What May Trigger Great Depression?

The bubble of sub-prime lending market has burst. This has followed a crashing of the housing market. Hedge Funds betting on rises in commodity prices have perished or are losing heavily. The big money bets everywhere were predicated on ever increasing consumer demand due to booms everywhere. But the boom was fueled by credit expansion. Now credit will be dear to come by and hence slowing of consumer demand is inevitable.

The US economy is creating jobs. But good jobs are being lost to other countries where American conglomerates are producing to sell to American and European consumers due to rigged exchange rate differentials.

US Conglomerates are opposing legislation to raise tariff on American imports from China. It is because they set the process of rigging currency values of the developing world downwards to rip off American and European consumers by enticing the latter with lower prices of American/European/Japanese brands and lower interest rates on credits. This process started in 1994. But it has reached a point at which the roots (good American jobs) being undercut since then are discernable by the naked eyes of ordinary people.

It is too late because the good jobs that have been lost cannot be recreated. But politicians who shared the profits of American Conglomerates through increased political contributions cannot stay in power when ordinary people watch being undercut to benefit the Business-Political self-aggrandizement schemes. Politicians will have to act now and they will.

Politicians will impose tariff on imports from China, judging by the following article. This is not a solution to the problem of self-aggrandizement by undercutting the vast majority. But the tariff route is inevitable because myopic strategy is the name of the game in the democratic world.

With tariff, cost of imports will rise tremendously. The dampened consumer demand will further erode. The lost jobs will not return. American Conglomerates will suffer from declining profits. American investors will lose due to falling stock prices of these companies.

This may be why China and Japan continue to buy US Treasury bonds and the yield curve is inverted, contrary to wishes of Federal Reserve Board. The FRB will be bound to cut rates of interest, eventually, for this is the only solution to decrease the value of credits created by self-aggrandizing rulers (Conglomerates and politicians) by undercutting the vast majority of households everywhere. This is the solution recommended in my book, “Prosperity: Optimal Governance.”

Policymakers are not lowering short-term interest rates (despite contrary indications from long-term rates) perhaps because it serves their self interests to earn higher rates of interest on credits they have created on the rest of the society. They will lower interest rates only when panic-gloom-doom resurfaces as in 2001. Incidentally, that panic was created by reckless increases in interest rates in 1999 when prices were deflating, not inflating. Now panic-gloom-doom may resurface due to raises in interest rates during 2005-2006 when the inflation was moderate, though commodity prices were rigged up.

Sankarshan Acharya

Citizens for Development and Pro-Prosperity.Com
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Graham Says Democratic Congress Will Intensify `Pain' on China

By Mark Drajem and Brian Faler

http://www.bloomberg.com/apps/news?pid=20601070&sid=aj3ONYMQ48Hc&refer=home

March 9 (Bloomberg) -- Senator Lindsey Graham, who led an effort to impose across-the-board tariffs on imports from China last year, said the Democratic takeover of Congress will intensify pressure on China to raise the value of its currency.

Graham, a South Carolina Republican, said he is working with the leaders of the Senate Finance Committee to develop a new legislative package that would conform with the rules of the World Trade Organization, and still create ``pain'' for the Chinese ``when they cheat.''

``There is a growing resentment against Chinese currency and trade practices, and we opened that box,'' Graham said in an interview with Bloomberg TV's ``Political Capital with Al Hunt'' scheduled to air this weekend. ``Politics have changed in this last election cycle.''

Graham withdrew legislation that would have imposed a 27.5 percent tariff on Chinese imports. ``We pulled back because we don't want to pass a tariff bill,'' Graham said, adding that the measure was designed to get the ``attention'' of the Bush administration and the Chinese.

Graham's new effort seeks to address the threat to American workers and small manufacturers from surging imports. The U.S. trade deficit with China reached a record $232.5 billion last year. Graham and other lawmakers say that China's yuan is undervalued by as much as 40 percent, giving its exporters an unfair advantage.

Economic Populists

Graham, who has also signed on to measures this year to withdraw permanent normal trade relations with China and punish mistreatment of workers there, said the Bush administration could rely in previous years on House Republicans to kill proposals targeting Chinese currency policies. With Democrats in the majority, that bulwark is gone.

Under a Republican Congress, Graham and New York Democrat Charles Schumer forced a procedural vote in the Senate in 2005 on their tariff proposal. They got 67 votes for their measure, a level of support Graham said shocked them. With Democrats in charge, that support may have grown.

``The Congress has changed,'' he said. ``Democratic members of the House and Senate are running as economic populists.''

Representatives of the largest U.S. companies are trying to head off any legislation, arguing that trade with China has been good for the American economy.

John Frisbie, president of the U.S.-China Business Council, testified yesterday to the U.S. International Trade Commission that ``expanded trade between China and the United States has benefited the U.S. economy through increased exports, lower prices, and higher productivity.''

Frisbie, who represents Citigroup Inc., General Motors Corp. and other companies doing business in China, opposed Graham's efforts last year to levy tariffs on Chinese imports.

China also holds $350 billion of U.S. government bonds, second only to Japan, and any measure that forces China to raise the value of the yuan might backfire by upsetting financial markets and the Chinese, former Treasury Secretary Lawrence Summers told lawmakers yesterday.

``Putting a stick in your banker's eye is not a very good idea,'' Summers said at a Senate Finance Committee hearing.

To contact the reporters on this story: Mark Drajem in Washington at mdrajem@bloomberg.net Brian Faler in Washington at bfaler@bloomberg.net

Last Updated: March 9, 2007 14:24 EST