Chinese Credit Card Cut

Get Your Own Chinese Credit Card

Get Your Own Chinese Credit Card

Maybe you can get one directly from a Chinese Bank?

Original Image Source It is my belief that as a non-profit educational use, the use of this image constitutes ‘fair use’. The China Merchants Bank can be reached here if you would like to apply directly and bypass The Fed…

Well, for the second straight month China has reduced the credit limit for the USA on the Chinese Credit Card. From The Wall Street Journal:

we have:


WASHINGTON—China was a net seller of U.S. Treasurys for a second straight month in June, while overall inflows into long-term U.S. assets continued, the Treasury Department said Monday.

China’s holdings fell $24 billion to $843.7 billion, though it remained the largest foreign holder of Treasurys. That followed net sales of $32.5 billion in May.

The rest of the article is worth a read as it tells where the treasuries are going.

OK, so what have we got? China is a net seller of Treasuries. They are reducing the credit limit on the Chinese Credit Card. The wealthy folks of the world are buying more and so is Japan (in an attempt to keep the Yen from rising too much). In related news, China is now the number 2 economy in the world. Passing Japan and gaining on the USA.

What’s going on here is that the Chinese know their currency has to appreciate and don’t want the dollar exposure when that happens. While Japan wants to try to stop the appreciation of their currency by selling a load of it for Treasuries. (This works short term, but longer term the relative economic health dominates). For a while, this will be a ‘net nothing’. Then The Fed will need to raise interest rates at some point and the private demand for Treasury Bonds will turn into selling. When? That depends on when we start an economic recovery.

This means there is a very large inflationary risk being built into the dollar. We’ve got The Fed saying they will buy in $Trillion of bonds as the real estate portfolio runs out (as mortgages are paid off) and China now clearly dumping treasuries at about $250 – $333 Billion a year (given the two months run rates). So about 3 years they could be out of treasuries. (If following my ‘shorten the maturity’ strategy it could be done in 2 with reduced net sales but rotation into shorter maturities that then simply mature without replacement). The real estate portfolio will not run out that fast… nor is Japan going to be able to buy that fast for that long.

The bind begins.

I give it about a year for inflation to start kicking up. Measure it off of employment rates. When we’ve got unemployment down around 6% to 7% and The Fed starting to tighten rates, that’s the likely ‘lift off’ point. Between now and then we’re going to be trying to dig out of a recession with prices under some pressure. Before that time I’d expect to see resource price inflation as China starts buying more things like copper and coal. But…

To whom will they sell?

The American Consumer has been hitting the home equity ATM for the last decade or two to make ends meet. That’s now shut down. The personal credit cards are full. The job is not giving a raise (IF they have one…). And now the Chinese Credit Card is full too. Japan can’t currency manipulate to wealth against that tide and The Fed is already over a $Trillion of balance sheet and just trying to run off the mortgages (from that home equity ATM…) without causing a disaster (via soaking up the money into treasuries) and will not be interested in printing ANOTHER $Trillion just to keep the American Consumer loaded with debt to spend.

So we’re stuck with the hope that the Rest Of World will pick up the consumption. Can it? In the ROW we have Brazil doing well, and Chile, a little high end indulgence in the OPEC / Oil states, but they mostly just sink the money into buying assets world wide, not Chinese Trinkets. Japan is moving toward retirement and wants to sell it’s own electronics and goodies. And a large or growing domestic demand inside China has yet to show an impact. (And I doubt they would want many “happy meal toys”

So I’m left with the uneasy feeling that this does not have a good ending.

No, I can’t point at any particular “why”.

I just can’t see where the “engine of growth” comes from. The USA is on a government driven consumption binge (now focused on medical care and wealth redistribution / destruction) and the US Consumer is tapped out and facing a Demographic Bomb as the Baby Boomers retire so the new crop of workers will not have a lot of cash left over after paying medical care for everyone else.

Europe is trying to just hold everything together and get the PIGS cleaned up. (Portugal, Italy / Ireland, Greece, Spain) and I can’t see them developing a sudden love of Chinese Mercantilism.

It just looks like things are headed for a deadlock.

The optimist in me wants to embrace a scenario where the USA starts to grow again and jobs pick up with spending to follow and a virtuous circle of prosperity. But I know that I’d not start a business in the present conditions and if I did have one, I’d be looking at what staff to let go to pay new taxes on the remainder; not looking to add more to the burden on my back. So I’m quietly hopeful, but for no reason at all, and that makes it a fearful hope.

I hope I’m wrong.

But hope is not a strategy.

About E.M.Smith

A technical managerial sort interested in things from Stonehenge to computer science. My present "hot buttons' are the mythology of Climate Change and ancient metrology; but things change...
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31 Responses to Chinese Credit Card Cut

  1. Larry Geiger says:

    I know next to nothing about any of the financial stuff that you post. However, it appears, from what I’ve heard, that we are saving more than in the past. Some are certainly in debt, but is some of the spending that is not happening because many people are saving more? Seems to be true around here. Isn’t this a good thing long term? If so, how long is the term?

  2. Jason Calley says:

    As usual, you make very good points. Consider one more senario — and note that this is a “senario”, not a prediction! :)

    Assume for the sake of argument that the highest leaders in the US, all those corporate, fiscal and governmental big-wigs, have absolutely no regard for the long term welfare of the US citizen. Assume that the last act of any collapsing government is for the leaders to loot the country. Yeah, I know, hard to imagine, but just assume it is so.

    The only way for current leaders to continue amassing power and money is to keep the ongoing system going on for as long as they can. The huge amount of outstanding Treaury Bonds WILL lead to price inflation if the bonds are redeemed and the dollars are spent. China knows this, but China also knows that the US Federal Government has title to lots of valuable things other than our famous dollar printing presses. I would be amazed if the Chinese did not force an agreement long years ago to cover this situation. It is to China’s benefit to trade bonds for something other than dollars. Remember, dollars now are issued with what is effectively a very short life span. Use ’em or lose ’em.

    First and easiest to transfer to China as non-dollar payment for T Bills is intellectual property. Any idea how many patents have been filed by NASA, by Lawrence Livermore, by all the various governmentally funded research labs? Me neither, but it is a bunch. If you check the last couple of years, you might find that this has already started. One of the tip offs for me was when I saw a short news blurb that Bush Senior and his buddies had formed a company for the express purpose of expediting sales of surplus federal properties.

    Second easiest is existing military hardware — but that might raise eyebrows, so probably not too many public admissions of that. Maybe arrange those through a third party. The easiest to hide would be through Israel.

    Third — and I think that this will be a clear and unmistakeable sign — is the sale of mineral and timber rights in national forests, parks, and other Federal lands. Start with Alaska. No one pays attention to what happens in Alaska.

    Fourth, trade off infrastructure. Highways, utilities, especially water rights. This is a continuation of the techniques perfected by the IMF for third world countries. It’s our turn now.

    I am sure that there are fifth and sixth and seventh, and etc.

    Maybe I should invest in companies that make logging equipment, hard rock mining equipment, smelters…

    All of these non-dollar trades enable the dance to continue a bit more. Granted they prolong the dance at the cost of beggaring this and future generations, but as Keynes said, “In the long run, we are all dead!”

    By the way, Keynes was wrong, flat out wrong. We are NOT all dead in the long run. I am dead in the long run. He was dead in the long run. You are dead in the long run. WE are NOT dead in the long run. “We” lives on, at least as long as we have children, grandchildren, or even robotic heirs. “We” keeps going. Only a person who thought only of himself would justify stealing from future generations by the fact that he would not be around when the bill came due. I think that that famous quote from Keynes is what convinced me that the man was not to be trusted.

    Any way, as far as the US and China goes, think of a wealthy heir who has squandered his patrimony, (or matrimony, perhaps!) who is finally reaching the end of his credit lines and the bill collectors are mulling about. As long as the creditors will take an oil painting or Grandma’s necklace, the party goes on. Not for long, but for just a bit longer.

  3. E.M.Smith says:

    @Larry: Finance, like most everything else, is simple at it’s core, but has a lot of jargon wrapped around it. All it takes is some time to soak up the meanings and get used to the language.

    Yes, having Americans save more would be a good thing. BUT, at the moment, that means we’re spending less, so the economy slows on the consumption side. (And our government has decided to pick up the slack by spending for us…) The problem is that at the end of the day, the government is going to tax us to cover that government spending. So what the people are adding to their savings, the government is taking away.

    But yes, we have lower consumption and higher savings and that’s a good thing. It takes a few years for that to have an impact. The bad news is that government actions are going to negate that benefit and then some. Oh Well…

    So at the end of the day we still have an economy burdened by ‘weak spending’, one where a $Trillion of government stimulus did nearly nothing (with the possible exception of preventing a financial ‘crisis’ by stretching it out). Yet the consumer has not the capacity to buy much more. Their “wealth” is gone and then some. The banks, who had funded excess spending with lush credit lines, are now holding back. The Home Equity ATM that kept the game going from the last recession has ended. Loads of folks have no jobs and the machine tools were sent to China. Now China, who loaned us about a $Trillion to buy stuff, has decided to run down our credit line…

    So I’m just looking at this and wondering: From where will the money come to buy things? Where is the demand side funding? And finding none.

    Savings eventually adds to investment in production. It feeds the supply side. And while that’s good, I’m not seeing how having another car company would let me buy a car…

    @Jason: Patents expire after some short number of years. 18 IIRC. So only recent patents really matter. It’s easy to get them, just buy the distressed companies that hold them. Watch for China doing ‘mergers and acquisitions’…

    China is already doing ‘treasuries for stuff’ swaps including a 20 year oil supply deal with Brazil, paid for with a basket of U.S. Treasuries. $200B IIRC. So they are not only net sellers, they are also bartering them away. The spending spree has been focused on oil, coal, minerals and metals (so far that I know of…). We don’t have much else they would really want. We already sent them the entire patent library on CD… So they could know what patents to not infringe… in theory…

    The point on Keynes is an interesting one…

  4. boballab says:

    Jason in one of his points brought this up:

    Fourth, trade off infrastructure. Highways, utilities, especially water rights. This is a continuation of the techniques perfected by the IMF for third world countries. It’s our turn now.

    China has been very interested in picking up American shippng infrastructure for some time now:

    The Chinese state-run China Ocean Shipping Company (COSCO) shipping firm, a tenant at the Port of Long Beach since 1981, had been negotiating with the Port for additional terminal space for the past few years. The expansion of Pacific Rim trade and the deep-water and rail infrastructure in the Long Beach-Los Angeles area has resulted in a substantial increase in volume. The Port of Long Beach planned to build and to lease to COSCO a $200 million container terminal on 145 acres of former Navy property, using a 10-year lease with additional five-year options. Annual lease payments, estimated at between $13-15 million, or about $100,000 per acre would be consistent with rates paid by other Port tenants. However, on April 21, 1997, the Long Beach Harbor Commission voted to cancel the lease with COSCO.

    This goes along with how the Chinese run the two ports on the Panama Canal in 1999. They figured it out a long time ago, you control the US transportaion infrastructure you can control the US to a point.

  5. Ken McMurtrie says:

    Hi EM.
    Thanks once again for a good article, your understanding and ability to express yourself are impressive.
    One comment, you say:
    “The optimist in me wants to embrace a scenario where the USA starts to grow again and jobs pick up with spending to follow and a virtuous circle of prosperity. But I know that I’d not start a business in the present conditions and if I did have one, I’d be looking at what staff to let go to pay new taxes on the remainder; not looking to add more to the burden on my back. So I’m quietly hopeful, but for no reason at all, and that makes it a fearful hope.”

    I tend towards cynicism and pessimism these gloomy days GFC, AGW and never ending wars, so I have to ask – can you visualise or verbalise any scenario that will turn this financial mayhem around and actually enable/trigger the USA start to grow again?
    (This is, I suppose, really a rhetorical question.)
    Regards, Ken.

  6. Jason Calley says:

    Hey Boballab, check out the new port facilities built on the Pacific coast of Mexico at Ciudad Lazaro Cardenas.,-102.178345&spn=0.221775,0.298691&z=12

  7. E.M.Smith says:

    The scenario is fairly easy. Getting it to happen is hard.

    Republicans (filtered for Tea Party affinity) get elected in droves in November. The Democrats are so chastened by this, they don’t do anything stupid during the lame duck session.

    Over the next 2 years, nothing much can get done by Obama and the Socialist Cadre. Then the clock runs down to a new non-Dim president and they set about undoing Obama-care and repeal the tax increases. The overweening regulatory burden gets rolled back.

    The Fed stops printing money like crazy and just lets the real estate loan portfolio run out instead.

    The income tax code gets repealed and replaced with a 10% flat tax. Oh, and let a couple of states go bankrupt and repudiate their pension funds. That would chasten union demands a mite… Though it would be better to just ban unions from government employment. No government can ever say no to a union full of voters, so it’s a doomed combination. Short of that, just have all union contracts subject to a vote of the people… At the same time, I’d be willing to have all public employment pay rates published on the web.

    A limit on government to 25% of GDP total for all forms and levels would be nice to have.

    Basically, get the government boot off the neck of Plain Folks and they will do just fine.

    Other nice to do things would include putting a large tariff on Chinese goods and telling them the tariff comes off when they drop the mercantilist policies. It would also be nice to start building coal to liquids plants as fast as possible and tell OPEC their money spigot is getting turned off too. In short, keep the serveral $Billions per month we send to both of them here at home instead.

    None of that (other than the November vote) has a hope in hell of happening, though.

  8. boballab says:

    Your scenerio fell apart here:

    The Democrats are so chastened by this, they don’t do anything stupid during the lame duck session.

    If losing dear Teddy’s seat to the GOP wasn’t enough to wake them up, then this November won’t either. That loss caused the House to deem that the Senate version of Obamacare was voted on, what do you think losing the House is going to do? I see a lot of “deeming” coming between Nov 2nd and Jan 2011 when Nancy Pelosi gets the boot from the Speakership.

    Heaven help us all if the GOP wins enough seats to take over the Senate too, because that will realy trigger some impressive contortions by the Dems to get a bunch of crap passed.

  9. E.M.Smith says:

    Note my last sentence…

  10. boballab says:

    But we don’t live in hell……yet. :)

  11. Ken McMurtrie says:

    It seems we are pushing boundaries here of emotive issues. Not so good. Especially if the political aspects become personal.
    EM. You mentioned tariffs for Chinese goods. I think so too, but its a bit late. Also, the Chinese goods often come from Western businesses outsourcing and setting up in China. So we would damage these businesses, then, maybe they deserve it. On the other hand the local shareholders would suffer. And so the ramifications multiply.
    Whatever method(s) are chosen, it comes back to promoting local manufacture and services, rebuilding the capability of US industries and creating employment. It doesn’t have to be full employment, but sufficient for the workers to create useful and meaningful products, get them off welfare or at least feed themselves.
    Your idea “coal to liquid” etc to reduce overseas dependence is positive. Most alternatives to fossil fuels make some sense because no matter how much access to overseas supplies is achieved by sacrificing money and lives, in the long term, we have to change our dependence on oil.
    How much might we have achieved if we had spent millions on developing and encouraging alternative energy sources, instead of letting the oil industry control things and stifle alternatives.
    Anyway, does this approach indicate that you are not a supporter of globalization? I have never been and see it as a means to an end, not to help other countries develop, but to increase personal and corporate wealth. In the meantime reducing local production to a standstill.
    Regards, :-)

  12. Jason Calley says:

    E.M., thanks for the info on China trading “treasuries for stuff.” I had missed that, but it makes sense.

    As for “None of that (other than the November vote) has a hope in hell of happening, though.” I have to sadly agree, mostly because it has been done before and did not work then. The 1994 “Contract With America” election was essentially the same thing, but once the Republicans got elected, they failed to follow through and the “contract.” Now the Repubs are raising up Newt again. After all, he has the most experience in pulling off this exercise! Oh well… I am wandering off the subject of China/US credit status.

    Boiled to its essence, here is what we have:
    Wealth can only be created by mining, agriculture and manufacture. Creative thinking does not create wealth, but does at least facilitate its creation through the processes above. For the last three decades, China has been increasing its power to create wealth. We here in the US have been diminishing our ability to create wealth. Those who do not create wealth but who wish to acquire it, can only trade, borrow, or fight. Borrowing is coming to an end. Where do we go?

    My fervent desire is that as a nation we would begin again to create wealth in surplus, but the people who control the corporations, banks, armies and yes, even the elections, continue to make huge profits from the present system. Where do we go? Things that can’t last forever, don’t.

  13. David says:

    We are in a global debt deflation cycle. What can Japan expect by “easing” when 5-year bonds are yielding .28% and 10-year bonds a mere .95%?

    Every country wants a cheap currency relative to the others to help fuel exports even as demand is falling (the savings rate in Japan has fallen to 1% so not much local consumption stimulus there either) and or internal policy is to try to produce more locally. Mathematically that is impossible, and the global imbalances keep piling up as a result.

    E. M. you stated…”I just can’t see where the “engine of growth” comes from.”
    Hence I think your uneasy feeling. We have debt, consumer debt, worldwide govt debt and local state debt.

    If by some miracle we get down to even 7% unemployment and both national and foreign demand for treasuries subsides, sending intrest rates up, this will have further deflationary pressure on housing and consumption in general, rapidly killing any borrowed expansion, and so as you say, the govt debt will still be there.

    In all this I understand how the govt gets money supply to the banks, but is it not pushing on a string? Inflation can only happen when the velocity of money accelerates, and until they just drop the money from Ben’s helicopter into your backyard I am not certain how this happens
    if the Banks lend responsibly and consumers dont want to or can not afford to spend….????

  14. As always: In the end what really backs an economy is the production of salable goods. Printing paper it is not enough.
    An economy runned a la Chavez can´t work more than two years before it begins to collapse.

  15. David:

    Didn´t you see it falling from the sky?….It´s raining all the time!

  16. KevinM says:

    How about a Chinese civil war scenario.

    We talk about how we feel about China’s merchantilism, and how it effects our American lives. At about this stage of economic development, US industry had a run in with Alf Landon and friends. How will second generation urban Chinese deal with global economic collapse?

    Would it be Ironic for the Chinese government to be overthrown – by communists!

  17. E.M.Smith says:

    @Ken McMurtrie: I’m ambivalent about globalization. The reason for a tariff matters. I’m NOT advocating them to “promote” American production against a LEVEL playing field. I’m advocating them as a “Countervailing Force” to market dislocations. China has strongly mercantilist policies. Those give it an unfair competitive advantage. We ought to apply just enough tariff to offset that advantage or get it removed.

    FWIW, my core philosophy can be summed up as “Be A Mirror”. China wants all intellectual property handed over to set up shop? We ought to demand the same of Chinese companies doing business here. COSCO wants to buy up key port facilities? What does China let us do there?… So as a first blunt cut at ‘being a mirror’ one can simply say “Your mercantilist policies cost us about 20% (or whatever) so that’s the tariff you face. Policy can change and so can the tariff.” None of this “Heads You win, tails I lose.”

    Yes, it would whack the folks who packed up their machine tools and factories and moved them to China. They can always move back ( IF China lets them… ) and in the future other folks would have something to think about. Note that this would not impact folks who relocated to India, for example. India has currency float and less predatory mercantilism. Down in the weeds: One can have a tariff gradually scale in at 5% / year to give folks time to adjust…

    BTW, we need to do ZERO “research and development” to start a coal to liquids or gas to liquids program. It’s in production now all over the world. We just need to do it. (Ongoing R&D for improvement at present rates would be of use, but does NOT stand in the way of ‘doing it’.)

    @Jason Calley: I think there may be some other minor forms of wealth creation, but they could be taken under the heading of ‘manufacture’ with a wide definition. (For example, a fine painting or a computer program that predicts accurately where to find oil. Both could be seen as forms of ‘manufacture’. Then there is the grey area of wealth preservation. Does a fire department that prevents homes burning ‘create’ a higher level of wealth?…) but in essence, yes.

    And it’s that last part that has me worried. “Things that can’t last forever, don’t.”

    @David: BINGO! The Fed is in a race condition with velocity, but no one is taking actions to change that velocity. Just putting more into the banks vaults to ‘re-capitalize” them. In the end, each home needs an owner, ad we have the Demographic Bomb about to move into nursing home rooms. Who will buy the new homes when each kid in America is inheriting one already?… Who will buy the new TV or car when they have 4 already, and no job.

    @Adolfo: Chavez only survives due to the large buckets of oil money he gets. A coal to liquids program would put him under pronto.

    @KevinM: Don’t see that in the cards. China is doing too well to collapse that way. Much more likely would be a border war with Russia or India that gets out of hand and turns into a regional catastrophe (all are nuclear powers) or a North Korea moment of supreme stupidity that also escalates to a regional nuclear event. Short of that, the folks in China are just loving it right now and doing a fine job of spreading their dependency away from the USA onto the ROW. So while it’s an interesting thought toy, I don’t see it as likely.

    More likely, IMHO, is a collapse of the US Government into a bit of dictatorship vs anarchy internal food fight. Still not very likely (yet…) but more probable than that the present winner would have that kind of issue. (Basically, we get to hell in the handbasket first at present trends.) Even more likely is a blow up in the MIddle East with a nuclear exchange of some sort between Israel and Iran. Then all hell breaks lose and we end up with Armageddon (as in the biblical story) with Russia, Muslim States, EU and USA all converging on Megiddo. I give it about 4 years at present trends. (And I really hope trends change, soon.)

  18. David says:

    Adolfo Giurfa stated…

    Didn´t you see it falling from the sky?….It´s raining all the time!

    (-: Funny thing about that. Water is a invaluble resource. Without the current level of CO2 in the atmosphere ( about 390 vs the 280 before the industrial revolution) crop production worldwide would be down 12% to 18%.
    I have been trying to gently prod our esteemed host to apply his skills to put a monetary value on the life giving gas our govt calls a pollution.

  19. David says:

    A significant part of the the demographic bomb about to impact the USA is the pension crisis with more unfunded trillions.

  20. E.M.Smith says:

    @David: Simple. Take global ag production and multiply by 12%, convert to dollars. A google ought to turn up global ag value. Go for it… is a start…

    I did a calculation somewhat like that once in a comment on WUWT. The hardest bit was finding the wood prices quote…

    IIRC it was a couple of $Trillion all told, so a few hundred $Billion per year thanks to CO2. But that understates it due to the knock on effects (what is the worth of forgone wars and lives saved?)

    Also, I heard a statistic of $200 B of unfunded retirement mandates for the USA. Per year. Yeah, “that’s gonna hurt”…

    About $1000 per head per year. And I think THAT is even understated. So a ‘few thousand’ per family. Not including health care… on top of their own present needs and their taxes for everything else… Yeah, needs a tighter analysis, but still…

  21. David says:

    Yes the WUWT comment was from me and I appreciated your response. At the time I was working full time and raising my two youngest kids 35% of the time.

    Now I am retired and yes, I could come up with a rough estimate which you did quite rapidly on WUWT. However I would be preaching to the quire and having no degree in economics or the sciences, would have no real credibility to address the need I perceive. Right now there is a political disconnect between the developed world and the yet to be developed in regard to CAGW which was probably the principle cause of failure at Copenhagen. The only way for the political proponents of CAGW to further their agenda is to offer additional monetary compensation to third world countries for the harm inflicted on them by the evil capitalist spewing the pollution CO2.

    I would like to see this addressed in advance by credible economist. I strongly believe the reverse is true and CO2 has been a hugely net positive for all countries through its well established beneficial effect on all plant growth. To often skeptics are placed in a defensive position trying to refute literally hundreds of poorly done studies predicting the next CO2 induced disaster. A well written and researched report on the realized and future benefits of CO2 would be a powerful ally, giving ammunition to the politicians trying to resist the large scale social changes advocated by the political left advancing CAGW as the reason necessitating statism on a worldwide basis. Such a report would need the following…

    An estimate of the current worldwide food, clothing, and wood production, including food for livestock, with monetary value included.

    An estimate, based on the many available CO2 studies, of what these same production goods would currently be if CO2 was still 280 PPM.

    An estimate of how much it would cost to bring the lower production of an 280 PPM CO2 world to current production levels of a 390 PPM CO2 world. This would include a straight line cost analysis based on current production costs in all areas, as well as an estimated inflation cost based on additional demand for more land, more water, more fertilizer, more labor, more machinery costs etc; all at higher costs due to greater demand for said resources. This would add several percentage to the direct line cost estimates.

    A further estimate of the future, based on additional CO2 up to whatever level is reasonable, keeping in mind that any adverse warming effect decreases exponentially, while the benefits continue to rise in a more linear fashion.

    Ideally this would be broken down by country before totaled.

    And finally, some comments on the social pressures you mention that a lower CO2 world would have, potentially resulting in social upheavls or revolutions and international military conflicts.

    My doing this would have no real effect, even assuming I did an excellent job. If you have no time in your busy world perhaps a prod from you to a Professor McKitrick could get such a project rolling. I could see this as an excellent masters thesis for some young PHD candidates also.

    Sincere appreciation for all that you do.

  22. David says:

    A further value of such a study is to short circut the devisivness even a failed Copenhagen produces. Pointing to the developed world as greedy capitalist doing uncompensated harm to the third world perpetuates animosity between nations, even if the CAGW ambitions are not realized.

    Such a study would perhaps have the opposite effect.

  23. Jason Calley says:

    Interesting short article re China’s move away from Treasury Bonds.
    This is the largest game of Musical Chairs ever.

  24. David says:

    Sorry to be so off topic. However I feel such a paper as I described in my “August 18, 2010 at 3:50 am” comment would have great value. I am not a teacher and so I am not handing out an “assignment”. However if you agree concerning the potential value perhaps you would have an idea of who or whom may be intrested in such a paper.

  25. E.M.Smith says:


    Don’t know who would be ‘right’ for it. I may take another whack at it and see if I can tighten it up some.

    The basic problem with all such papers / stories is that the are quite common in economics and all amount to “Given these conclusions what assumptions can we draw?”. While that’s a fine game to play, it never really ‘proves’ anything.

    So, do you assume folks just starve to death and they are ‘lost productive capacity’ or do you presume they will attack their neighbors in a broad war, so we have net wealth destruction? Do you assume as 20% more timber is grown per year that lumber prices are static, or do you use dynamic scoring and say lumber prices drop? If so, what elasticity do you assume?

    It all comes down to assigning probabilities to things that can not be known and assigning economic certainty to factors that are very uncertain (price elasticity of supply and demand for those woods most improved by CO2 vs the price elasticity of the demanders, for example)

    It’s almost certain, for example, that adding 20% more wood products will reduce the price of wood products all else held constant; yet nothing else IS held constant. So if you do hold all else constant, you know it is not a true answer; and if you don’t hold all else constant, then you know the answer depends on the assumptions you chose.

    Yes, it would be interesting to simply look at it with a static scoring model, or perhaps do it in simple direct ‘global tons’ that dodges the price issues. But the impact is lost from a non-dollar analysis and the truth is lost from a static scored model.

    Is natural gas $4 / unit or $12 / unit? It’s been both recently… Oil $120 / bbl or $60 / bbl or the present $80ish? Do you find the net present value using a 4% cost of funds or the 0 to 1/4% present Fed Funds Rate? Or perhaps the longer term 8% value?

    The truth that we know is that we get 10% to 20% more agricultural ‘stuff’ thanks to CO2. Once you add prices and secondary impacts, it becomes an exercise in creative assumptions.

  26. David says:

    True the assumptions on supply and demand price will vary, but they appear to me to dominate in one direction. The more labor put into a product the more expensive it must be. Additional CO2 allows more product in less space with less labor with less materials needed to produce the end result.

    I was thinking Ross Mckitrick (or his graduate students)would be excellent for such a study. Have you ever communicated with him. Do you see such a study as beneficial against the CAGW political agenda?

  27. E.M.Smith says:

    I’ve met Ross once. Nice fellow and very bright. I could easily see an econometric study of the benefits of CO2 as something for a student to work on. Might even get a Masters Thesis out of it if they worked it hard enough. Comparison of net utility increase and net utility decrease from both positive and negative externalities of CO2 in agriculture. Yeah, that’s complicated enough ;-) Add in a spectrum of scenarios with different base assumptions and run with it.

    Would probably work best for a Ag Econ major, though, as they could work in the field work with CO2 enrichment in particular crops and have the ag background to carry it.

    Like I said, I’ll likely do a better version of my comment at some point. Just not right now…

  28. boballab says:

    Well if the AP report that came out today is right get ready to bend over and kiss your assets go bye:

    Bernanke’s options down to comforting words

    Economy is teetering and central bank’s usual tools aren’t working

    The Fed chairman will speak at 10 a.m. EDT, less than two hours after the government spells out just how fragile the economy is. The Commerce Department is expected to report the economy grew at an anemic annual rate of 1.4 percent from April to June. Growth in the current quarter is shaping up to be just as weak.

    As if the 27% drop off in existing home sales and the 12% drop off in new home sales wasn’t bad enough we are about to get another quarter of dropping growth! With those problems and the thing people are pinning our economic hopes to is that Bernacke can whisper the right sweet nothings?

    All I got to say is thank god they decided to make the announcement and have Bernacke speak on a Friday. With a weekend with no active trading the market might not drop too far. Just imagine if they did this on a Monday what the stock market would look like by the end of the week.

  29. E.M.Smith says:

    The pattern has been: “Bernanke talks, market tanks”

    I see no reason to doubt that will happen again. I’d expect a rebound a day or two later, though.

    FWIW, The Fed has a whole load of options left. One trivial example: They can change the reserves requirement. Anywhere from 0% to 100%. That can make the money supply anywhere from infinite to ‘nearly nothing’. (At 100% they can lend zero money. At 0% the ‘fractional reserves banking’ system says that the banks will create infinite money via re-lending.

    (I deposit $10, they loan it to GE, who deposits $10, they loan it to Joe, who deposits it, they loan it… repeat infinitely.

    Another? They can expand their balance sheet an infinite degree.

    Another? They can set negative real interest rates (or any other rate they like).

    How about simply printing a few $Trillion and ‘rebating’ it to everyone.

    There’s more, but I think you get the idea.

  30. Ken McMurtrie says:

    Hi EM,
    I would like to contribute a link quoting the FED Reserve as basically admitting loss of control. I haven’t followed this up as it is too deep for me. However it may be of interest to you.

    “The Fed Has Admitted That It Has Totally Lost Control of the Crisis
    August 11, 2010 • 7:07AM
    In its Aug. 10th meeting, where it escalated the hyperinflationary bailout, the Federal Reserve basically admitted that it has totally lost control of the financial crisis. With Kansas City Fed President Thomas Hoenig dissenting, the Fed vowed at the meeting to continue buying securities — reportedly, U.S. government debt — and reneged on its pledge to reduce it $1.4 trillion securities holdings—much of it mortgage-related toxic waste. The Fed will pour billions (up to $200 billion) of new non-existent money into buying new assets, because there is no recovery. Or, in their language, “the pace of recovery in output and employment has slowed.”

    Hoenig, who had been the first of the Fed regional presidents to support reinstating Glass Steagall, opposed the Fed’s reversal of its stated policy that it would bring down the $1.4 trillion in assets holdings by $200 billion. Another big bailout—with no need to ask the Congress or the American people—and another massive jump in hyperinflation.”

    This is a biassed source but that doesn’t mean the facts are not correct.
    Regards, Ken.

  31. E.M.Smith says:

    @Ken: The only issue I have with that statement is the notion that The Fed ever had control to lose…

    They had a proposed “fix” that didn’t. I would not count that as “loss of control” so much as “failure to ever get any” (control, that is… ;-)

    The basic problem is that the economy is made of a few billion people (we are now a modestly integrated global economy…) who all make independent decisions and The Fed has very limited impact on a very small part of them. So whatever “control” they have is weak, dilute, and ‘at a distance’. So jigger and thump as they might, if I’m out of a job and trying to figure out if I can buy a jug of milk for my kid today: I will not be refinancing my home, buying a car, going to the movies, having dinner out, or even putting new tires on the car.

    The person who changes that is the business who hires me. And the Obama administration has so screwed up the business climate that no sane business owner will take on THAT risk unless there is NO other choice. So we sit in a ‘jobless recovery’ (that is no recovery, just a failure to plunge more…) and The Fed thinks they may have lost the control they never had.

    So while China stops buying treasuries, The Fed starts buying them (as the realestate portfolio runs off, which it’s doing at a fair clip) and the end game is just that instead of the Chinese monetizing our debt via loaning us money The Fed monetizes the debt via loaning us money. (And instead of Joe Sixpack buying more Chinese stuff we have the US Government buying more junk bridges to nowhere and “shovel ready” projects digging and filling in holes.)

    In both cases we have no net wealth creation in the USA as our productive capacity is shipped over seas where there is now less “Sovereign Risk” associated with capital investments and vastly lower tax rates.

    The Fed can not stop that, either. They are not in charge of tax policies.

    Just like a sleepless junky can stay awake with a shot of Meth, they do so at the cost of continued decay of their fundamental strength and health. So are we getting our fix of “stimulus” and watching our economic muscle and guts rot. The Fed can provide some ‘stimulus’ and it can provide some ‘pain killers’ via low interest rates. The Fed can not make industry grow nor make tax leaches stop sucking the blood out of our body economic. And they never could.

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