United States USD Policy is Misguided

September 27, 2010

I begain writing this about a week ago, and am beginning to see some media reports supporting my argument below, thankfully. Hopefuly, these opposing opinions to current US Policy are not too late.

Recent media reports indicate a growing strain between US-Sino relations over the Chinese policy on currency valuation. The fervor of Chinese currency manipulation is once again bubbling within the United States.

The US, or at least those proponents of this agenda believe China’s cheap currency is artificially low and therefore is creating unnatural imbalances in global reserves and global trade.

In layman’s terms these folks think the shit we import from China is too cheap, giving Chinese manufacturers an unfair pricing advantage in global trade. As a result, dollars flow (as well as the currencies of other developed countries) into China and just stay there.

The logic being espoused now is that in order to correct these imbalances the Chinese should be letting their currency appreciate (at least against the dollar) by as much as 20-40% as of recent reports. This is a large movement as it pertains to currencies, and normally would be something that might happen naturally over the course of years, if not the better part of a decade.

Recent reports claim that a growing consensus of US policy makers want to see this kind of movement in the Chinese currency over a far shorter time frame.

For more than two decades US consumers have benefited directly and indirectly from a relatively weak Renminbi (Yuan). We were able to consume more Chinese imported / manufactured goods for less money. Indirectly this helped to keep inflation in check, and benefited industries who were able to capitalize on China’s relentless demand for natural resources and those companies who were able to arbitrage the cheap cost of Chinese labor.

Now that US unemployment stands as high as it has been in over a generation, America seems abruptly convinced that part of our troubles have arisen from the fact that our finished goods cannot compete with the prices of Chinese finished goods and therefore China is “keeping a good man down”. Funny we don’t consider our legacy cost structures part of the problem.

If not absurd, the evangelical approach supporting a rapid rise in the Renminbi is at least short sighted, and may actually dangerous for the US.

The end result of a rapid rise in the Renminbi (RMB) against the US Dollar would certainly help US manufacturers compete better on price in the global market place, this would particularly benefit our durable goods industries like cars that are assembled here. However increasing the purchasing power of the Chinese consumer dramatically and quickly seems to me might have other adverse consequences.

For one, despite continued commentary that inflation is not an issue, anyone who does grocery shopping in the United States can tell you otherwise. Food prices have not benefited from the deflationary recession that took home prices and the prices of other durable goods down. As per-capita purchasing power increase for the Chinese consumer, we here at home will be competing with them more heavily for grains, dairy and protein which will surely drive up global prices.

The same scenario that is described for food would also apply ubiquitously across all commodities and natural resources. In fact a fast rise in Chinese purchasing power might incentivize stockpiling, creating additional pressure on the prices of all natural resources.

In addition a stronger RMB relative to the USD specifically implies not only an increase in the relative purchasing power for the Chinese but concurrently a relative decrease on the purchasing power for Americans, a major double whammy. In the areas where we compete to consume natural resources this could have dramatic, adverse and even rapid consequences.

The direct impact would be modest to severe rise in price driven inflation, particularly for “headline” CPI. Core CPI would be less impacted in the near term as it excludes food and energy prices. I won’t explore how the government gooses these numbers anyway.

The political agenda out of Washington is currently misguided, if not dangerous. An article today appearing in Bloomberg alludes to this as well. In the article Nobel-Prize winning economist Robert Mundell says that U.S. legislation to press China to raise the value of the yuan [RMB] would be a “disaster” and fail to narrow the trade deficit between the two nations. He goes on to say:

The bill “would create a very damaging thing to the world economy and the stability of Asia,” Mundell said. “This would have a wounding effect on the stability of international relations. There’s never been any precedent in economic history where a country through any legal system was forced to appreciate its currency relative to another country.”

“It’s not going to have much of a dent in the U.S. deficit,” he said. “America has had a huge deficit since the 1980s. None of that is going to change if China changes its exchange rate.”

Policy makers should try to keep the currencies within a range to prevent “huge swings” in the price of raw materials such as oil, he said.

The euro-dollar fluctuation “is a terrible thing for the world economy,” Mundell said. “We’ve never been in this unstable position in the entire currency history of 3,000 years.”

I agree with Mundell. What he doesn’t say directly but he alludes to is that US policy smacks of protectionism, and at a time and with a trading partner that could undermine the global recovery. A protectionist policy agenda with China could easily and quickly escalate to stimulate a new geopolitical divisiveness that in its worst form could lead to war(s).

This week in fact the House of Representatives is voting on a China trade tariff that would inflate the cost of more Chinese goods imported into the US. This comes after a handful of other trade tariff disputes since Obama took office on things such as tires and gift boxes. In retaliation earlier this year China proposed a tariff on US chicken going into China.

There is no good that can result from an escalation of trade tariffs, a system that was mostly dismantled through globalization. It is only a matter of time before the US/China trade was draws allies inspired to align their home interests by protecting their own major industries.

At home in the US, the result would further squeeze the middle-class American budget that Obama so adimantly wants to protect. It’s not the wealthy that rely on cheap products from China Mr. Obama, its the men and women who are trying to stretch every dollar.

My alarmist comments are not unfounded by anyone who knows a little bit of history and has a little bit of vision. But the future of human survival will depend on social order. A major imbalance in global resource production and consumption (particularly in food and energy) could tip a boat that has been running evenly for more than half a century. If you want to consider what happens when people cannot eat, consider the Middle East and Africa where poverty rates and lawlessness run hand in hand.

What makes this policy misstep so dangerous in my opinion is that it is driven not by rational thinking that can be tested and rebuffed, but instead by dogmatic Middle-Class zealotry. The administration in its effort to return middle-class Americans to work, may incite the worst bout of protectionism seen since before World War II, an action that could certainly inspire a new Cold War, and as mentioned before possibly a real one. I am not a Republican, nor do I consider myself to be overly conservative, but I think they have got this RMB agenda all wrong.

I believe the Obama Administration has done a tremendous job with what was left behind by the Bush Administration. However, I see forcing China on its currency as having the potential to undermine everything accomplished thus far, and with the potential to recreate a level of global instability far in excess of what was left behind by the Bush Administration.

It seems to me that a better agenda for the administration would be to focus on USD stability instead on RMB parity. The vast majority of the World’s commodities are priced in USD. In addition, US corporations are faced with the onerous task of calculating their currency exposures on a regular basis. Even small and medium sized business who may not have significant overseas sales are victims of price instability caused by commodity fluctuations. Consider the chart below.

DXY: US Dollar Index Spot Summary - USDI Chart 2006-2010

DXY: US Dollar Index Spot Summary - USDI Chart 2006-2010

The USD index has made moves of 10-15% three times now in the last two years. This is unprecedented volatility in the world’s largest reserve currency. The USD Index has spiked when fear spiked, and sank when fear subsided. The US currency has effectively become the beneficiary/victim of the global risk on/risk off trade. With equity and bond markets now chasing highs, the dollar is again heading downward.

At some point, however, I suspect unless we stabilize our currency, it will begin to lose its place as the preferred store of value. Not to mention what this volatility has done to commodity prices effecting everything from food and fuel, to industrial goods. Companies who bare the brunt of controlling costs or raising prices are force to make decisions today that may be totally obsolete a few months from now, based on currency movements alone. Regardless of the structural imbalances between China and the US, and despite objective (or subjective) relative valuations of the RMB vs the USD, I have to believe that price stability predicated by US Dollar stability is the more immediate issue rather than the RMB/USD exchange ratio.

In a world of uncertainty and unprecedented volatility, we need stability. We are so focused on China’s proported currency manipulation when the truth is we ought to be more concerned over our own.

Remember China has about four times the population as the US. The more the RMB appreciates, the greater the increase in 1.2 billion people’s purchasing power. Are we really sure we want to force that agenda? Seems idiotic to me.


Reduce, Reuse, Recycle, Renew

June 14, 2009

Our leveraged economy made it easy to fill two car garages, put a flat screen in every room in the house, and to have a 2:1 computer to user ratio in most middle-income homes.  It allowed us to wait in line to buy iPhones that cost 5x another utilitarian cell phone, while sipping $5 cups of coffee just for the “experience”.  Leverage and all its ignominious glory put a Starbucks on nearly every crowded corner, allowed every Best Buy to sit across the street from a Circuit City, and allowed people who would otherwise shop at thrift shops–for furniture with character–to fill their SUV’s up with an abundance of home furnishings at Ikea.   Cheap money offered by leverage boosted the success of throw-away fashions and throw-away lifestyles. We ate out more than cooked, and as a result more and more five star restaurants flourished.  Leverage provided a level of corporate earnings and personal spending that fueled one another.  The symbiosis was a tango for airline companies, helping to spawn a brand new airline into a national player in less than five years.  JetBlue’s rapid ascent was fueled by a peripatetic population of work-hard, play-hard types who longed for leather seats and televisions wherever they jetted.  Leverage and all its misgivings provided economists the opportunity to dust off the century old phrase conspicuous consumption.  In short, until credit markets seized, we had no idea how leveraged we really were, and how much we over-bought, over-developed, over-retailed and over-consumed.

With New York City apartment prices dropping in half over the last year, the expression that $5 million is the new $10 million carries some weight, at least in and around Manhattan.  Today people no longer gloat about how much they have made in the market.  Today we gloat about who has lost the least.  Asset values of all shapes and sizes are deflating, and with less leverage at the consumer and corporate levels, demand for excess is being rightsized.  But we are at a crossroads.

The quantitative easing being provided by the current administration is a strategy to stop the insanity of deflation.  With few market participants willing to take or provide credit, the United States is using its own balance sheet to be the lender (and borrower) of last resort.  The hope is that the Treasury will begin to fill the shoes of now defunct investment banks, strained commercial banks, hedge funds, pension plans, and other large institutional investors, and lenders.

But what is the end game of such policy?  Sure stabilizing the pricing mechanism is an important goal, but is doing so without changing our pre-existing habits the best way to move forward?  We are and we have been a service economy for quite some time.  American wages grew along with our post WWII economy, fueling spending and leisure. Wages grew so much in fact that we realized we could no longer afford the goods we wanted if we had to make them ourselves.  We became so dependent on the the mass production model that instead of curtailing our consumption we learned to exploit cheap labor around the world.  As our standards of living improved, we could afford to “lift standards of others”.   Thus we began outsourcing to countries whose standards of living were low enough to attract the quantities of labor necessary for an economic model based on mass production and mass consumption.

Eco-doomsdayers like to note that at present we currently consume more natural resources than the earth can produce.  Considering that the top 20 countries ranked by GDP per capital by the IMF account for 50% of global per capita GDP, that leaves no room for sustainable growth in living standards around the rest of the world.  There is physically no way the whole planet can live the way Americans have over the last half century.  What is more important, is that Americans cannot afford to live the same way they have into the future.  The global compression of credit and asset values is really just a warning shot around the developed world that our lifestyles are not sustainable.

A bright side that I see is that we are adept in building and running a service economy.  The future of consumption is sure to be through subscription and through the pooled use of durable assets.  The planet cannot afford to waste resources, and as such we cannot afford to waste assets for conspicuous under-consumption.  A car that sits in a garage 80% of the year wastes materials and real estate that are precious and limited.  Washing machines, excess technology, and the billions of throwaway products are not efficient uses of resources.  Not to mention non-renewable energy sources and unsustainable sources and methods of food production.

Why not build on our service economy?  Cooperative models can be successful, moreover they will be successful.  Reduce, reuse, recycle was a lifestyle choice of yesterday.  Tomorrow these movements will become the standard of living.  Cars need not be owned by individuals.  Fleet ownership is a much more efficient and effective use of materials and real estate.  I began writing this in March of 2009, but as I edit it today, I am inspired to note that last week ZipCar announced it will be going public in the next year.  Capital will be forced to flow into new business models, because as we put Chrysler and GM to sleep, we are now keenly aware that we no longer need that many new cars.  Mass transit is wildly more efficient than customized transit, and today’s technology is already providing an integration of the two through advanced car pooling social networks.  In the new economy, the government, national or local, needs to subsidize the fleet business model and mass transit.  It should be difficult and expensive to justify individual car ownership.  It should be financially burdensome and socially awkward for a single family under one roof to own multiple automobiles. Conspicuous consumers should be subsidizing sustainable consumption.  Employers should be supportive.

We are at a cross roads to permanently affect behavior and consumption patterns.  We need to seize this moment to change the economic model in this country from one of mass production and mass consumption, to one of sustainable production and cooperative sustainable consumption.  The transition will breed new growth industries, new business models, and ultimately create a sustainable middle class.  Car sharing clubs should be as common as individual car ownership is today.  Cradle to cradle product development can be accomplished if manufacturers are forced to dispose of the products they make.  Ownership should be through subscription for most products, and certainly those which are toxic to the planet.  We cannot be mass consumers and individuals.  Said another way, we cant have every emerging economy live the way we’ve lived for the last almost century.  We need to refine and enhance our systems of consumption.

The mass consumption model will need to accommodate aggregate consumption in a less individualized way.  Technology can help us feel like we are not dramatically changing our habits and patterns, but we cannot continue as we have.  We have to begin to understand that idle assets are wasted resources.

More than stimulus, and more than price stability, what we need from our leaders is the courage to help us all understand where we’ve been, where we are, and where we are going economically speaking.  Global crises don’t occur all that often.  When they do, global leaders have the opportunity to bend ears around the world.  At those moments in time global constituents are willing to consider change.  We maybe get one or two chances a century to educate the entire society, we cannot let this opportunity pass us by.  We need to replace our civilization with one that understands how to grow and succeed in a manner that is economically, socially, and environmentally sustainable.

When you finish reading this, start helping to create change, one person at a time.  Turn off your unused electronics, lights or other devices, when you leave the room (even if its not in your house).  Instead of throwing out things that may have value, try selling them on eBay or Amazon.  Before buying something brand new, see if you can find a decent used alternative.  Use the money you make from selling old items to buy new ones.  Take care of the things you own so that they retain more of their value.  Turn off the water while you are brushing your teeth. Before you buy a new car, consider leasing it.  Consider buying a used car.  Consider first if you even really need or want the car.  Today that is probably easier since so many people are forced to cut back.  Consider investing in a digital device if you don’t have one and choose to receive your favorite periodicals electronically.  If you have a digital device, consider canceling all of your paper subscriptions.  Make sure to cancel catalogs you don’t want or use.  Make sure to recycle as much as your local area will permit, and be bold enough to encourage new initiatives for the things that you know should not end up in a landfill. Give things away, don’t throw them away. If it is available find an ESCO for your electricity consumption.  Some utilities now allow you to choose the source of power you want to consume.  In New York City for instance you can choose wind and hydroelectric power over coal through Con Ed who now contracts with independent energy providers.  If you can afford it, eat organic, fair trade, and locally produced foods.  Choose to consume goods and services from companies whose business model is working towards a sustainable future, and boycott or try to avoid the most unsustainable companies on the planet.  When furnishing a home, the best thing is not to over-buy, the next best thing is to try to buy materials that have not, and will not hurt the planet, and that ultimately could be reused one day.  If you eat out, find restaurants that are environmentally conscious.  If you order in, ask them not to put in items you don’t need (cutlery, napkins, condiments).  Moreover, ask the worst offenders to start a new policy of asking customers if they want cutlery, napkins and condiments, so that they don’t automatically provide them to people who simply throw them out. Volunteer once in a while to keep your neighborhood clean.  Trash in the garbage can is less likely to end up in a waterway.  If your employer or town does not recycle, ask them to.  If you already watch what you put in your body, start watching what you choose to put in your home or office.  If you’ve learned not to overeat, try not to over-consume.  If you’ve learned to eat healthfully, then try to consume sustainably. If you see a business or industry that is run unsustainably, start your own company and build a model that is more sustainable, you will likely find a cost advantage and you will immediately have a loyal customer base.

All in all, at this point there is nothing terribly revolutionary that has to be created or invented.  All we need now is the revolution to begin.

Text-To-Speech Site Speaks in Foreign Accents

February 1, 2009

A little horsing around late on a Friday at work led a few of us to uncover a very cool web application that allows you to type text and have a computerized voice speak what you’ve written.  What was particularly special about this application, something that I found novel and fairly powerful is its ability to incorporate foreign accents.  This made its stand far apart from other TTS applications I found on the web.

Have fun, play with it, impress, surprise or prank your colleagues.  But be sure to try pasting some foreign text into the box and then having the same foreign accent read it, its really cool!  Even cooler is having the American accent read foreign text.  Click on the image to visit the site.

Text To Speech Online Tool with Foreign Languages

Text To Speech On-line Tool with Foreign Languages

Text To Speech Online