessary move to sustain the economic recovery.

Construction cranes sprouting in big cities, busy furniture shops and soaring property sales all show that the transition is going smoothly so far, though officials are wary that house prices may rise too high, too quickly.

China’s biggest listed property developer, Vanke, lifted its housing starts target for this year by 45 percent, while its rival Poly Real Estate said sales in Jan-July rose 143 percent from a year earlier.

On the ground, construction firms, big and small, are trying to meet the demand, last years’ downturn now a distant memory.

“It’s been a long time since we’ve had a day off. Several months, I think, though I can’t remember exactly,” said Zhang Minghui, owner of a small building company in Beijing.

“From late last year to early this year, we basically had nothing to do. Everybody was careful with their money because of the crisis and so projects got delayed.”

Zhang cut his staff to three in November but is now back up to a crew of 14.

The economic importance of the property sector in China is hard to overstate. Investment in residential housing accounted for about 10 percent of gross domestic product before a property boom turned to bust in 2008, roughly the same as the contribution from the country’s vaunted export factories.

The government’s first steps last year to revive the stalling Chinese economy were to offer tax cuts to encourage home purchases, followed by rules to ease access to mortgages.

These are bearing fruit.

With housing investment up an annual 11.6 percent in the first seven months, Chinese growth momentum is broadening out and the central government has been able to slow the pace of its stimulus spending on infrastructure.

Real economy

But Beijing must strike a fine balance in its bid to kick-start the housing market.

On the one hand, it wants rising prices to persuade house hunters to stop putting off purchases and to get developers to invest in new projects. On the other hand, it is wary of prices rising too quickly, luring speculators into the market and turning it into an asset bubble, not an economic driver.

“Because it is closely linked to so many industries, volatility in the real estate market will inevitably lead to macroeconomic volatility,” the government-run China Economic Times warned on Monday.


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Europe Posts Trade Surplus in May


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Both imports and exports continued to fall in May as nothing there seems to be going right.

Europe Posts Trade Surplus in May as Imports Fall

By Emma Ross-Thomas

July 17 (Bloomberg) — Europe posted a trade surplus for a second month in May as exports declined less than imports.

Shipments from the 16-nation euro area fell a seasonally adjusted 2.7 percent from April, when they dropped 0.7 percent, the European Union’s statistics office in Luxembourg said today.

Imports slipped 2.8 percent, swelling the trade surplus to 800 million euros ($1.1 billion) in May from 700 million euros.


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FT.com / Europe – Exporters warn of German credit squeeze


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Don’t think markets are ready for this:

Exporters warn of German credit squeeze

by Ralph Atkins

June 26th (Bloomberg) — Germany’s powerful export industry is warning of a credit squeeze in Europe’s largest economy even after the European Central Bank’s injection this week of one-year liquidity into the eurozone banking system.

The German BGA exporters’ association on Thursday forecast a “dramatic deterioration” in credit conditions in coming months, which would result in “massive financing squeeze”.


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China policy obamanation


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We do not need China or anyone else to buy our securities and we net benefit enormously from net imports in general.

The profoundly confused China policy comes from an administration that both does not understand the monetary system and does not understand that imports are real benefits and exports real costs:

Policies are being held hostage to Communist China’s demands.

by Adrian Van Eck

May 29 — The communist rulers of China have laid down a threat to the government of the United States of America. They are the largest foreign holders of treasury bonds. They say they fear that the huge Federal deficit this year – four times the record deficit set last year – will bring on inflation of such a magnitude as to threaten the buying power of their treasury holdings. They have said that if Washington does not stop this massive deficit spending (much of it financed with money created by Fed Chairman Ben Bernanke and the Federal Reserve)

All–not some, or most of government spending is a matter of ‘changing numbers in bank accounts at the fed’ (as per Bernanke’s statement last month).
Govt spending adds varying degrees of aggregate demand, government taxing reduces demand, and government borrowing supports interest rates. ‘Financing’ as the word is generally used does not apply to the issuer of a non convertible currency with a floating exchange rate.

they will protect their own interests by dumping all of their holdings of U.S. treasuries on the market for whatever price they can get for them. They say they will do so even if that collapses the U.S. dollar and pulls down not only the American economy but the economy of the entire world.

To date ‘their own interest’ has been that of supporting their export industries by suppressing their real wages.
So this statement would indicate they are threatening to move away from an export led strategy. Possible, but hard to believe and contradicts what follows here.

Apparently Washington has taken this threat seriously. All of a sudden China is being overrun by important officials from the U.S. Government. Speaker of the House Nancy Pelosi is one of the Americans traveling to Beijing. In past years she has been well known in both the U.S, and China as one who dislikes the rulers of Mainland China. A few years ago she barely escaped being arrested by a pack of Party goons as she led a group of Americans protesting China’s policies toward the formerly independent nation of Tibet, which China overran and conquered soon after they won the Chinese Civil War some 60 years ago. A few days ago she was fawning over China’s Government leaders, telling them how we want to cooperate with them in working to protect the environment. (As usual they blamed America for polluting the Earth, ignoring the fact that it is China which is the worst polluter anywhere.) She must have almost gagged on her own sweet words as she talked.

The second important American Government official in China was Secretary of State Hillary Clinton. She has never been thought of as an enemy of China’s communist rulers, so it was easier for her to talk with them. (There were rumors that money from China helped fund her husband’s re-election campaign.) Unfortunately the visit came about as China’s neighbor and close ally – North Korea – exploded a nuclear device reported to be as powerful as the one America dropped on Hiroshima in 1945. They also fired off several rockets. All of this violated the terms of an agreement they signed in 2006 – an agreement that brought them enormous quantities of fuel oil and food. When the nations that negotiated that treaty protested the nuclear explosion, North Korea announced that it was renouncing its agreement to a truce that ended the war in the 1950’s. That again called for Secretary of State Clinton to try and patch up relations without pushing the virtual outlaw nation into crossing the border and attacking South Korea. This made the response to China in threatening America – a definite form of blackmail, as nations such as India and Japan agreed – a secondary issue with Hillary.

That left Treasury Secretary Geithner to absorb the heaviest verbal blows from China’s leaders during his own visit to Beijing. They knew that Geithner, as the president of the independent Federal Reserve Bank of New York, the largest and most important of the privately-owned regional Feds, had himself made threats to China shortly before being confirmed by the Senate to take over the top job at Treasury. He had told the Senate that if China did not stop manipulating the yuan in the foreign exchange market to gain an unfair advantage in its trade he would be in favor of America taking steps on its own to counter this in the foreign exchange market.

What sense does all this make?

China was buying dollars to keep the dollar strong and the yuan weak as part of their strategy to support exports by suppressing domestic costs vs rest of world costs.

Geithner was pushing for a weaker dollar as a way to reduce China’s exports by, in effect, causing prices of goods made in China at Wal-Mart to rise to the point where they wouldn’t sell as well.

Now China is threatening to do the opposite- push the dollar down by selling its USD financial assets, and Geithner is doing the opposite by trying to stop them.

He has since had to swallow those words and now he has to swallow as well threats against America by China.

This administration is in it way over its head and is pursuing a totally confused policy.

We thought it was fascinating that no one in the media mentioned Ben Bernanke or commented on his complete absence from the dialogue with China. So I will take it on myself to make such a comment. Bernanke is, after all, the one man closely tied to the creation of the money that so offends the communists in Beijing and one might have expected him to be involved in current talks with China’s rulers – under normal circumstances. A while back, he went to China as part of a delegation and he was asked to make a speech at a university where China trains many of its economists. Bernanke was brutally candid in his remarks. He pointed out precisely all of the mistakes he felt they were making in their centrally planned economy – and predicted that they were heading for trouble so bad that it might bring the ruling Party and the country down, just as a dozen prior dynasties had come crashing down during China’s long history. The woman who serves as China’s economics minister was livid with rage after his remarks. She took over and screamed insults at him for a half hour. Then she called President Bush and said that Bernanke was “persona non grata,” a diplomatic phrase meaning he would never again be welcomed to China. Months later when a Chinese delegation paid a return visit to Washington, they carefully avoided the Fed’s marble headquarters.

Not a whisper has escaped that anyone knows about from the ideas expressed by Tim Geithner concerning China’s threats if America does not sharply curb its deficit spending.

For China’s export strategy to ‘succeed’ they need high levels of aggregate demand in the US.

Yet it is clear from everything happening in Washington that this Administration has absolutely zero intention of stopping its near reckless abandon of any restraint in Federal spending.

In fact, the deficit spending has not even begun to get high enough to restore aggregate demand to levels where unemployment stops rising, never mind falling.

We need to remove a lot more fiscal drag to restore demand, now the unsustainable (non-government) credit chennels have been capped.

Quite the contrary, as new demands are made they are coming up with more plans to lavish Federal spending on recipients. For example, the latest we are hearing regarding General Motors is that the Federal Government may be willing to hand the company $50 billion on top of the money allocated to them already. But Washington would then want to gain 70% ownership in what critics are calling “Federal Motors.”

The problem here is the administrations looks for public purpose in the ‘input’ side rather than the output side. The public purpose of industry is the output it produces, not how the inputs, particularly labor, get rewarded.

Output is directed by markets working within institutional structure which can be modified to influence output towards public purpose while sustaining full employment at all times. But not with an administration that has it all backwards.

And now we have California’s demand that the Federal Government guarantee $18 billion in State borrowing to fund their own wild deficit spending. Political pressures are building to make this happen. If that does happen, a lot of other states will be lining up at the White House front door to demand the same treatment.

The answer here is to give all states $500 per capita of revenue sharing with no strings attached. California would get about $17 billion.

That way it’s ‘fair’ and there is no ‘moral hazard’ issue.
But, again, this hasn’t even been discussed.

This brings us to a topic that is being brushed aside as being too unlikely to even deserve treatment as a rumor. Thus it is being dismissed out of hand in the national media. Yet it is springing up from several key Washington sources and that makes us suspicious that where there is so much smoke there may be fire. What I am talking about, of course, is the sudden discussion of an American Value Added Tax – another name for a national sales tax. It would apply to goods and services alike. Most nations in the world including China itself now have such a VAT tax. It is called value added because each company is taxed only on the value it adds to raw materials or parts it buys and manufactures or assembles into a product. Trucks and hairdressers and even lawyers would be taxed under a VAT.

Even at a rate as low as 10%, which would be seen as very low in the world, it would raise a ton of money. Some are proposing a rate high enough to allow the income tax to be ended but that idea is being shot down by agents of the Administration. The idea would be sold to conservatives as a way to avoid the huge inflation that China is warning against… and also to make unlikely that America would be forced to go back to pre-Reagan Federal income tax rates of just about double those paid today. And industry would be told that – just as happens in other nations with a VAT – it would be forgiven on any goods or services marked for export. I think these VAT tax rumors are for real and I suggest you keep an eye on this. More next week. Adrian Van Eck.

The VAT is even more regressive than the payroll taxes still on the books.

And with consumption being the entire point of the economics it makes no sense to tax consumption in general.

‘Sin’ and ‘luxury’ taxes are different- the idea is to limit consumption of those items subject to the tax, and not to raise revenue. The success of the tax is then judged by how few dollars are collected, not how many as with the VAT.

Now more than ever the US would benefit from an administration that understood the monetary system and the simple fundamentals regarding imports and exports.

But this is not going to happen, and we will continue to pay the price.


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