Mish's Global Economic Trend Analysis

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• UAW Workers Vote 457 to 96 to Close Plant Instead of Reducing Salaries
• Pied Piper Politics; Krugman and Candle Makers Complain about the Sun; Global Trade Wars
• Eurozone Recovery Slows; Contraction Evident Except Germany, France

UAW Workers Vote 457 to 96 to Close Plant Instead of Reducing Salaries Posted: 27 Sep 2010 08:38 PM PDT With Indiana unemployment rate at 10.1% one might think that jobs that pay more than double the minimum wage would be in demand. Actually, such jobs are in demand, but ironically not from some of those who have them. Let's take a look at an offer Illinois businessman Justin Norman made last August to UAW members in a plant in Indianapolis scheduled to close in 2011. The offer was rejected today. Illinois Businessman Proposes to Save 650 UAW Jobs August 29, 2010: Norman talks pay with GM workers Illinois businessman Justin Norman continued his effort to win over GM Indianapolis stamping plant workers, telling a gathering Sunday that skilled trades employees at his Chicago-area plant will earn nearly $100,000 this year. GM executives three years ago scheduled the shutdown of the 2.1-million-square-foot metal plant in 2011 if no buyer appeared. This spring, JD Norman Industries agreed to take over the factory if UAW Local 23 accepted a new contract that cuts costs. The new contract would include a lower base wage of $15.50 per hour, down from $29 per hour, and pare the wage for skilled trades workers to $24 per hour from about $33. Autoworkers who stay with JD Norman would receive lump sum bonuses, in some cases up to $35,000 over two years, and retain the right to transfer to open GM plants. They could keep the bonus if they did transfer. UAW Prefers No Jobs to Jobs September 27, 2010: UAW turns down contract offer to keep Indy stamping plant open General Motors autoworkers have rejected the contract offer from JD Norman Industries to continue operating an Indianapolis stamping plant, said Maurice Davison, a UAW official in Indianapolis. According to retired GM autoworker Gregg Shotwell, publisher of the UAW dissident newsletter Live Bait & Ammo, the final tally included 457 "no" and 96 "yes" votes. The rejection means that General Motors will proceed with plans to remove machinery and close the plant in 2011, Davison said. The plant employs 650 workers. How is it that people can be so destructive to their own well being? Lines would be 5 miles long for jobs that pay $15-$24 per hour with a $35,000 bonus after two years if such an offer could be made to the general public. I do not know the nature of their existing contract or how long severance benefits might last, but I strongly suspect many of those rejecting the offer will start looking for minimum-wage jobs at Walmart when their benefits expire. Few if any of them will blame themselves for their situation. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Click Here To Scroll Thru My Recent Post List Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

Pied Piper Politics; Krugman and Candle Makers Complain about the Sun; Global Trade Wars Posted: 27 Sep 2010 12:36 PM PDT The odds of a global trade wars took yet another step forward today. Brazil's finance minister went on the warpath complaining about the "international currency war" upset that the Brazilian Real appreciated 25% against the US dollar in less than two years. Guido Mantega, Brazil's finance minister, said on Monday the world was in an "international currency war", in a further sign that Brazil is preparing measures to prevent further appreciation of its currency, the real. "We're in the midst of an international currency war, a general weakening of currency. This threatens us because it takes away our competitiveness," he said, according to Reuters. The US dollar has fallen by about 25 per cent against the real since the beginning of last year, making the real the strongest performing currency in the world, according to Bloomberg. Mr Mantega recently said Brazil's sovereign wealth fund was preparing to make "unlimited" dollar purchases to prevent the real appreciating any more. Currency Intervention Doesn't Work Currency intervention does not work but that never stops any country from trying. Worse yet, with increasingly harsh rhetoric from China, Japan, the US, and now Brazil, I am starting to wonder if anything can stop the trade war that is shaping up. This is now my third consecutive article touching on the subject of trade wars. See also ... Eurozone Recovery Slows; Contraction Evident Except Germany, France Prepare for Currency/Trade Wars; How Might China Respond to US Tariffs? Krugman Favors Protectionism Would the Yuan rise if China floated it, resulting in more jobs in the US and a better balance of trade? That's what Krugman thinks, but I have stated many times it's not even clear the Yuan would rise. Moreover, Krugman never looks at the unseen effects of what he suggests. The Acting Man Austrian blog agrees while noting China Bashing in High Gear Again It began with a NYT editorial by Paul Krugman, who appears to have a number of hobby horses that occupy most of his efforts – demanding more deficit spending, more money printing, raising taxes and bashing China for currency manipulation. Now, don't get us wrong – we also tend to think that China's exchange rate policies are harmful – alas, they are mostly harmful for China. Krugman asserts that the yuan's exchange rate would increase if it were allowed to float as though that were an incontestable given (he does not explicitly demand a floating, fully convertible yuan however – he just wants China to keep 'manipulating' it, albeit in an upward direction): "If discussion of Chinese currency policy seems confusing, it's only because many people don't want to face up to the stark, simple reality — namely, that China is deliberately keeping its currency artificially weak." How do we know whether the yuan is 'artificially weak'? As a matter of fact, we do not know that, and there are many arguments in favor of the yuan weakening if it were allowed to float. .... In addition to these considerations, think about the fact that China's citizens had to live with a closed capital account for an eternity. How would they react if it were to be opened? We tend to think that citizens with large savings who have heretofore been forced to invest those savings within China – a major force in driving China's real estate bubble to absurd heights – would begin to divert a lot of capital to investments abroad. While we can not be certain how big a flood of money would leave China in the event, it's a good bet the markets are not prepared for it. The consensus is after all congruent with Krugman's assertion that the yuan is too weak. Let us however step back for a moment from this discussion and for argument's sake accept the notion that the yuan's exchange rate is too low and would rise if left to float. How can that harm the US? Krugman asserts that a trade deficit is 'negative', but why should that be so? Trade is after all a voluntary economic activity. When people engage in trade, they do so because both parties to the trade deem it to their economic advantage. It follows that there can be nothing 'negative' about this. China's merchants wouldn't sell their goods for dollars if they did not prefer these dollars over their merchandise, and conversely US consumers would not trade their dollars for Chinese merchandise if they thought the trade harmful to their economic well-being. Just because there is a national border between these sets of traders this basic economic fact is not magically suspended. If trade deficits were worth worrying about, why not also worry about the trade deficit between, say, New York and Philadelphia? The fact that Krugman does not even mention this basic facet of trade anywhere in his articles is tantamount to a red alert. Frederic Bastiat lampooned protectionism back in 1845 when he penned his 'Petition of the Candle Makers'. The candle makers are incensed that the light of the sun can be had for free. The sun's 'unfair trade advantage' surely needs to be curtailed somehow! We are suffering from the ruinous competition of a rival who apparently works under conditions so far superior to our own for the production of light that he is flooding the domestic market with it at an incredibly low price; for the moment he appears, our sales cease, all the consumers turn to him, and a branch of French industry whose ramifications are innumerable is all at once reduced to complete stagnation. This rival, which is none other than the sun, is waging war on us so mercilessly we suspect he is being stirred up against us by perfidious Albion (excellent diplomacy nowadays!), particularly because he has for that haughty island a respect that he does not show for us." Replace 'perfidious Albion' with China, and you have Krugman. Krugman makes the same mistake he always makes – the one mark of a truly bad economist if you will – he neglects the 'unseen' effects of his policy advice. It may well be true that a small group of domestic producers would benefit from a higher yuan (which ones? We're not quite sure, actually…). Alas, every single consumer would suffer for their betterment by having to pay higher prices. This in turn means that consumers will either have to cut back on their consumption, or lower their rate of saving. It seems obvious that this entails a lower standard of living for everyone but the favored few. Since less money will be available for either consumption or saving, there will also be less money available for investment. Capital formation is thus likely to slow, further impinging on future growth. Who is Harmed by Low Prices? From Prepare for Currency/Trade Wars; How Might China Respond to US Tariffs? Assume for a second that everyone is selling us stuff for far less than it's worth. Who is harmed by this, us or them? The overwhelming percentage of the population (everyone but the handful of jobs we would save by tariffs) comes out ahead. How is this not a good thing? Pied Piper Politics Those who believe tariffs will solve our problems effectively argue along with Krugman and the candle makers against the sun. Yet, the parade of protectionists, led by Pied Piper (Paul Krugman), grows with each passing day. The Pied Piper and his followers all scream for higher prices as if tariffs are the magic elixir that will restore the US to fiscal health. It won't. Trade wars never solve anything. The US is in a mess of its own making. Screaming about "fair trade" is a scapegoat for preposterous US economic policies on military spending, entitlements, policing the world, public sector pensions, Fannie Mae and Freddie Mac, too big to fail, and numerous other disasters at the state and federal level. Giving into the Pied Piper, will do nothing but make the problem worse. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Click Here To Scroll Thru My Recent Post List Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

Eurozone Recovery Slows; Contraction Evident Except Germany, France Posted: 27 Sep 2010 08:54 AM PDT Robust growth in Q3 will soon give way in Europe. Markit reports Eurozone recovery slows as renewed contraction is evident outside of French-German core Contracting periphery Outside of the two largest euro member states, a renewed contraction of economic activity was evident in September. The Composite Output Index for the rest of the Eurozone1 has fallen steadily since peaking at 54.2 in March, dropping from 51.7 in August to 49.4 to thereby slip below the 50.0 no-change level for the first time since last November. Employment growth disappoints One of the more disappointing aspects of the recovery has been weak job creation. The Composite PMI Employment Index fell slightly in September, down from its weak post-recession peak in August, and is consistent with only very modest employment growth of perhaps 0.2% per quarter. Furthermore, the jobs growth is largely confined to France and Germany. The former saw jobs created at a rate only just below August's 28-month high, while the latter saw the sharpest rise in employment since May 2008. In contrast, outside of these countries, PMI data signalled an accelerating rate of job losses in September, with the rate of decline reaching the highest since February. How long Germany and France can keep Europe from slipping back into recession remains to be seen, but if contraction of economic activity in the rest of Europe continues, I would suggest another quarter or two at most. One big advantage German exporters had earlier in the year was the Euro collapsed to 1.18. The Euro is now approaching 1.35. Meanwhile, Japan's intervention in the Yen has failed to produce any lasting results, as expected. Trade Friction Increases Congress and Geithner are on the warpath over currencies already. Moreover, the House is set to vote on Tariff legislation this week, as discussed in Prepare for Currency/Trade Wars; How Might China Respond to US Tariffs? Yet, without waiting to see whether or not the House and Senate pass a bill, China has fired off a preemptive warning. MarketWatch reports China raises antidumping duties on U.S. chicken China's Commerce Ministry has decided to increase an antidumping duty on U.S. chicken products, months after the punitive measures were first introduced, in a sign of continuing trade frictions between the two economic superpowers. China will raise the minimum chicken duty to 50.3% on chicken products imported from the U.S., compared with minimum duties of 43.1% that were introduced in February, the ministry reportedly said in a statement on Sunday. The maximum antidumping tariff for the chicken products will remain at 105.4%, reports said. Global Trade War Risks Increase With US and China openly bickering, and with the US House of Representatives prepared to act, risk of a global trade war is increasing by the day. I do not think China's chicken move will help any. Every country wants its currency to weaken to stimulate exports. However, that's mathematically impossible except against gold, and rising gold prices will not do exporters any good. Hopefully cooler heads will prevail, but now that Geithner has stirred up a hornet's nest, anything can happen. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Click Here To Scroll Thru My Recent Post List Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

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