Monday, April 5, 2010

Knight takes steel mill, the checker players don't know what hit them

Something totally unexpected has happened that can be a major boost to the US economy for at least the rest of the year. The world price of iron ore has doubled, literally overnight. Since the US produces a lot of iron ore this is good news. But wait there’s more; most US steel mills sit idle; the ones still in operation are vertically integrated meaning they mine their own iron ore and the world price of ore doesn‘t matter. The jump in iron means the world price of steel will be at least one third higher and suddenly US steel is competitive again.

The reason for the price jump is the end of a forty year worldwide agreement to set the ore price for the year based on the first supply contract signed each year. This was always a race to the bottom and this was how Japan could buy iron ore and coal, ship them to Japan and ship manufactured goods to the US driving US companies under. Japan is not happy that this system has ended.

The end of this pricing system was caused by another player in the world market that used this same Japanese principle of cut throat economics and did it even better. The Peoples Republic of China who now produces five times the steel that Japan does and is now the big dragon on the block. Why would China change a system that has made them a super power? China can afford to be generous with its trading partners since it has two trillion USD worth of foreign currency reserves. It has also been going around the world and buying up iron mines with surplus USD that it didn’t know what to do with, so the price jump doesn’t cut into them nearly as much as it does Japan.

It also does a favor for China’s new BFF Barrack Obama who will be able to produce the jobs he needs to get Democrats elected in the fall. China is also indicating that they are likely to do away entirely with pegging their currency to the USD. This is not to make you think that all of a sudden The Peoples Republic of China has ceased to be Stalinist regime bent on our destruction, it has not. But the Chinese leadership is pragmatic and thinks in the long term.
China’s senior leaders lived through the Cultural Revolution and understand the inevitable disaster that comes from turning things over to extremist ideology. They doubtless find Obama a breath of fresh air after Bush and don’t want the Neo-cons back in power. China will of course be looking to the long term to take any advantage and their throwing us a bone does not fix any of our real economic problems. This is a tourniquet and not just a band-aid but real surgery will be needed from the next Congress if we are to survive as a democracy. There is now a good chance that we will have “yes we can” instead of “Hell no you can’t”.


CrisisMaven said...

Even-handed comment. That an undervalued currency boosts exports and harms trading partners via a kind of "dumping" effect is largely a myth. What a nation "gains" in currency undervaluation it must on the other hand shell out in higher imports prices. Since in a globalised exonomy exported goods are built with foreign implements and machinery, since workers buy also foreign products and demand their wages to pay for them, most of these alleged gains cannot materialise as they are kept in check by the unnaturally high prices for imports. No one can have their lunch and eat it. Trade envoys invoking the dumping claim when it comes to alleged currency undervaluation really are trying to do the same thing as a tariff would achieve but resort to bullying as tariffs are prohibited by the WTO they themselves signed! While the're not Stalinist anymore though won't mean they can't collapse - neither was the Soviet Union in 1989. There will be much more hardship soon with a looming Chinese collapse bigger than the Soviet Union's.

prairie2 said...

Sorry Chris but there is no natural balance of trade hence the huge trade deficit. Workers have almost no influence in the equation. The flat earth traders don't play by your rules. China is in no danger of collapse, there is no comparison to the Soviets other than they started out as Communist. You can make the case that they aren't true Stalinist but not if you're waiting to be shot as an enemy of the state. They sell your organs to the highest bidder so that makes them capitalists. The Soviets were short of everything and couldn't make anything work. The Chinese make top shelf everything and have huge stockpiles of all commodities. Not that they don't have a certain amount of instability. Anything "could" happen. Thanks for the comment, Bruce

volaar said...

Prayer works, Bruce...but for me prayer is an action taken on behalf of a particular outcome. That action can be anything personally intended to manifest the desired outcome.

Maybe someone besides the fundies and nutjobs are taking action -- finally. Hope springs eternal.

On an unrelated note, my wife told me that blowing glass (a secret obsession of mine) almost always results in some type of pulminary disease...true? False? Don't know? If true, can one mitigate and still enjoy the craft? How?

Enjoy your missives!

macnow said...

Six centuries ago, a mighty armada of Chinese ships crossed the China Sea, then ventured west to Ceylon, Arabia, and East Africa. The fleet consisted of giant nine-masted junks, escorted by dozens of supply ships, water tankers, transports for cavalry horses, and patrol boats. The armada's crew totaled more than 27,000 sailors and soldiers. The largest of the junks were said to be over 400 feet long and 150 feet wide. (The Santa Maria, Columbus's largest ship, was a mere 90 by 30 feet and his crew numbered only 90.)

Loaded with Chinese silk, porcelain, and lacquerware, the junks visited ports around the Indian Ocean. Here, Arab and African merchants exchanged the spices, ivory, medicines, rare woods, and pearls so eagerly sought by the Chinese imperial court.

Seven times, from 1405 to 1433, the treasure fleets set off for the unknown. These seven great expeditions brought a vast web of trading links—from Taiwan to the Persian Gulf—under Chinese imperial control. This took place half a century before the first Europeans, rounding the tip of Africa in frail Portuguese caravels, 'discovered' the Indian Ocean.

Despite the strength and prosperity that marked their empire, Ming emperors deliberately chose not to try to colonize lands beyond the Middle Kingdom.

With unrivaled nautical technology and countless other inventions to their credit, the Chinese were now poised to expand their influence beyond India and Africa. Here was one of history's great turning points. Had the Chinese emperors continued their huge investments in the treasure fleets, there is little reason why they, rather than the Portuguese, Spanish, Dutch and British, should not have colonized the world. Yet less than a century later, all overseas trade was banned, and it became a capital offense to set sail from China in a multi-masted ship. What explains this astonishing reversal of policy?

***For me this says, this is a whole different mindset that is a lot more complicated then what is first thought thru the western lense.

The Chinese have proven time and time again, en mass, they can serverly restrict ambitions for decades, or even centuries. Unless their is severe embalance (Tinamin Square, food rights of 90 etc.). This is not a severe time of imbalance for them on large scale, it is for us, not them.

They are not doing Obamas or the West's bidding they are...

...being very pragmatic.

Like the question above, I have heard many ideas, from PBS shows to scholars etc.; but what made sense to me was the fact that the Dynasty rulers during that time new that the more expansion would lead to more imbalances of powers toward the Warlord/Cheiftans on the coast etc., so they made the pragmatic decision to eschew the trappings of untold wealth over the horizon and simply deal with the empire at hand.

How many Western "Master of the Universes" could pull off such a choice?

prairie2 said...

I met one once that was 90 and still doing it, so I would say not(you do need a vent hood). Lead glass is dangerous however and extra ventilation and air scrubbers are required.

Ronmac said...

Hmmm...lots to ponder here. But on a different tack I want to take issue with an earlier statement: "The Soviets were short of everything and couldn't make anything work."

That's not entirely true. During WWII the Soviets dismantled their factories at the onset of the Nazi invasion and moved them eastwards in the Urals. Within a couple years the Soviets were turning out tanks and what have you by the tons. They were even outproducing the Nazis who had control of most of the production capacity in Europe for crying out loud.

prairie2 said...

Iron fisted central planning for an economy works fine during a desperate war (the US was doing the same thing) The Soviets refused adapt to peace and things fell apart. China has central planning but in a pragmatic way. The US has central planning but by fascist think tanks for their own purposes and that's why we are falling apart. We have more and more in common with the Soviets.

Ronmac said...

You're right...the Soviets had difficulty letting go of their wartime mindset at the end of WWII but maybe for good reason. Unlike the U.S. the Russians had to beat back three million Nazis who had invaded their their country in 1941. In the immediate aftermath, the cold war set in and once again the Soviets found themselves facing a hostile army on its borders in the form of NATO. So who could blame them.

prairie2 said...

The Soviets didn't spend as much on their military as Reagan would have everybody believe. Their economy was so poorly run that they couldn't keep it going. By the seventies the Red Army had to grow its own food to keep from being hungry. The light bulb factory had to barter bulbs to other state enterprises to get what it needed and so on. The Soviet planners wouldn't let go of a failing system because it worked well for their class just as the ruling class here does not want to give up what they are doing. China's ruling class is also afraid of its middle class but see growth as a survival technique. The ruling class here see shrinking the middle class to zero as a good thing and perpetual war as a way to keep everybody in line just as the ruling Soviets did.