Inflation and the coming trade war.

            It has been well established that China is purposely undervaluing its national currency, the Renminbi, with the Yuan as its principal unit. China's reason for doing so is quite simple. By undervaluing its currency, China keeps the cost of its goods and cost of labor artificially low giving it an extreme competitive advantage over those countries with a free floating currency. World governments, especially those of the U.S. and Japan, have been trying to persuade China to allow its currency to rise with market forces for years now, with hardly any luck. Well it now seems these governments have taken the philosophy; if you can't beat them, join them.

            The Japanese government has taken unilateral action to hold down rising appreciation of the yen and has promised future action if needed. Both the U.K with its pound and the Swiss with the franc, have taken aggressive measures to devalue their currency in hopes of competitive advantage. The United States Federal Reserve, already after one round of quantitative easing, has stated that it would be willing to purchase another $1 to $2 trillion more of government debt, if the economy remains on shaky ground. The argument for such action is populist in nature, make our exports more affordable while creating and holding manufacuring jobs, but like all government intervention, unintended consequences abound.

             With the major economies debasing their currencies, the first hints of inflation to come are starting to be seen in the commodities market. Precious metals, cotton, coffee are all at multi-year highs, while most other commodities are up over 20% for the year. As the cost of these raw materials increases, that added cost will be felt and magnified at every step in the process chain. From the price of a cup of coffee at Starbucks to a box of cereal at the supermarket, prices are going up. With unemployment still near 10%, any increase in the price of staples would be felt much more quickly than in times of prosperity.

              Which brings me to the ratcheting up of trade tension between the U.S., China, and Japan. China and Japan have recently clashed of islands in the South China Sea, to which both lay claim. Japan detained a Chinese boat captain accused of ramming into two Japanese coast guard boats. In retaliation, China cut off high-level diplomatic talks, discouraged Chinese tourism to Japan, detained 4 Japanese nationals, and supposedly cut off all export of rare earth metals to Japan. These rare earth metals are crucial to the battery and cell phone industry, industries heavily relied upon in Japan. The U.S. has also gotten tangled up in rising tensions with  China. In retaliation to China's unwillingness to allow its currency to appreciate, the U.S. House of Represenatives is considering to impose tariffs on Chinese exports deemed to have unfair competitive advantage as a result of the devalued yuan. Earlier this year the U.S. imposed tariffs on imported tires from China, they recently retaliated by imposing steep tariffs on U.S. poultry exports.

               Not only does this tit for tat retaliation step up tensions with our largest trading partner, these escalating tariffs are another add cost that will eventually be past down to a consumer who is ill equipped to handle rising prices. It is clear that the debasing of world currencies and the imposing of tariffs will raise the cost of production when the global recovery is anemic at best. Economists continue to rally against deflation for fear there is not enough demand to ensure stable prices, this is certainly true in the very short term, but do we really trust the Fed and other world governments to quickly cut the money supply and find an efficient exit strategy for all this loose monetary policy, their track record leaves alot to question. We've, also, come along way from the passage of the Smoot-Hawley tariff act of 1930, but with extreme nationalism on the rise in China, Japan, and the U.S., will cooler heads prevail?

Government Ineffeciency

            A question for those who see expanding government and more government intervention as a cure for our economic ills, is the government set up to be a model of effeciency? If one looks at the incentive structure of the US government, the emphatic answer is no. In truth nearly all incentive is designed to reward those programs and departments that are least effecient. It all boils down to the way government budgets are allocated.

           Say you head a certain department of government, take your pick, these departments are expanding at an exponential rate, so fast I don't even think the government truly knows how many departments are under they're control. So, you're a department head, every year you receive an operational budget to conduct whatever your department is tasked to do. Say for arguments sake your budget is $10 million, now lets assume you only need $5 million to adequately run your department. In the private industry you would be rewarded for this thriftness, why wouldn't you be, you just saved the company $5 million. Hey you might even get that promotion or a nice bonus.  Unfortunately, the government works the opposite way. If you do not spend your entire budget, then the following year your budget is cut, the last thing a department head wants to have is the punishment of having their budget cut. Now if that department head spends there entire budget, they have an argument to go to the government coffers and ask for more money in next years budget.

          I've spoken to many government workers over the years and all seem to relate the same story, close to the end of the fical budget year departments go on massive spending sprees to ensure they use their full allotted budget. New office furniture, regardless of the fact that the current furniture is less than a year old. New computers and software, just say all the equipment has become obsolete. The end of the fiscal budget year is like Christmas come early, if only the taxpayers knew of the looting going on at their expense.

A Question of Intolerance

            Let me start by saying, this is my first attempt at creating a blog and I do this as more of a therapeutic release than anything. Hopefully my posts will inspire debate and a questioning of conventional beliefs.
     
            Alot has been made lately about the supposed intolerance of Americans toward the religion of Islam. This idea of Islamophobia has exploded onto the national scene and the media seems to be falling all over themselves to paint Americans, especially those on the right, with the broad brush of intolerance. From TIME magazines "Is America Islamphobic?" cover to the many op-eds calling opponents of the mosque near Ground Zero ignorant bigots, even though the majority of Americans and, more importantly, New Yorkers oppose the mosque.

             Well, we have a new front in this debate. As a "commemoration" of 9/11, a pastor at the Dove World Outreach Center has decided to burn Qurans because he sees Islam as a religion of violence rather than peace. The pastor, Rev. Terry Jones, has an estimated following of a paltry 50 or so followers, yet he has received condemnation worldwide. From Angelina Jolie, David Petraeus, Hillary Clinton, Sarah Palin, even the President of the United States has pleaded for the pastor to cancel the Quran burning. The State Department and Interpol have issued warnings about the possibility of a worldwide muslim backlash and President  Obama suggests the Quran burning would further put our toops in harms way. All of these things maybe true, but the real question is why.

              It seems clear today that the freedom of speech and expression guaranteed by our Constitution apply to all things, except for any slight or perceived slight against the religion of Islam. Examples abound, a cartoonist in Denmark depicts the prophet Mohammed in a series of cartoons, worldwide violent riots ensued and the cartoonist, Kurt Westergaard, received numerous death threats and even had some acted upon. The irreverent creators of "South Park", Matt Stone and Trey Parker, who often go to extreme and sometimes distasteful ends to make fun of Judaism and Christianity, tried to address the sensitivity of Islam. Instead of actually depicting the prophet Mohammed, they place him in a bear costume, yes you read correct. Even so, in response to harsh muslim response and death threats on the creators, Comedy Central censored the episode taking even the word Mohammed off air. Artists have gotten taxpayer money to trash sacred objects of Christianity, the "Piss Christ" and the portrait of the Virgin Mary made with elephant dung as prime examples, yet we have to treat Islam with the utmost respect for fear of violent retribution. How does this help the narrative of Islam as a religion of peace?

             Alot of the same people denouncing the pastor's planned Quran burning, are the ones who fought so fiercely for the legal and constitutional right of the mosque being built near Ground Zero. Yet where are the people in the media standing up for Rev. Terry Jones' constitutional right of free speech and expression, no matter how idiotic and reprehensible those actions maybe. Even though the majority of Americans have misgivings about the mosque near Ground Zero, the mosque will be built because our Constitution protects it. Those same protections also should apply to the right of a private citizen to burn the Quran whether he chooses. Instead of the media and elites blaming Americans for Islamophobia and intolerance, maybe we should ask where the real intolerance is coming from. Freedom of speech and expression is being crushed by political correctness, to which Islam seems to have a monoploy.