Reflections on the US Middle Class

I am going to be slightly offbeat today...First up..to paraphrase Frank Zappa..."Fox TV and equivalents are for people who can't write/think interviewing people who can't talk for people who can't read"

The subject today is the great American Middle Class. The latest election results and the subsequent de-railing of the US President's plans proves one point conclusively.

Healthcare: Shooting one's own foot

"The US Middle Class has mastered the art of shooting itself in the foot by consistently voting against it's economic interests". The clamor over the health plan and few other spending deals only show how deeply entrenched this tendency is. It is pitiful to see the US from outside....pathetic...The chart below shows that the US has done well when taxes were at higher levels. As greenspan said in 1987, higher taxes if structured correctly cause wage infaltion and help for provision of services.

 Even a cursory glance at the above figure shows that during the 1950s, 1970s and 1990s (adjusted for dollar regime and other cyclical features) the US consistently did well thanks to a higher tax regime that taxed more as individuals earned more. Contrary to expectations as my other table will show..Reagan did not preside over a boom...he just dug a hole which was not visible so very well till 1993. 

Want more proof? See the adjusted data from beckworth to uniformly compare Republican and Democratic Administrations from 1960-2008. Surprise.....Clinton created 23 million jobs, the Carter years saw growth, Johnson was not that bad either...barring Ike Republican administrations have consistently screwed over the government with big deficits or something equally abominable.

Big Government: Another Pet Gripe

Really? I doubt if people understand what it really means...It is not big government when the government desperately tries to shore up aggregate demand or tries to tame a wild financial sector or tries to reform the 'racket' called the healthcare system. 

Big Government is the current security state that was created by Messrs Bush and Co during 2001-2008. It is big government when the rulers start nibbling at your privileges (not rights..we never have rights). Bush II did it very well. Also it is BIG GOVERNMENT when they start telling you what to read, what to wear and which position to have sex. Folks your government is already is leviathan....

What is number 44 trying to do?

Number 44 is trying to do something very simple

a. Restart the US Economy

b. Ensure that the healthcare racket dissolves

c. The banking sector acts prudently

Now, Obama has ofcourse fallen in between stools and got screwed by attempting bi-partisanship....but to punish the chap before he got adequate time only shows the mental state of the nation.

Debt: Econ 101 anyone?

Y= C+I+G

The above is the basic economic identity with taxes netted out on both sides. If Y is national income (GDP), then the three uses of C consumption, I investment, and G government purchases. If you think of it as a cake which has to grow or atleast remain the same, then if say C and I fall, then the government spending has pick up the slack to boost aggregate demand(ofcourse this is simplifying it...but broadly it is true currently). It needs funds to do so and there in come debt.

Debt is like blood in the veins of a country. When government tries to fill the gap,it will rely on more debt than usual. If the personal concept of debt is mixed up here or in a corporate context, then disaster ensues. So when Republican politicians try to give a village bum type explanation about debt and then hypocritically support middle class austerity while helping fat, rich chums..it is so infuriating.

even now, the incoming congress has no agenda or plan expect that it wanst to derail this presidency...The combination of fear pscychosis drilled in by media networks and GOP politicans has ensured the stellar efforts of number 44 have been unappreciated by a ungrateful nation. The corporate sector sits on 2.5 trillion $ worth cash but does nothing...the republican opposition ensures stimulus goes into bank coffers and never sees the light of the day. The litany of errors is confounding and frustrating...

Republicans are very enthusiatic about the other guy,meaning the middle class being austere while they remain fat cats....they don't have a policy template..what will they cut and how will they cut? Interesting to see them in jan 2011... the stupid nation deserves it... 

End Note: I don't like Krugman particularly... but this video is quite instructive....... 

Note: Thanks Larry Greenberg and Beckworth for your useful data 

RMB as a reserve currency? Miles to go....

Miles to go before I sleep mused Robert Frost. The question of the RMB as a reserve currency merits the same quote.

The Chinese having floating this idea rather enthusiastically of late and have even initated yuan settled trades in HK and Russia's Putin has echoed this sentiment and called for Yuan to be traded in Russia and used in trade settlements. While some of the RMB's rise especially as a regional currency is indeed warranted, the more grandiose dreams of replacing the greenback are bit farfetched. A reuters' video should illustrate how the tip of the iceberg looks like.

http://jp.reuters.com/news/video?videoId=169173082&videoChannel=204

First, it would be interesting to see why the USD is the reserve currency of the world (before that the sterling), there are 3 reasons

a. availability
b. liquidity
c. perceived safety

Each of the above factors are very important. The USD for starters is widely available and is backed with deep and liquid capital markets. While the historic circumstances circa 1945 are resented in some parts of the oriental world, the fact remains the US has the best functioning capital markets in the world despite the 2008-09 crisis.

Availability has another dimension, openness of an economy. The US is arguably one of the most open economies in the world. The US for instance exported capital till 1971 when it reversed course and ran deficits. essentially BoP ensured the greenback's availability. The RMB is so behind in this department with basic financial clearing infrastructure still deficient severely.

Currently, getting money in (easy) and out (pain in the nether regions) of the PRC is overall a pain. For a concrete example, Look at the figure above to see that debt capital markets which are a basic barometer of market depth is very indicative of China's illquidity and ill-preparedness for any big role even on a APAC scale.

Growth Engine: The last aspect directly links to export dependence and investment driven nature of the Chinese economy. While exports are plateauing out, China is heavily dependent on internal investments for growth. Consumption as a % of GDP is around 37-40% (see picture), way less than even say India or the US. Chinese restrictions on capital ensure a BoP surplus on both accounts. This ensures the RMB can never be held in large amounts outside PRC.

All this has missed one elephant in the room: The PRC's brand of politics internationally has started ignoring Deng Xiaoping's advice to bide time and be prudent. Abrasiveness is becoming visible and I am afraid the PRC does not have the fire power yet to ride roughshod....this should in addition to the dangers mentioned above should ensure preponderance of the USD with the RMB growing in stature to an important baslet currency in the FEER/REER sense..

Note: McKinsey, Reuters and Tiburon Partners are acknolwledged for data