Obama moves toward trade war with China

President Obama’s Treasury Secretary nominee, Tim Geithner made statement today which will most certainly catch the attention of China. In a written response to questions submitted at his confirmation hearing, Geithner accused the Chinese government of currency manipulation.

“President Obama — backed by the conclusions of a broad range of economists — believes that China is manipulating its currency,” … {snip}
As an Illinois senator, Obama had co-sponsored legislation aimed at changing how the US government formally determines currency manipulation and authorizes new trade reprisal measures.

During the presidential campaign, he had accused China of suppressing its currency’s true strength to make its exports more competitive, echoing some US lawmakers who blamed the snowballing US trade deficit with China on the weak yuan and have sought sanctions against Beijing. AFP

This is a serious and fundamental policy shift, signaling a move against the Chinese. It is one that will have consequences, both seen and unforeseen. We can expect higher prices for imported goods, and a reduction in trade as China retaliates. We can expect fewer bond purchases by China which will drive bond prices down and boost yields – which, eventually, would cause borrowing costs for residential and some corporate customers to increase. The unforeseen consequences may actually make deflation more of a problem instead of less, as deleveraging and the unwinding of debt continues to impair corporate balance sheets.

I’ve got a bad feeling about this. I think we may have just passed a mile marker of some kind. The serious recession that we have endured for the last year may have just shifted into a 30’s style depression, fueled by bumbling politicians and an unnecessary trade war.


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Peeling back the onion

The Dow closed below 8000 today for the first time in over 5 years. As the economy continues its downward spiral, another 5% in market cap has been peeled away. October consumer prices also fell by their largest margin margin in 60 years.

Here’s an economic stimulus idea for Congress. How about getting busy buying some long term oil contracts and begin refilling the Strategic Petroleum Reserve. The Democrats voted to stop filling the SPR over 6 months ago in order to put an additional 70000 bbs/day on the market. Ostensibly, this would help bring down prices. Well, oil prices are definitely down, and filling the SPR would make sense from an economic as well as national security standpoint. This is something that even a lame duck session could accomplish.

As prices for consumer products and commodities continue to fall, fears of a deflationary cycle have caused the Fed to forget about inflation. You may have also noticed a word that I’ve begun hearing more often than I can ever remember: depression as in “The Great.” I’ve wondered what a sure-enough depression would look like in 21st century America. Drake Bennett has too. His article in The Boston Globe is worth reading. Here is the link


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