Free Markets, Free People

Daily Archives: October 7, 2010

Unemployment Preview

According to Gallup’s private read on unemployment, we currently stand with an unemployment rate of 10.1%. Gallup says:

Unemployment, as measured by Gallup without seasonal adjustment, increased to 10.1% in September — up sharply from 9.3% in August and 8.9% in July. Much of this increase came during the second half of the month — the unemployment rate was 9.4% in mid-September — and therefore is unlikely to be picked up in the government’s unemployment report on Friday.

The government’s final unemployment report before the midterm elections is based on job market conditions around mid-September. Gallup’s modeling of the unemployment rate is consistent with Tuesday’s ADP report of a decline of 39,000 private-sector jobs, and indicates that the government’s national unemployment rate in September will be in the 9.6% to 9.8% range. This is based on Gallup’s mid-September measurements and the continuing decline Gallup is seeing in the U.S. workforce during 2010.

So, when looking at the numbers we have from ADP, showing a 39,000 job loss for the month, plus the sharp spike upward in the last half of September, tomorrow’s unemployment figures from the BLS will miss most of the job losses, and will show a national unemployment rate that is smaller than it truly is.

Federal Judge: HCR Mandate is Constitutional

U.S. District Court Judge George Steeh has ruled that the individual mandate to purchase health insurance is a constitutional exercise of Congress’ power under the commerce clause.

The plaintiffs have not opted out of the health care services market because, as living, breathing beings, who do not oppose medical services on religious grounds, they cannot opt out of this market…

As inseparable and integral members of the health care services market, plaintiffs have made a choice regarding the method of payment for the services they expect to receive. The government makes the apropos analogy of paying by credit card rather than by check. How participants in the health care services market pay for such services has a documented impact on interstate commerce…

Obviously, this market reality forms the rational basis for Congressional action designed to reduce the number of uninsureds.

The Supreme Court has consistently rejected claims that individuals who choose not to engage in commerce thereby place themselves beyond the reach of the Commerce Clause. See, e.g., Raich, 545 U.S. at 30 (rejecting the argument that plaintiffs’ home-grown marijuana was “entirely separated from the market”); Wickard, 317 U.S. at 127, 128 (home-grown wheat “competes with wheat in commerce” and “may forestall resort to the market”); Heart of Atlanta Motel v. United States, 379 U.S. 241 (1964) (Commerce Clause allows Congress to regulate decisions not to engage in transactions with persons with whom plaintiff did not wish to deal).

The logical extensions of this ruling, if it were to stand, are obvious.  For instance, since everyone inevitably dies, Congress can require you to purchase life insurance, or a pre-paid funeral services.  Similarly, we all eat, wear clothes, etc.

Essentially, this decision gives power the Congress to regulate practically any area of human necessity.

Here’s something I’ve been re-reading a lot, lately:

Prudence, indeed, will dictate that governments long established should not be changed for light and transient causes; and accordingly all experience hath shown that mankind are more disposed to suffer, while evils are sufferable, than to right themselves by abolishing the forms to which they are accustomed. But when a long train of abuses and usurpations, pursuing invariably the same object evinces a design to reduce them under absolute despotism, it is their right, it is their duty, to throw off such government, and to provide new guards for their future security.

Congress throws fuel on a raging currency war fire

In case you missed it, there’s a currency war going on. It may not be the sexiest thing in the world to talk about, but it is important to understand. Probably the most important thing to understand is, in the midst of all this financial upheaval, it’s not healthy for anyone. In fact that best thing right now would be to back off and let things chill for a bit.

That’s why the US Congress passed a bill calling China a “currency manipulator.” So much for cool heads. Blame it on election year politics and the need to seem to be sticking up for America … even if what you’re really doing is adding more heat to an already ferociously hot situation.

The baseline here is the US believes the Chinese yuan is undervalued by about 25%. And it has been on China’s case for some time to get them to revalue their currency upward. That would make US exports more competitive against China.

But, there’s more to the story than just that.

First thing to know is because of the horrific global financial climate, “Japan, Brazil, Peru and countries all over the world are trying to beggar thy neighbor (just as happened during the 1930s) and gain a leg up for their exports by cheapening their currencies,” according to The Market Oracle. So we have any number of countries trying to boost exports at the expense of their currencies.

You have to then dial it back to June of this year to understand the second part that makes this so complex.  June 19th specifically. Jack Perkowski explains:

That is the day that China, by far the world’s largest currency trader, announced that it would no longer peg the yuan to the U.S. dollar, but would instead peg it to a basket of currencies. What China’s announcement meant in practice is that at the margin, beginning on June 19, China would tilt its purchases in favor of buying assets denominated in the euro, the Japanese yen, the British pound or some other major currency, rather than those denominated in the U.S. dollar. When an investor with $2.5 trillion of buying power makes such a statement, markets tend to listen.

Here is what has happened since.

As of the September month-end, the euro has increased in value by 10.3% against the U.S. dollar since June 19, the pound by 6.3%, and the yen by 7.8%. In fact China’s purchases of yen-denominated securities has heightened trade tensions between Japan and China to the point where the Japanese have complained publicly that China is effectively pricing Japanese products out of the market with its yen purchases, threatening to derail Japan’s economic recovery.

In the broadest measure possible, the United States Dollar Index (“USDX”) has declined by over 9.6% percent since June 19. The USDX measures the value of the US dollar against a basket of currencies that includes the euro, yen, pound, Canadian dollar, Swiss franc and the Swedish krona — exactly the currencies that China is most likely including in its own basket and which are now appreciating as a result. The USDX began in March 1973 with a value of 100.000 and has since traded as high as the mid-160s. At its current level of 78.691, the USDX is approaching its 33-year low of 70.698, which was reached on March 16, 2008.

On the one hand you have countries everywhere trying to cheapen their currencies to sell their exports (China wants theirs to stay right where it is) in order to boost GDP growth. And on the other you have China’s move away from pegging the yuan to the US dollar to pegging it to a basket of other currencies, and driving those currencies higher and making their exports less competitive.

Unpegging from the US dollar has also driven the dollar down relative to those  other currencies but still much higher than the yuan, which has only appreciated 2%.

Back to the point about the bill just passed by Congress. It doesn’t really help:

But the former U.S. trade representative, Susan Schwab, says that – while there’s a very real problem in terms of China artificially keeping the renminbi low, this isn’t the way to solve anything. Schwab calls it "a signal-sending exercise during an election season". She says that the bill won’t really do anything, even if the Senate passes it and it is signed into law. Schwab says it "makes no sense", won’t solve any problems, will escalate tensions, and will only divert attention from the real trade problems between the U.S. and China.

In fact the “election signals” may blow up in our face:

Indeed, Schwab warns that other countries might decide that this U.S. bill means that it’s open season for addressing currency manipulation, and that other countries believe that the U.S. is manipulating our currency. She says there could be a "boomerang effect" from the legislation.

All we’d need now to kill our recovery as weak as it is, is to have a full blown, open season, take no prisoners currency war where the dollar would be weakened even more than it is now. And that’s especially true if the “quantum easing” (printing more money) the Fed has been hinting about is about to take place.

What no one seems to want to admit is now is not the time for any country to be revaluing its currency upward. The US is demanding of China what it wouldn’t do itself.  Until the financial crisis has passed, these demands that China push the value of the yuan up should be on hold. Then, as Zachary Karabell explains, it is in China’s best interest to see the value of the yuan eventually increase:

China has been revaluing its currency, nearly 20% between 2005 and 2008 and now nearly 3% since June when the government resumed that policy having shelved it during the midst of the global financial crisis. It is in the domestic interest of the Chinese government to raise the value of their currency because they are focused on building up on internal, domestic consumption market. They have no wish to be dependent long-term of the vagaries and whims of American consumers, and higher purchasing power for Chinese consumers is the answer. They are not revaluing quickly enough to suit an America stuck in second gear and looking for someone to blame, but revaluing they are.

And there’s the bottom line – the US recovery isn’t going as well as we’d like it and as seems to be the penchant among US politicians, they have to have someone else to blame for the problem.

Solution: throw gas on a raging fire. I sure hope China has cooler heads at the helm.

~McQ

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Has North Korean succession been settled?

The answer to that question is “probably.”  That’s a step up from “possibly.”  But in the Hermit Kingdom, nothing is really ever certain.

The recent late night announcement by Kim Jong-Il of the promotion of his third son, Kim Jong-un to the rank of general in the North Korean People’s Army (NKPA) has removed any lingering doubt as to which of his sons is his chosen successor. The promotion repeats a pattern from the past.  Kim Jong-Il was also promoted to a high post in the NKPA in 1991 by his father, Kim Il Sung, to establish his future claim to the top position in the country.

According to Dr. John Ishiyama, a Professor of Political Science at the University of North Texas and expert on North Korea, the sudden rush to establish his third son as his legitimate and chosen heir to power has been accelerated by Kim Jong Il’s deteriorating health.

But, says Ishiyama, there are some other promotions, which have taken place, which are also important to understand and indicate how any succession in the near future might be handled.  Kim Jong-un is in his late 20s and is virtually untried, having had little or no experience to date within North Korea’s power structure.  If Kim Jong-Il were to die soon, he’d be left to fend pretty much for himself.

However Kim Jong-Il has now carefully prepared the way for a sort of “regency” if should die unexpectedly. Kim Jong-un’s consort is a visible part of the top leadership, and in the position of Kim Jong Il’s personal secretary for years, is thought to wield exceptional power. Additionally, Jong-un’s uncle, Jang Soong-taek, considered by some to be an opposition figure, has been reconciled with the family and promoted to the vice-chairmanship of the National Defense Council, solidifying his position in the power structure. Kim Kyon-hui, Jong-un’s aunt and Soong-taek’s wife, is a 4 star general in the NKPA as well as holding a powerful position within the ruling Korean Workers Party.

All of that suggests that the consort, aunt and uncle will form a power clique that will be the actual “power behind the throne”, until Kim Jong-un is deemed to be prepared to take the reins of power himself.

In the meantime, and unlike the careful grooming Kim Jong Il got from his father, Kim Jong-un will be set upon a relative crash course to learn what is necessary for him to survive and thrive in the leadership role his father will leave him. The recent promotion sets him on that path and the other promotions are designed to protect him and enable him to learn the levers of power there.

It won’t be an easy task by any means.

The totalitarian nature of the regime, the poor international standing of the nation, the sanctions imposed by other nations for its role in nuclear proliferation, another bad harvest and the subsequent rumors of starvation all combine to paint an even bleaker future for the country than present. All that can be realistically hoped for at the moment is that when the young Kim Jong-un does take power he will look outward with the aim of reform and rejoining the society of nations instead of looking further inward and remaining on the road to eventual catastrophic ruin.

~McQ

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