Tuesday, February 1, 2011

The good news is that China is no longer our biggest creditor...

Oil prices fell back slightly today after Egypt’s President announced that he intends to retire making it a real possibility that Egypt and its oil pipeline will make a peaceful transition to a new government. Egypt is a choke point for 30% of the oil going to the US and is even more critical for Europe as they refine a tremendous amount of oil as well.

Meanwhile the King of Jordan fired his entire government in an attempt to quell unrest over skyrocketing food prices. The food crisis is only going to get worse across the developing world as most of the countries that provide cheap labor for transnational corporations have been importing a large percentage of their food. Even in countries that have adequate supplies or even export food the sudden jump in prices creates unrest as food consumes half the income of the majority of the population even at normal prices.

In the US, the Dow closed above 12,000 for the first time in almost three years, this happened supposedly on good economic news. In Europe however they are concerned with USD inflation as the Federal Reserve continues to pump money into the system. The Fed has now passed China to become our largest creditor as they continue buy Treasury bonds on the open market and now hold 1.1 trillion compared to China at 896 B and Japan at 877 B.

The Fed is not even halfway through its QE2 buying spree and when it is scheduled to end in June they will have holdings comparable to China and Japan combined. I’m not sure China still holds that much in Treasuries as they have been quietly selling for some time and aren’t all that transparent in their dealings. In case you’re wondering where the Fed gets all that money, they go through complicated accounting gymnastics to pretend they don’t just print it.

So you see why some people are worried about inflation. On the other hand the numbers for “sticky” inflation continue to trend lower suggesting a real danger of deflation. “Sticky” is a fancy economists’ term to refer to prices on things that don’t change easily which should give a better indication of what is really going on with the economy.

Even without including real estate, which is pretty much falling through the floor, the trend for “sticky” prices is still bad. That’s not to say so called volatile prices (you know those things you need to live like food and fuel) aren’t going to sky rocket at least on the short to medium term, almost certainly they will. But the point of the “sticky” trend isn’t about prices but that the economy isn’t doing well, in case you hadn‘t noticed.

So despite reports that manufacturing is way up (I’m not sure those are real numbers anyway) and recovering sales in automobiles and such, I wouldn’t start humming “Happy Days are Here Again” as you go out looking for a job. Even if we started creating jobs in a big way (by normal standards), the hole Bush put us in will take a decade to climb out of as we aren‘t even holding even with population growth.

Oh and in case you were wondering, income inequality between the haves and have mores in the US and the rest of the population is much worse than it is in Egypt. Of course we started out at a much higher level of average wealth and have a long ways to go to have as many people in desperate poverty as in Egypt but that is the trend and it’s accelerating. We are already back to the 1920s in inequality and heading rapidly toward the times of Charles Dickens and beyond. Next stop feudal Russia.  www.prairie2.com