Not so hot. Europe:
Activity at European businesses hit a near three-year low in May, according to a survey by Markit.
Its index, based on a survey of purchasing managers in the manufacturing and service sector, fell to 45.9 in May, a 35-month low.
In response, the euro fell to $1.2515 against the dollar, a 22-month low.
"The flash PMI figures for May look horrible and provide a clear warning that eurozone GDP will almost certainly show a contraction in the second quarter after stagnating in the first quarter," said Martin Van Vliet, from the bank ING.
"It’s not good," said Peter Dixon from Commerzbank.
"The German ones were particularly disappointing, as we had been expecting some more buoyancy.
"It clearly indicates that the evaporating sentiment that we have seen in recent weeks, as the Greece crisis has intensified, is having a big impact on the economy."
A separate report from Germany’s Ifo showed that business confidence fell sharply in Germany in May.
China’s manufacturing activity contracted at a faster pace in May as conditions for exporters worsened during the month, the preliminary findings of a survey by HSBC showed Thursday. The "flash" reading of the manufacturing Purchasing Managers’ Index dropped to 48.7 in May from a final print of 49.3 in April, HSBC said. A measure below 50 in the survey indicates deterioration, whereas one above that figure shows an improvement. The flash reading is typically based on 85% to 90% of the total responses in the monthly survey.
The big red kangaroo is almost to the car.
Meanwhile, in the US, we’re focused on … politics. Silly politics.
This week, Bruce Michael, and Dale record talk about China, illegal immigration, and Egypt.
The direct link to the podcast can be found here.
As a reminder, if you are an iTunes user, don’t forget to subscribe to the QandO podcast, Observations, through iTunes. For those of you who don’t have iTunes, you can subscribe at Podcast Alley. And, of course, for you newsreader subscriber types, our podcast RSS Feed is here. For podcasts from 2005 to 2010, they can be accessed through the RSS Archive Feed.
While all the drama of the debt ceiling negotiations and downgrade were happening, China quietly launched their first aircraft carrier.
So what does that mean in the big scheme of things? Well IBD lays out the big point as clearly as anyone can:
It is not yet a full-fledged fighting ship. Its mission is to gain experience in carrier operations, particularly for pilots unaccustomed to taking off from and landing on a carrier’s moving deck.
Yet it represents a sea change in potential capability and something that Congress’ bipartisan fiscal supercommittee should ponder as draconian defense cuts remain on the table.
The first is no mean trick. Learning carrier operations and training carrier pilots takes a while. But the second point – about the supercommittee and defense cuts – should be lost on no one. One of the critical points about cuts to spending is the differentiation between good cuts, that is cuts that trim away fat and waste, and bad cuts, cuts that remove muscle and bone.
But back to the carrier and China’s intentions. First a few facts:
A few weeks ago Chinese Su-27 fighters intercepted a U-2 reconnaissance aircraft that had taken off from Kadena Air Base in Okinawa as part of a routine surveillance program of China. And Beijing issued a warning that such surveillance near its shores will not long be tolerated.
China’s capabilities have taken a quantum leap since a Chinese J-8 jet collided with a U.S. EP-3 surveillance jet in April 2001 off Hainan, the island that now has a base for Chinese ballistic missile and attack submarines.
China in recent years has laid claims to Japan’s Senkaku Islands, the Spratly Islands in the South China Sea, and has conducted at least nine incursions into Philippines-claimed territory.
China is flexing. No question in anyone’s mind that it is feeling its oats and will be challenging the status quo in the South China Sea. It consider that to be China’s “blue soil”. Add to the facts above that China has been reported to have developed an aircraft carrier killer missile and is in the beginning phases of developing a 5th generation fighter, and you have to begin to wonder if all of that points to benign intent.
Beijing’s goal is to secure the waters from Japan’s home islands, along the Ryukyu chain, through Taiwan and to the Strait of Malacca, encompassing the South China Sea.
Chinese government writings refer to the waters surrounding China as blue soil. Where governments used to draw a line in the sand, Beijing is preparing to draw a line in what other governments view as international waters.
Last week, the state newspaper People’s Daily warned of "dire consequences" if Beijing is challenged in the South China Sea.
The People’s Daily is, of course, an organ of the ruling Communist Party in China and nothing hits its pages unless approved at the highest level.
Aircraft carriers are offensive weapons, not defensive weapons. Their purpose for existence is to project power. The carrier China just launched will not be their last or only carrier. The question is, what does China intend to do with it?
IBD concludes with the current situation and the future worry:
We will be hard-pressed to meet the emerging Chinese threat when our Navy has only 286 ships (down 45% from 1991, when it had 529) and continues to shrink.
We’ve closed the F-22 Raptor production lines, and even some in the Tea Party are insisting on defense cuts to make up for our spending follies.
Defense is a constitutional imperative, not an optional budget item. We’d better pay attention to that Chinese carrier.
First among the reactions globally was that of China:
China bluntly criticized the United States after the S&P ratings cut to AA-plus, saying Washington had only itself to blame and calling for a new stable global reserve currency.
"The U.S. government has to come to terms with the painful fact that the good old days when it could just borrow its way out of messes of its own making are finally gone," China’s official Xinhua news agency said in a commentary.
Xinhua scorned the United States for a "debt addiction" and "short sighted" political wrangling. China, it said, "has every right now to demand the United States address its structural debt problems and ensure the safety of China’s dollar assets."
"International supervision over the issue of U.S. dollars should be introduced and a new, stable and secured global reserve currency may also be an option to avert a catastrophe caused by any single country," Xinhua said.
If you think it is bad now, consider our predicament if the dollar was to be replaced as the new global reserve currency. However it is ironic to be lectured by the Chinese on economic matters given their ideological bent. Communists telling Capitalists (pseudo anyway) how they should conduct their business.
France, on the other hand is expressing faith in the US’s ability to get its house in order, as is Poland’s Prime Minister:
France’s Baroin said France had faith in the United States to get out of this "difficult period." Friday’s U.S. unemployment numbers were better than expected and so things were heading in the right direction, he said.
"One should not dramatis, one needs to remain cool-headed, one should look at the fundamentals," he told France’s iTele.
"There is no need for panic," Polish Prime Minister Donald Tusk said. "We will see in August, and maybe more intensively in September what the effects for the world economy will be."
Of course, with the huge problems in Europe, both France and Poland are inclined to play down the significance of a US downgrade. And more interesting than what will happen later this month or next may be what happens on Monday, the first day global markets will mark their reaction to the US credit downgrade:
Because the S&P move was expected, the impact on markets may be modest when they reopen on Monday. But the ratings cut may have a long-term impact for U.S. standing in the world, the dollar’s status and the global financial system.
"The consequence will be far reaching," said Ciaran O’Hagan, fixed income strategist at Societe Generale in Paris.
"It will weigh on secure assets. The bigger reaction will be on risky assets, including equities and on agencies (Freddie Mac, Fannie Mae) and states backed directly by the federal government."
But he added: "U.S. Treasuries will remain a benchmark. This is a ship which takes a long time to turn around."
Norbert Barthle, a budget expert for German Chancellor Angela Merkel’s conservatives, said the downgrade would certainly provoke further turbulence in markets.
Everything mentioned is very important to the future of the US economy and its financial health. Unfortunately most of it is negative. In the next few months we’ll see how this shakes out, but at this point, even the optimists are pessimistic.
Every now and then I’ve been given the opportunity to talk with some of our movers and shakers from the past. First it was former SecDef Donald Rumsfeld as he launched his book "Known and Unknown". And through the Rumsfeld office, I’ve been afforded the opportunity to now sit down with former NSA and Sec State Henry Kissinger today as he launches his new book, "On China".
Unfortunately I received the book yesterday and haven’t been able to read it, but as the title suggests, it is all about China – history, politics, foreign relations, etc. Kissinger has apparently been fascinated by the country ever since Richard Nixon sent him to Beijing to help open and better relations between the US and China.
If you have any serious questions about China – since that’s obviously going to be the theme of the coffee klatch arranged for today, I’d welcome them. I think it will be a fascinating hour or two. China has always been an enigma to the West, and it is no less so today. Drop any ideas for q’s in comments and if they’re good, I’ll try to ask them.
Obviously I have mixed feelings about the country of Saudi Arabia. On the one hand they’re a tyrannical 12th century monarchy that controls a good portion of the world’s oil and exports a brand of radical Islamism. On the other hand they’re a bulwark against Iranian aggression and expansionism and a titular ally of the US.
So, the question then, given the situation in the Middle East, is it in the best interest of the US to do things that have them seeking solace and partners (allies they feel they can depend on?) elsewhere?
Yeah, probably not. But that’s exactly what is going on. Interestingly it is Tom Brokaw who brought the situation to our attention:
After remarking on the difficulty of establishing democracy in the Middle East, Brokaw said that Defense Secretary Robert Gates “will face some tough questions in this region about the American intentions going on now with all this new turmoil, especially in an area where the United States has such big stakes politically and economically.”
“And a lot of those questions presumably will come from King Abdullah of Saudi Arabia,” reported Brokaw on the Nightly News. “I was told on the way in here that the Saudis are so unhappy with the Obama administration for the way it pushed out President Mubarak of Egypt that it sent high level emissaries to China and Russia to tell those two countries that Saudi Arabia now is prepared to do more business with them.”
All of this stems from how the Obama administration handled Egypt. And it has caused Saudi Arabia to doubt the sincerity of the relationship between the US and the kingdom.
However, Saudi Arabia’s concerns emanate from the manner in which Egyptian dictator Hosni Mubarak was removed from power. Mubarak had been an American ally for decades and yet the Obama administration, in the eyes of Saudi criticism, turned its back on the Egyptian government when reformist protests spilled into the streets.
High sounding rhetoric talks, but actions walk, and SA is not at all happy about the actions the administration took in Egypt nor, apparently, satisfied with their assurances since. And despite the supposed buy-in of the Arab League on the latest attack on an Arab country- Libya- I’d guess they’re not particularly happy with that either. Another indicator they file away and continues to feed their fear of the sincerity of the US as an ally.
The good news, if there is any, is the administration has apparently figured out that it has badly messed up its relationship with SA. Whether or not they can salvage the relationship remains to be seen. It may take another trip by Obama and a lot more bowing and scraping to do that:
Mr. Gates met with the Saudi king on Wednesday, and the Associated Press reported that the purpose of the meeting was to smooth relations with the uneasy and oil-rich ally, noting that "this was Gates’ third trip to the area in the past month."
Thus far the Obama administration has been a foreign policy disaster. Interestingly, some of the highest polling results for Obama deal with his handling of foreign affairs. If anything, that should clue you into how badly it is going for him on the domestic front.
You are all familiar with the killer earthquake that occurred in New Zealand recently. During that disaster, 70 international students at the King’s English Language School, along with 10 staff, lost their lives. Among the dead were 7 Chinese students.
You’ll never guess why China is now demanding increased compensation for its dead students:
Chinese officials have requested extra compensation for the families of Chinese students killed by the Christchurch earthquake. They say China’s one-child policy means the families will face long-term economic hardship.
In a Radio New Zealand interview this morning, Cheng Lee, head of the Chinese Embassy’s disaster relief efforts, explained that China’s situation was very unusual due to the fact that, under Chinese law, families could only have one child per couple.
Mr Cheng believes the Chinese families deserve special consideration and should be given economic assistance above what’s available under New Zealand’s Accident Compensation Corporation (ACC) payments. Mr Cheng said: "There is a very notable difference in terms of the family situation between the Chinese family members and other foreign family members. You can expect how lonely, how desperate they are, not only from losing loved ones, but losing almost entirely their source of economic assistance after retirement."
So here’s a summary of the thinking as presented by Mr. Cheng – Since China unilaterally and by force restricted its population to one child per family and subsequently since in the case of the disaster in NZ, some of those children were killed, creating a hardship for the families, it is the responsibility of the government of New Zealand to up its compensation to the Chinese families (over and above what it pays others) because of the consequences of the Chinese law.
A pretty absurd claim wouldn’t you say? And the claim also implies that the Chinese student’s lives were more valuable than those of the others that were killed – again, the supposed value based in a law which restricted parents to one child.
Mr Joyce said that with all the investigations currently underway it was too soon to say if special compensation might be available for any of the victims’ families.
Really? The fact that NZ is even entertaining the idea for the reasons given are astounding. If China believes what it is claiming – i.e. that because of the policy of one child per family, the families effected have a particularly tough road ahead of them financially – then it should be compensating the parents for the consequences of its policy, not New Zealand.
Turner, however, does indeed reflect the thinking of various leftist eco extremist groups on population. Interesting though that his solution is so incredibly authoritarian. And, at the last moment he tries to hide that with his selling scheme:
Mr. Turner – a long-time advocate of population control – said the environmental stress on the Earth requires radical solutions, suggesting countries should follow China’s lead in instituting a one-child policy to reduce global population over time. He added that fertility rights could be sold so that poor people could profit from their decision not to reproduce.
Wonderful stuff from a guy who obviously spent a few days too many in the company of Jane Fonda and her ilk. Nice reference to China. Does it bother anyone that more and more on the left (*cough* Tom Freidman *cough*) see China as a ideal to emulate?
The French Finance Minister has noticed that the disparities within the European economy are causing a number of issues, and fingers the….Germans!
“Clearly Germany has done an awfully good job in the last 10 years or so, improving competitiveness, putting very high pressure on its labour costs. When you look at unit labour costs to Germany, they have done a tremendous job in that respect. I’m not sure it is a sustainable model for the long term and for the whole of the group. Clearly we need better convergence.”
You see, having an economy so efficient that you can be more competitive than your neighbors with high wages and a high standard of living means you need to change so that the French, Greeks and other assorted PIIGS can continue down the path they have chosen. The Germans are just too darned efficient for the greater good.
In the interest of being helpful I have identified several important initiative’s that the Germans should adopt to align themselves more fully with their neighbors.
- Do not keep your debt levels below 3% of GDP…ever.
- Encourage massive strikes at the drop of a hat.
- Make public services far more attractive than working in the private sector, with massive strikes and riots to keep it that way.
- Make it almost impossible to layoff anyone for any reason.
- Mandate at least six weeks paid vacation for every employee.
That should make sure your economy is not too efficient.
Is China’s economy about to rollover?
I won’t explain this, just let it sink in:
I don’t think it will be as bad as Japan, but the evidence isn’t giving me any great comfort either.
I love Apple, and I love my iPhone. Still, is Apple really worth more than Walmart? Or these various baskets:
- 4x the global smartphone market
- 5x the global music market
- 100x the global smartphone app market
- Enough to buy HP, Dell and Hitachi, with mad money left over for Xerox or Seagate
Yep, that whole efficient markets hypothesis may take a beating again.
Did any of you see Michael Lewis on 60 Minutes Sunday? If you didn’t, I highly recommend it.
Cross posted at The View From the Bluff
How can you tell when claims of budget hawkishness and fiscal responsibility are all talk and no walk? When you put deficit commissions together with no power and propose trillion dollar a year deficits for the next 10 years as the Obama administration has:
A new congressional report released Friday says the United States’ long-term fiscal woes are even worse than predicted by President Barack Obama’s grim budget submission last month.
The nonpartisan Congressional Budget Office predicts that Obama’s budget plans would generate deficits over the upcoming decade that would total $9.8 trillion. That’s $1.2 trillion more than predicted by the administration.
Any idea of where we’d get the money? We certainly don’t have it. And if you guessed China, et. al., yes, you’re right – for all intents and purposes we’d become a wholly owned subsidiary of the PRC.
The new report predicts that debt held by investors, including China, would spike from $7.5 trillion at the end of last year to $20.3 trillion in 2020. That means interest payments would more than quadruple — from $209 billion this year, to $916 billion by the end of the decade.
So, we’d be paying almost a trillion a year in interest (with even more money we don’t have). You can imagine what a debt like that would do to us, not only the economy but in terms of national security.
The deficit picture has turned alarmingly worse since the recession that started at the end of 2007, never dipping below 4 percent of the size of the economy over the next decade. Economists say that deficits of that size are unsustainable and could put upward pressure on interest rates, crowd out private investment in the economy and ultimately erode the nation’s standard of living.
And is the White House concerned? Well, other than lip service, it has moved decisively to address the problem /sarc.
“While the president is intent on ramming through Congress a new trillion-dollar health-care entitlement, he appears far less concerned with addressing the looming crisis of entitlement spending already on the books,” said Rep. Paul Ryan of Wisconsin, the top Republican on the Budget Committee. “Instead, he delegates this task to a ‘Fiscal Commission’ — which would not even report until after the next election.”
Other than make recommendations, the “Fiscal Commission” has absolutely no power. And the White House has shown no real interest, other than the usual lip service, in addressing the huge deficits projected for the next 10 years. I’ll be interested to see if the White House continues to treat the CBO’s reports as the gold standard after this one saying the administration has proposed an even higher debt than it claimed.
And, of course, one of the rather large points is the effect of having countries like China holding 20 trillion in US debt instruments and the amount of control that grants such countries over what we can or can’t really do – economically, in foreign policy, militarily, etc. That much debt becomes a weapon, whether the administration or others want to admit it or not. It’s an economic bomb and detonating it would have a profound negative effect on us and our economy and our enemies know it. It reminds me of the saying about how a capitalist will sell you the rope by which you hang him. That’s precisely what we’re doing with this debt problem and our desire to spend what we don’t have.
The time for a sane fiscal policy which cuts spending and the size and scope of government is long past due. And even if the politicians don’t recognize it yet, it is the public’s understanding that the time has come that is driving this discontent manifested in the Tea Parties and the overwhelming “wrong track” majorities to be found in polls which track whether or not people believe the country is on the right track or the wrong track. Democrats thought the public believed the country was on the wrong track during the last administration because of Bush. But after a year of Obama, those same numbers are even higher.
The people may not really like the fact that such measures must be taken, but they are prepared for them. They understand that this spending addiction, if continued, has no acceptable outcome and that the longer it continues the worse the outcome will be.
Step one is getting sanity back into the federal budget. And adding 9.8 trillion to an already huge debt while pretending to be concerned about deficit spending isn’t how that is done.