Turning and turning in the widening gyre
The falcon cannot hear the falconer;
Things fall apart; the centre cannot hold;
Mere anarchy is loosed upon the world,
The blood-dimmed tide is loosed, and everywhere
The ceremony of innocence is drowned;
The best lack all conviction, while the worst
Are full of passionate intensity.

The Second Coming
by William Butler Yeats 1921

A truly dramatic event in contemporary intellectual history occurred unnoticed in April. To understand it, you have to understand the history of the famous Hockey Stick climate chart, which has decorated IPCC documents since the late nineties, appeared in lots of Green publications all over the world, and has been used as vivid proof that human caused global warming (AGW) is real and an imminent threat to human life and civilization.

The Hockey Stick chart appeared to show that we live in extraordinary times. The researchers, Michael Mann and his coauthors, had assembled a reconstruction of temperatures going back about 1,000 years. There were two elements to this. First, there were temperature records from weather stations. These however only go back about 100 years, if that. So you need some other way of estimating temperatures from earlier periods.

Like it or not, real or not, global warming is a huge problem for the world. Serious debate is going on about what to do, government action on this is already affecting us all, and will continue to do so. The potential effects of legislation on the world economy, the politics of trade and on our lifestyles are all huge. So it makes sense to follow this debate as closely as you follow any other big issue, from the housing bubble to the Iraq war. The problem, as usual, is getting some context and separating the facts from the political bias.

Let's start with the big picture. This graph is a reconstruction of the Earth's temperature for the last 500 million years. As with the rest of these graphs, read them from right to left. The left edge, at zero, is the present.

"Most of (the seafood) we eat that's farmed is coming from China. We have little idea of what's happening in China," said Peet. Food and Water Watch reports that the United States imports 80 percent of the seafood we consume, most of it from Latin America and Asia. The aquaculture practices in many of these countries damage the environment, and many enterprises use additives and antibiotics banned in the United States.

My knowledge regarding products liability cases is pretty limited. The rule is: if a merchant sells a product to a user or consumer that is unreasonably dangerous and causes harm then that merchant is liable for the injuries to that user or consumer. Because of the nature of the distribution chain, a plaintiff and sue anyone or everyone in the chain of distribution. The reason for this is that the merchant is presumed to be in a better position to know the potential dangers that the product poses for an unsuspecting consumer. Therefore, the defense of "comparative" or "contributory negligence" is not normally available to defendants in these kinds of cases.

If the merchant knew that such a danger was posed to the ultimate user or consumer and fails to warn or protect the consumer from harm, punitive damages can be assessed.

That is what happened in the famous McDonald's coffee case. A memo was discovered that showed that McDonald's knew that their coffee, at 180 degrees Fahrenheit, would cause 3rd-degree burns.

For more on the McDonald's case see this link:

THE "MCDONALD'S COFFEE CASE" AND OTHER FICTIONS.

5. McDonald's admitted that it has known about the risk of serious burns from its scalding hot coffee for more than 10 years -- the risk was brought to its attention through numerous other claims and suits, to no avail.

If you will notice, business lobbies are trying to limit damages that consumers can receive when they prove intentional malfeasance on the part of the defendant business. As you are pointing out, there is not enough inspections to protect consumers from dangerous products from China, and with the courts now getting emasculated by damage limits on lawsuits, there is much less incentive for private businesses to inspect their products as well. It was always difficult enough to prove that they knew their product posed a danger; but now even if you prove it then the potential damages may not be enough to make them want to change their practices.

GM's stock price "implies little to no downside and potentially large upside from the real possibility concessions end up even larger than what is priced in," he said in a note to clients.

It had taken me several months and many intermediaries before I could finally meet with this self-effacing, frail 75-year-old, branded an enemy of China by the Party—a label it gives to anyone with the temerity to oppose the regime.

The government’s initial reaction was to deny any problem, isolate AIDS-affected areas, and let the sick die (a pattern that initially repeated itself when SARS broke out in the country).

Police barred entry to the contaminated villages, and new maps of Henan appeared without the villages, as if they had vanished into thin air. But after the international press became aware of the growing crisis, the Party banned the blood trade (though it enforced the prohibition fitfully) and in 2000 at last officially acknowledged the existence of AIDS on Chinese soil.

Despite all its pious declarations in the subsequent years, though, the government continues more to obfuscate than to help. When Bill Clinton visited Henan in 2005 to distribute AIDS medicine provided by his foundation, for example, the Party prevented him from visiting the worst-off villages. Instead, in the Henan capital city of Zengzhou, he posed with several Party-selected AIDS orphans as the cameras clicked away. It was an elaborate public-relations charade: "China, with the West’s help, was tackling AIDS!" The world saw a smiling Clinton, but not the real tragedy of Henan.

"Ultimately, though, China will switch from a mass production economy to a mass production and mass consumption economy and have the courage and ability to free its exchange rate and shift away from its mercantilist model."

Is the incredibly wicked satire of last year's independent film hit Little Miss Sunshine accessible to non-Americans? I wonder.

In the Village I No. 2 district, between 5 and 6 percent of homes are delinquent while about 14 percent are late in Fairview Village. In Patterson, the delinquent taxes make up 16.43 percent of what residents in the subdivisions owe.

A year ago, Britton said, only about 2 percent of the taxes in the Modesto subdivisions were late.

Britton said the city sent out letters this month encouraging homeowners to catch up on the taxes. If the residents fail to do so, the city will begin negotiating with lenders. Often, Britton said, lenders will pay the delinquent taxes rather than allow a tax lien to be placed on a property. Those liens must be paid before lenders can receive money from buyers.

Britton cautioned that the collections cost will increase in each step of the foreclosure costs. Those charges will be passed on to the delinquent taxpayers.

I think people have been trying like hell to keep the credit market bombs quiet, and they succeeded - until this evening, when it came out that Merrill seized $400m worth of Bear's Hedgie bonds.

NOW the fun starts because that little bitty amount of money (in the grand scheme of the indices) is NOT enough to blow them up. So what ELSE is going on that we don't know about? And who's in trouble on the CMBX (Commercial R/E bonds) side?

Once cannibalism gets started it is very, very easy for it to get out of control in the credit markets. Nervousness begets nervousness. You saw how fast New Century blew up - one day they were working it out, two days later - BOOM - shortly followed by a bunch of other BOOMs, including LEND and others. The carnage picked up speed FAST.

Here's a scenario for how it can happen - Fund #1 blows up (as it appears Bear's Hedgie just did.) The AAA bonds were sold off over the last couple of weeks to try to prevent that, which is not really all that big of a deal - they're very high credit quality and didn't hit the spreads all that much, although the "AA" components DID get hit. Nonetheless, price paid was reasonable, so all is more-or-less ok - so far.

Ok, now the TRASH gets sold. But the trash isn't worth much - if anything. This forces Moody's to re-evaluate some of these issues, perhaps up and down the line. NOW you got trouble, because Moody's, while they're beholden to the issuers (after all that's who pays 'em!) can't be seen as complicit in an outright FRAUD! So now they're forced to take a look at CURRENT conditions and say "hmmm... that bond looks like crap!"

Suddenly, you get a cascade of downgrades that sweep through. Some nail low-level investment grade bonds and push them under investment grade. That makes them unable to be owned in certain types of funds, such as some pension trusts, forcing a sale - at very unfavorable terms. THAT creates even more losses.

The equity tranches, which are the worst of the junk, become completely illiquid - basically, they're worth nothing at all in the market; you may as well hold them and PRAY that there is something left when the dust settles. Repeat until you can knife it and it comes out clean - lots and lots of people become very quickly DONE.

The effective coupon shoots up on these because in order to get people to buy you must give them a hell of a discount. That is, RISK COMES BACK except now that "enhancement" to the coupon comes out of the seller's hide! That's a REAL capital loss and its not a small amount of money either.

We're in for Round #2 of this game and this one looks worse than February - FAR WORSE - as its NOT just in residential R/E loans this time. Something is going on in the commercial R/E sector as well, but I can't get a handle on what it is.

If it starts to spread through the credit markets as derivitives contracts start to reprice risk, well, then things get very, very ugly indeed - especially for those guys who WROTE swaps (insuring against the failures!)

Shares rose faster than at any time during the century. House prices were also climbing sharply, producing a boom in the construction of suburban mansions. The Republic lost some of its Calvinist austerity as its people became a nation of consumers, mixing their love of display with an avidly speculative pursuit of wealth.

Speculators were, in Vega's words, "full of instability, insanity, pride and foolishness. They will sell without knowing the motive; they will buy without reason." Vega's speculators exhibit many of the features associated with the full range of manic-depressive behavior. A manic-depressive experiences violent and uncontrollable mood swings. As his expectations grow increasingly unrealistic, the manic becomes careless and this precipitates his downfall. Unable to see the broader picture, he becomes fixated on insignificant details.

Kerogen -- aka "oil shale" -- is not in commercial production, except in a few pilot plants build with government money.

I suspect you are thinking of bitumen -- aka oil sands -- mined in Canada.

Oil shale is not commercially feasible to mine at today's oil prices with current technology. The same is true about switchgrass. Neither is even close to commercial production, despite claims of promoters.

For that matter, it's not clear that Canada has the necessary natural gas and water to mine and refine enough bitumen to produce 5 million barrels/day of synfuel -- the commonly quoted production goal for the year 2020.

The futures markets reason for existing is to transfer risk. When commodity prices rise, ceteris paribus, we see those prices increases as end users. And it means we can purchase less of the things we need in effect, changing our standard of living. Prices can rise due to monetary related issues or supply/demand issues which can be complex. But for end users it is simple: they purchase less or substitute.

If you listen to the podcast of the interview of Steve Jobs and Bill Gates, these guys frequently use the phrase "took the bet". This is what business is about. Trading is a business and therefore we take bets.

I bet that if fat cattle futures go from 70 to 114, rib eye steaks are going to cost more at the checkout counter. Why not buy futures to lock in the price at 70? Currently we hear and see mortgage lenders advertising how rates are at 40 year lows. We all know they won't stay this low but how many people are taking action to lock in these rates by shorting bond futures/options? The inevitable rate rise will change the purchasing plans of many, but if doesn't have to be this way.

Major corporations, banks, farmers etc..., do this (put on hedges) everyday to protect profits. If we can convince people to turn off the TV, sit down in their comfy chair, open a book that will educate them on the business of commodities and how it can help protect their profits (earnings/purchasing power) while sipping on a glass of fine wine then, IMHO, our work is done.

Many centuries ago in southeast Asia, some clever soul figured out how to use the thinking patterns of monkeys to make a highly effective monkey trap. The trap is a gourd with a hole in one end just big enough for a monkey’s hand to fit in, and a stout rope connected to the other end, fastened to a stake in the ground. Into the gourd goes a piece of some local food prized by monkeys, large and solid enough that it can’t be shaken out of the gourd.

Sooner or later, a monkey comes along, scents the food, and puts a hand into the gourd to grab it. The hole is too small to allow the monkey to extract hand and food together, though, and the rope and stake keeps the monkey from hauling it away, so the monkey keeps trying to get the food out in its hand. Instead of dropping the food and scampering toward the safety of the nearest tree, the monkey will frantically keep trying to wrestle the food out of the gourd until the club comes whistling down.

The trap works because monkeys, like the rest of us, tend to become so focused on pursuing immediate goals by familiar means that they lose track of the wider context of priorities that make those goals and means meaningful in the first place. Once the monkey scents the food in the gourd, it defines the problem as how to get the food out, and tries to solve the problem in a familiar way, by maipulating food and gourd.

When the hunter appears, that simply adds a note of urgency, and makes the problem appear to be how to get the food out before the hunter arrives. Phrased in either of these terms, the problem is impossible to solve. Only if the monkey remembers that food is of no value to a dead monkey, and redefines the problem as primarily a matter of getting away from the hunter, will it let go of the food, get its hand out of the trap, and run for the nearest tree.

The same dilemma on a larger scale underlies current efforts to deal with the imminent decline of world oil production by finding something else to pour into our gas tanks: ethanol, biodiesel, hydrogen, you name it. Our petroleum-powered vehicles – not just cars, but the trucks, trains, ships, and aircraft that make our current way of life possible – are the food in the monkey’s hand. The problem of peak oil, as many people even in the peak oil community see it, is how to find some other way to keep the fuel tanks topped up. This seems like common sense, but that’s what the monkey thinks about getting the food out of the gourd, too.

It is a fact that ethanol only contains about 65% of the energy content of gasoline on a volumetric basis. Therefore, to displace the gross energy content of 1 gallon of gasoline requires 1/0.65, or 1.5 gallons of ethanol. What this means is that as ethanol is put into the gasoline pool, demand will go up simply because the pool now contains less energy.

But perhaps The Monkey Trap extends to more than Peak Oil.



Isn't our entire financial system based on an ever-increasing flood of debt and borrowing, as a nation, and as consumers?

If you were to question the average French man or woman’s opinion on their country’s health system you would no doubt be met by a deluge of criticism. Besides the fact that criticism of the country’s institutions is a national pastime, this is a rather curious attitude, since by international standards the system is judged one of the world’s best according to the World Health Organisation after that of Sweden, Finland, Norway and Japan, with the United States in the 14th position.

Any even superficial examination of a health system is extremely complex, thus it is difficult for observers to provide a rational analysis of so vast a structure, which in the case of France absorbs 10.6% of the country’s GDP, and which is influenced by multifaceted political and economic forces that come into play together with the demands of the general population.

It is evident that today, more than ever in history, health is the first priority of a nation for its population after peace, food and shelter. This is due to universal education and higher expectations, including that of life expectancy.

Healthcare is the right of every man, woman and child, and the right to health protection features in Article 11 of the preamble to the French 1946 Constitution. In addition legislation introduced in 1999 ensures the coverage of 99.9% of the country’s population.

Thus every individual, even the most modest citizen has access to instant medical care, whatever the degree of need and for as long as necessary, whether he is insured or not. It is considered a fundamental right and no person can be refused access to care.

The consequence is that any attempt to reform the generous system is instantly seen as some kind of insidious plot to reduce healthcare, often resulting in strikes and demonstrations.

In 2006 France stood at the top of the Euro Health Consumer Index, followed by the Netherlands and Germany. So the question that remains is why do French people criticise their system? The answer is that the demand for healthcare is endless; today for the slightest cold or sprain the average citizen runs to his doctor, who will refer him to a specialist, who will often propose costly treatment, when in fact old fashioned recipes would probably do the job in many cases.

Cost has become a nightmare. In 2000 France ranked number one in the world for health care, and in 2005 the country’s national health expenditure stood at €181 billion or 10.6% of gross domestic product, thus ranking France fourth in the Organisation for Economic Cooperation and Development countries, behind the United States (15.3%), Switzerland (11.6%) and Germany (10.9%).

The ongoing question is the cost and sustainability of the system, as France’s health system is institutionally complex, which leads to tensions between the state, health insurance funds and providers. The challenge of the new president, Nicolas Sarkozy is how to improve the relations and clarify the responsibilities of the key actors in the system, he has also promised to reform the system, which is a monumental task.

The principal political problem is therefore reform and cost control without reducing the quality of care, which is a daunting task for any politician.

According to the French authorities the health system is based on a national social insurance system, which is complemented by elements of tax based financing and complementary voluntary health insurance. The system is regulated by the state and statutory health insurance funds. The state sets the ceiling for health insurance spending, approves an annual plan for health and social security.

The statutory health insurance system is composed of a general scheme that covers about 84% of the population, followed by the agricultural scheme covering farmers and their families equal to about 7 % of the population. Then there is the scheme for those self-employed that covers another 5% of the population, and in 2004, a specific insurance fund was established to cover dependent elderly persons. Finally there is the universal health insurance coverage scheme established on the basis of residence in France introduced in 1999.

The French health system is noted for its high level of freedom for doctors and choice for patients, pluralism in the provision of health services, easy access to health care for most people is general, as is the absence of waiting lists for treatment that have become a serious obstacle to healthcare in Great Britain for example.

The French system is pluralistic since private and public structures coexist side by side. Patients choose their practitioners and freely access the different types of hospitals.

However, one of the sensitive questions constantly raised by different parties is the abuse of this very generous system, and abuse there is in all forms, both from the providers and those cared for. Nothing prevents a French person from seeing several doctors and specialists in the same day, his costs are covered at almost one hundred percent by the health insurance system (perhaps with an almost negligible surcharge), since the health insurance system established in 1945 offers all French citizens equal access to healthcare, regardless of income.

In 2005, the health insurance system covered 77.1% of health expenditure, whilst supplementary insurance bodies covered 12% of the remaining share, households 8.7%, and central and local government 1.3%.

The conclusion is that any such system cannot offer endless healthcare without some kind of limitation, reform is needed without refusing aid to those in need, but what kind of reform?

Sicko or Wacko?

Moore calls the French system 'free,' convieniently ignoring the 13.55 percent payroll tax, a 5.25 percent income tax, and additional taxes on tobacco, alcohol, and pharmaceutical company revenues that fund the system. (Despite the high taxes, the system is running an €11.6 billion annual deficit.) The French system is not even free in terms of what patients pay. Its patients pay high copayments and other out-of-pocket expenses, and physicians are able to bill patients for charges over and above what the government reimburses. As a result, 92 percent of French citizens have private health insurance to complement the government system. Yet there remain shortages of modern health care technology and a lack of access to the most advanced care.

Waiting list crisis as NHS cuts costs:

The 18-week target, set in 2004, is widely considered to be among the most ambitious of the Government’s aims for the NHS. A baseline estimate published in December suggested that 35 per cent of patients across the country were treated within this time.

At that time up to a quarter of patients needing operations such as hip or knee replacements were estimated to wait between one and two years for surgery, with a small number waiting longer than this. The figures showed that most specialities treat between 30 and 50 per cent of inpatients within 18 weeks. In trauma and orthopaedics the figure is only 20 per cent. The Government has set an interim target of 85 per cent of admitted patients and 90 per cent of nonadmitted to be treated within 18 weeks by March next year.

18 weeks is an astonishingly long time to be sitting around waiting for surgery! And this was for "inpatients"! So these people are already in a hospital, and waiting 4 months for treatment? Worse in a "trauma and orthopaedics" wards? Am I correct in thinking of accident victims warehoused for months before they can get corrective surgery?

If you study the spreadsheet you will notice that, if you retired with 1 million dollars in 1986 you would have had pretty good purchasing power. Left un-hedged that purchasing power dropped off dramatically. I didn’t adjust for any interest received because at these numbers it wouldn’t have mattered much. Even if you had 1 million is bonds at 6% throwing off 60K/yr., you are still living on a fixed income. I didn’t adjust for taxes or commissions either.

Purchasing power improved from 1986-2002 because the dollar went to 120 or thereabouts. Even locking in the dollar value in 2002 would have not changed the picture much.

The Dollar hedge was a bust. Your situation wasn’t improved much. The Gold hedge worked much better in terms of purchasing gold and a basket of commodities but did not offset the increases in energy enough. This means that perhaps it would have been prudent to purchase energy futures/options as well as gold.

There are different ways to hedge with different instruments. This is just one example but I think it shows that, if you live long enough, due to flawed policies that require ever increasing expansion of credit and money, the very real risk of having your standard of living decline dramatically exists. (emphasis added)

It is time that we all stop looking at the futures markets with the casino mindset. There is a very valid and valuable economic function of these markets. Used prudently, they can protect us from declines in our standard of living due to rising prices. Who, after 20 years of retirement wants to have their ability to put fuel in their vehicle fall by 90%? Keep in mind that this is just a discussion on goods. The costs of medical services are spiraling, as we all well know.

Who can look at the spreadsheet and still believe that retirement is a time where we must become risk averse? Becoming a millionaire (yawn) is not that big of a deal when you really look at what it means. Every gadget we use dollars to buy today is dollars that lose the opportunity to grow to serve us in the future. And to think that the savings rate is negative; what are people thinking?

Then during the 1920s prices rose almost 3% yearly in real terms. The depression saw real prices drop in half, and the 1940s saw them slightly more than fully recover. Real prices dropped about 2% yearly from 1949 to 1969 and then rose 3% yearly from 1969 to the famous peak in property values of 1989. From 1989 to 1999 prices dropped in half – again adjusted for inflation.

It is a great failure of the MSM to not balance their reporting of the Dow’s ‘new highs’ with equal reporting of the loss of purchasing power. The lack of objectivity of the MSM is alarming. That people have to rely on blogs written by concerned citizens and true patriots such as you is quite remarkable. On the one hand I fear for our great nation but on the other I read blogs like yours and know that there are enough good people in this country to get it back on track.

This idea presented itself as a problem last week when I read Anatal Fekete’s commentary on the preponderance of gold having moved from the hands of governments, central banks, to private holders. Gold Vanishing into Private Hoards.

This idea bothered me inasmuch as I began to wonder how on earth we will ever get back to a sane policy, a gold standard, where money really is money if the banks don’t have the gold to back it. Gradually I came to some understanding of the mechanics of this.

I read a lot of economic commentary, and if it is well-written and fairly simple I can follow along. You will find my own thoughts at least simple. Money is a store of value and a medium of exchange. Who determines the value of money? Those who hold whatever backs it. Presently we are in a state where money is not backed; it is all fiat currency - money by government decree only, having no intrinsic value. Who then sets its value?

Well, money, let’s just say ‘the dollar’ is not money, not any more. It is a commodity, a produced item, much like a farmer produces potatoes. As a commodity it is for sale on the open market and can be bought, at the very end of the line, with gold, with real money. Jim Sinclair likes to say that the value of gold does not change, only the value of the dollar does. I have read that many times without really grasping what it means - call me slow.

In my case it means that my pension from the State of California and the County of Alameda and the Social Security System comes to me not as real money, but as a commodity of ever decreasing value. Should those folk all send me potatoes I could eat them, and I could eat them as well in ten years as today. This is not the case with dollars. How many potatoes will my dollars buy in ten years? Not as many as today.

This brings me around to my small epiphany. It doesn’t matter if most of the gold is in private hands, because the market will always fix a value on the commodity-dollar. At least so long as this particular commodity is needed. It will be needed for quite some time as this commodity is what we pay rent, shop, buy services, and get taxed in. We will get squeezed as our personal stream of this commodity becomes worth less and less - what else is new?

But no matter who holds the gold the commodity-dollar will have some value, set by those who own the gold. Gold moving into private hands must simply be some part of the cycle of rebalancing. Do the governments finally get enough of it back to back a true-money currency? Probably sooner of later. Maybe countries where it is mined extensively, Canada?, will fill their coffers from domestic production and bring back real money.

This is most certainly not the way the various governments want it, but print and spend must have its consequence. The private holders of gold will do a much better job of keeping our money correctly valued than our governments have. Market price must trump lies. While this doesn’t bode will for those of us paid in commodity-dollars, or worse, on fixed incomes, it does have a tinge of justice to it that makes me smile. Actually, I can’t imagine why I am smiling as the burden of the printers’ deceit will fall on all our heads with traumatic force regardless of our complicity in the fraud. Down the garden path and into the weedy fields we go.

It is my family’s good fortune that we have accrued some gold in the meantime. Most have not. If I had fifty pounds of it hidden in the rafters I don’t think it would be enough at this point.

As an aside, what assets aren’t in gold are in Canada. We live in Maine and drove up to a border town a couple of years back and opened a Canadian account with some cash from the sale of a home. In the meantime we have rolled over our remaining IRA into a Canadian Broker and trade only in Canadian stocks and keep all the cash in Loonies. Our present vulnerability lies in our pensions. Our home is paid off and doesn’t really count as it is where we live and secure as such.

So, all this is pretty obvious and simplistic, but coming to grips with the idea of money as a manufactured commodity, and gold in private hands as the arbiter of this commodity’s value has somehow cleared my thinking a bit. Don E., who never promised a deep and probing analysis.

I also confirm your theories regarding Chinese real estate. I investigated this in depth, with the help of my wife and relatives up there on the East-side as I was wanting to purchase some property there. The thing that scared me the most is something you did not really mention directly in your post. Apartments are being flipped at huge profit every 6 to 12 months, sure, but what is scary is that nobody is living in them. It's all 100% pure speculation on a scale that my mind is not even able to comprehend.

The moment the gains hit 0% or less and the buyers dry up, there will be entire suburbs the size of medium European cities, packed with empty high-rise apartment blocks and nothing else. The owners, who live with their mothers and uncles and third cousins in squalor and who thus cannot really afford the apartments will be left with a big problem on their hands.

Land and property development has so far been one of very few successful businesses of the local governments and their powerful officials since the beginning of 10th 5-year planning period (2000 - 2005) --- imagine a gigantic entitlement program by a US state to grant unlimited land development and building rights to every local city council member, city manager, municipal judge, sheriff and deputy, and support them with abundant bank credit. The obvious end result would be a run-away property bubble. That is what the major cities in China are heading for.

But look beyond the headlines and you'll find that China's 1.3 billion people are actually buying relatively little. Although the mainland's population is four times that of the U.S., Chinese consumers last year spent just 12% of what Americans did, figures investment bank UBS (UBS ). And private consumption as a share of gross domestic product in China is falling, to less than 40% today from about 48% in 2000.

Prying open the wallets of tightfisted folks like the Xus is emerging as the hottest political topic in Beijing. Although the economy is still expanding at 10%-plus annually, China's economic mandarins are concerned that the country's growth depends too much on its soaring exports and investment in ever more factories and luxury high-rises. Exports leave the Middle Kingdom vulnerable to potential downturns in the U.S. and Europe while causing trade tensions with Washington. And too much investment threatens overcapacity in industries from steel to autos.

Hey Charles, I was thinking about something related to your article. Lots of the downward pressure on wage growth and stagnant wages, as I see it, is from global competition. Heck I know there is someone in India that can do my job cheaper. I already compete with guys in China for what I do (architectural visualizations) ans can't really argue when a guy in China is doing my job for a couple bucks a day.

Anyways, I was reading a book by the founder of Nolo Press. He thinks some of the best jobs with good pay, are service jobs. The guys that do your lawn, clean carpets, plumbing, things that can't be produced overseas. For any service job, if you want the job done, the person hiring will have to pay local wages, wages which allow a person to live in the area of the service. He argues these jobs are on the rise.

It seems to me that many good jobs go to illegals. (I live in Southern California). The jobs that are left over are the 'jobs Americans want to do' --at least this is how it is sold. These jobs include informational jobs, where you use your mind more than your back. But those jobs are the jobs under pressure from global competition. In summary it seems the best jobs, at this time, are filled by people who get the best of both worlds. They get good cash for their work and they dont pay taxes, how does that sound? Sounds a lot better than my 'American job'. Maybe this is the 'grass is greener on the other side' syndrome, who knows.

Vernon Smith, a Nobel laureate economist, is so bullish on stocks that he's put money in small drug companies -- investments he "wouldn't have touched in the late 1990s," he says. Louise Yamada, a longtime Wall Street market analyst, sees the Dow Jones Industrial Average climbing to 16000 as part of a bull market that she compares with the post-World War II boom. Fritz Meyer, who develops investment strategy for AIM Investments, a $149 billion money-management group in Houston, sees stock gains stretching as far as the eye can see.

From 2000 to 2005, Lishui's population went from 160,000 to 250,000, and the local government invested 8.8 billion dollars in infrastructure for the region it administers. During those five years, infrastructure investment was five times the amount spent in the previous half century. In money terms, what was once 50 days' work is now done in one.

For the past three decades, China's economy has averaged nearly 10 percent annual growth. The economy is fueled by the largest migration the world has ever seen: An estimated 140 million rural Chinese have already left their homes, and another 45 million are expected to join the urban workforce in the next five years.

Such cities must expand and attract industry on their own, because the central government no longer provides the funding and guidance of the old planned economy.

Chinese cities aren't allowed to raise funds through municipal bonds or sharp tax increases, so they turn to real estate. Legally, all land belongs to the nation, but local governments can approve the sale of land-use rights—the closest thing to private ownership. Cities acquire suburban land from peasants at artificially low set rates, approve it for development, and sell for a profit on the open market. Across China, an estimated 40 to 60 percent of local government revenue is acquired in this way.

Formerly, the 16.5 acres (6.7 hectares) had belonged to the village of Xiahe, but in 2000 the city government bought the land-use rights for one million dollars. Three years later, Lishui flipped the land to Yintai Real Estate for 37 million dollars. Given that corruption is endemic in Chinese real estate, the actual price may have been even higher.

In such an environment, everybody gambles on growth. Most of the city's massive investment in infrastructure had been borrowed from state-owned banks, which also loaned money to the developers—Yintai had borrowed over 28 million dollars for its Jiangbin venture. If the real estate market went cold, the whole system was in trouble. During the past five years, the average price of a Lishui apartment had risen sixfold.

Concerned about a slowdown of contracted foreign investment, the Shanghai municipal government has eased restrictions to lure foreigners to invest in property development again, in a reversal of an earlier policy aimed at cooling down the real-estate sector.

"Shanghai's property market also showed signs of cooling down in January-April, although housing prices in all other major Chinese cities continued to grow significantly. The average property price in Shanghai fell 3% in the first quarter, compared with a 9% increase in the same period last year."

This is an interesting development. I smell a bubble bursting, and they need the final sucker to bail out the speculators (everyone).

An indicator of the widespread speculation gripping the Shanghai exchange came last month with a Chinese government website reporting that one in 10 maids in the city, China's financial capital, had quit their jobs to take up trading full time.

I was reading this article on rising gasoline prices and started to think about the past, particularly the late 70s when I was a kid.

This article is pointing out that gas prices are going to hurt consumers soon and cause the consumer to reduce consumption (this should be a world wide phenomenon in industrialized countries). This spending pullback may tip the economy into recession (considering that last year the economy was barely growing and 70% of the economy in consumer spending).

Remember in the late 70s we had some inflation, a little growth and then pow, a huge gas spike... That sent the economy into stagflation. I believe that we may be looking at that same scenario again. Remember how the government solved the stagflation of the early 80s??? Ronald Reagan spent about 1 trillion dollars (doubled the national debt at the time) to buy military equipment and Paul Volcker raised interest rates to insane levels.

The interest rates cause the value of the dollar to increase thus making foreign products cheaper. Producing more spending, combined with government spending righted the economy.

If the same scenario happens again the first question is: can the government make the same kind of impact? We have all seen that the Fed doesn't have anywhere near the same ability to control the interest rates as it once had almost 30 years ago. We also know that it is taking more and more spending to generate each dollar of economic growth.

In the current situation the interest rate change will make the dollar rise and make foreign products cheaper. Remember house values and interest are inversely proportional. So high interest rates could implode the housing bubble.

But a side effect of high interest rates could be a huge impact to all of the people with adjustable rate mortgages. Would people whose home values are plummeting or that are losing their houses (because that can't be sold for what they are worth) be willing to spend more for stuff (the people that lost their homes would have no place to store the stuff)??? Any interest rate increase would impact the already leaking housing bubble. I can't believe that the politicians could even fathom this option.

If the government tried to spend their way out of a stagflation scenario they would have to borrow MASSIVE amounts of money (possibly double the national debt). Currently, there is enormous downward pressure on the dollar due to all of the debt being created by the US goverment (due to the borrow and spend Republicans). The dollar has suffered about a 25% decline against the Euro since early 2001 ( Federal Reserve website). The dollar has fallen against most unpegged worldwide currencies ( Federal Reserve).

So, what would massive federal spending do?? First it would cause massive federal borrowing, causing the dollar to fall if not collapse. Since most of the goods we buy come from foreign countries debt creation would in turn cause inflation, which would make an inflationary situation worse and reduce economic growth.

Unfortunately, the government looks like they would have limited solutions in this scenario. I think they would try the easy way out first, just making the problem worse.

Charles asked me to write something about the health care system in the U.S., but before I do that, I should add a few words about my own situation. The opinions below could be read as a rant by some overpaid techie who has never been sick a day in his life. Sadly, that is not the case. I sustained a spinal chord injury at age 7, and have spent the rest of my life in a wheelchair. Long-term paralysis leads to other complications, and so I now have multiple serious conditions. I have seen more than my share of the health care system.

This is in regards to March 24th Health and Bankruptcy article. I know it's a little late in responding, but I just came off of a four day stretch at work. In that article there is a purple circle which says "I want a pill, blame someone else for my ill health". That statement screamed at me because it's so true. I have the perfect example.

This weekend I took care of a 60 year old, overweight women who has an active bleed in her colon. She has been with us for three weeks. She has refused a colonscopy among a few other treatments and tests which are needed to treat this condition. She has also continuously violated our no smoking policy as well as her diabetic diet with the help of her family. You may ask why not just send her home then. We can't because if we do and she dies at home, we will surely be sued as her family has already threatened it. The patient and the family are in no hurry to get her home even though she has no insurance. Why because Medicare pays for part of it and the rest goes unpaid by the family.

Even though we have plenty of documentation of her un-cooperative behavior in everything, we will still be sued and the family will more than likely win the case because our country is adverse to personal responsibility. Although this case is an extreme one, I would say half our patients are not willing to do what is necessary to get themselves back in better health and we as citizens pay for that.

Anyway, I thought I'd share this example with you mainly because I just needed to vent my frustration at our citizen's lack of discipline and responsibilty for their own health care.

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I would be honored if you link any essay to your website, print a copy for your own use or add my RSS or Atom feed. And of course I appreciate your recommendations of this weblog and your comments: csmith@oftwominds.com.

                                                                       

wEssay noun, combination of 'web' and 'essay,' denoting a short online essay which exploits the hyperlinks, interfaces and interactive capabilities of the World Wide Web; coined by Charles Hugh Smith on May 1, 2005, in Berkeley California.

Aphorisms I like:

"Economic history is a never-ending series of episodes based on falsehoods and lies, not truths. It represents the path to big money. The object is to recognize the trend whose premise is false, ride that trend, and step off before it is discredited." (George Soros)

"The way of the Tao is reversal." (Lao Tzu)

"Chance favours the prepared mind.” (Louis Pasteur)

"It is neither necessary to hope to undertake, nor to succeed to persevere." (French proverb)

"You must have a willingness to do something when everyone else is petrified. You must learn the lesson of following logic over emotion." (Warren Buffett)

"Success consists of going from failure to failure without loss of enthusiasm." (Winston Churchill)

"May a fair road always be open to you." (CHS, April 2, 2006)


All content and images copyright © 2006 - 2007 Charles Hugh Smith, All rights reserved in all media, unless otherwise credited or noted.