Sunday, April 04, 2010

The .gov wants price increases at WalMart?

I'll be the first to admit that I'm lost at this level of the finance game, but:

1) A steeper Yuan would be a kick in the gut to WalMart, Harbor Freight, Best Buy, and all the other mass-market retail chains whose very existence is predicated on dirt-cheap Chicom consumer goods.

2) There is nothing currently to replace those goods. It's not like Americans are going to suddenly start buying American-made sneakers and toys and cheap electronics, because there aren't any, and even if there were, they'd likely be made by people steeped in generations of the BS union entitlement mindset. The cost of paying a guy $50k a year for the rest of his life to stand there and push a button 40 hours a week, 48 weeks a year, for 20 years is going to be reflected in the price of the goods, and I'm not ready for a $200 pair of Keds.

3) The only American car company that makes money in China is the Buick division of GAZ Autograd, although I think the Jeep division of ZiL is popular over there, too.

4) The Chinese hold a bunch of our debt, but we're the primary market for all their stuff. Right now they're really scary, but I think I've seen this movie before.


What dramatic implications am I missing?

29 comments:

Alan J. said...

The old saying goes that if you borrow a thousand dollars then the bank owns you - but if you borrow a billion dollars then you own the bank. Thanks to the entitlement mentality and runaway government spending, people are now becoming afraid of hyperinflation and the examples of the 'Weimar Republic', Zimbabwe and Argentina. After all what REALLY makes America so special in the face of that? I'm worried that the answer is "Nothing" until we elect some politicians with larger amounts of common sense and the courage to do the right thing than the ones in office now.

taylor said...

Tam,

If a country has a strong currency, the cost of their goods and services goes up to other countries. So, if the Yuan is strong (in essence if a Yuan is worth more than it was), then it will take more dollars to buy Chinese goods.

Couple a strong Yuan with a week Dollar and suddenly your $15 pair of kids shoes made by a chinese wage slave for pennies an hour cost $30. We import, quite literally, Billions of tons of goods anually from China. Im in logistics and I used to have firm numbers (there a few years old, but probably still accurate), but a VERY significant portion of consumer goods in the US come directly from china. Actually, at a certain number of dollars per pound essentially everything is made overseas.

Imagine the price of everything in Walmart doubling in the next 2-5 years, with some things tripling. No one can afford that...but that is what things will cost.

The previous poster is right about China holding too much of our debt. If the .gov goes under, then China stands to loose all that money that they exchanged for our debt. Wars start for such reasons.

CGHill said...

Regarding sneakers and such: I generally buy from New Balance, and they seem to have a three-tiered approach, with the actual Made In USA stuff occupying the higher price points, a lot of "Made In USA using domestic and imported materials" in the middle, and the Chinese stuff along the bottom. (NB also has a British facility.)

Anonymous said...

Another facet missing from the discussion is that lately China has become a net IMPORTER, not an exporter. They are accumulating physical assets, while their exports are falling.

Why is .gov cogitating a yellow menace? Well, they SOMEBODY to blame for this mess, and it sure can't be themselves.

Jim said...

Going a little beyond Econ 101, money, which currency represents, is both a store of value and a commodity.

As commodity, money has a price, a "rent" value which we call interest.

Tam's citation has congress critters asking Tim to bitch at China "for allegedly manipulating its currency to the detriment of the United States."

Maybe if Tim has breath left after that he can bitch at himself, Ben B., Clinton, Bush, Obama and virtually all of the congress for manipulating its currency to the detriment of Americans who play by the published rules -- the ones who create the relatively little actual wealth remaining to us.

Joe and Sally Sixpack worked like Hell for 40 years, saved, and turned 65 with $100,000 in CDs to ease their retirement.

A.D. 2008 opened with one-year CDs paying about five and one-half per cent. Today one-point-two per cent is normal.

Subtract $1,200 from $5,500 and you have the income penalty Joe and Sally pay because Tim and Ben and the others have decided that, as a commodity, the American dollar is and should be worthless.

And that understates the case. Washington is giving most banks all the money they want at a rate close to zero. So close that the face-saving fraction above zero is meaningless.

China is a problem. American politicians are the China problem squared.

WV - hysap. How the politicians secretly greet citizens.

TJP said...

How about this:

1. I've already found replacements for a lot of what WalMart sells, because honestly, a lot of it is overpriced junk. Other countries do it so much better that it's worth an additional cost. The only people that have to be worried are camera makers that sell landfill-ready digital cameras at a 300% markup, and shady no-name PC makers who like those Sun-Moon-Star mainboards that die after one year.

2. Almost every category of goods you can imagine is better produced in some other country. It's just that Comm-Chi has a central directive to produce, and a brazillion impoverished farmers who'd like a steady job. I wasn't ready for a $200 pair of shoes, either, until I got sick of collapsing soles and excruciating back pain with Chinese shoes that had a 3-month life-span. If you know where to look, you can find U.S.-made shoes, and they're usually much higher quality. (Some are made in China--but you have to ask--and that's better accomplished in an actual shoe store, as opposed to a department store with a minimum-wage worker who doesn't have a clue about the products he has to sell.)

3. The car market is saturated. The automakers have more production capacity than is necessary, and our government mandates so many luxury items (safety is a luxury) that the prices are ridiculous. A family of four doesn't need four cars, and when the going gets tough, they'll have one good one, and one beater.

4. It's kind of funny to see a government accusing another of "manipulating currency". So grossly mismanaging the majority of mortgage debt so its worthless, buying a failing auto producer, devaluing its fiat currency printing bills to cover the debt, and manipulating interest rates to hide inflation--that isn't manipulating currency?


People will either do with less, or buy something else if Chinese goods get too expensive. Heaven forbid we should be inconvenienced by having to resole a good pair of shoes instead of throwing them on some ever-growing mountain of rotting non-durable goods, in some town where we wouldn't live because of NIMBY.

Also: I'd like to know which New Balance shoes are the good ones, because I destroyed so many in one year, it made a pair of $200 look like a bargain.

Nathan said...

The biggest problem with the yuan is that its value is not realistic, since the Chinese set its value arbitrarily instead of letting it float like other currencies.

The best guess is that it is worth a lot less than the Chinese say it is.

RevolverRob said...

There is a lot of thought here that is ignoring the heart of the issue. The issue is the continued erosion of all things American to be replaced by all things Amerikan.

What better way to increase government dependence than to cause the prices of everyday goods to rise so dramatically that the people are forced to turn to the .gov for help. (See HEALTHCARE).

I consider this to be the ultimate goal, to be honest.

Stranger said...

Perhaps surprisingly, we still know how to make stuff and a very high percentage of the machinery to get us back in business is still in existence.

But at 6.8 Yaun to the buck you cannot make a profit. At a fair exchange rate, 4.7 or a bit less, you can. The textbook response is to make something new, and keep changing product faster than "offshore" can.

You can do that at a fair exchange rate. You cannot when you know that three pages off the calendar will see Chinese copies of your latest and greatest advertised on TV.

Yep, consumer prices on imported goods at the Bentonville Behemoth would rise about 35% with exchange rate parity. But within five years we would be making our own clothes again, seven years to take back consumer electronics, etc.. And at prices that would undercut "offshore" by 15% or better.

And the 24 million manufacturing and support jobs the Clintonistas shipped "offshore" would "come home." Cheap prices at the Behemoth are not much good when you have no income.

Stranger

Anonymous said...
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TBeck said...

The bloom is leaving the Chinese rose. Companies are discovering that lower production costs don't necessarily cover the costs of doing business in a corrupt society and certainly don't cover the cost of some supplier deciding to poison your customers because he can't make quota any other way. So, companies are beginning to bring production back to the States. Good news for right-to-work states like Texas and Alabama. Michigan and the rest of the Midwest are still screwed.

TheGraybeard said...

There's a black swan circling to land in the whole China trade "conflict" thing, and I'm surprised no one here is mentioning it. You rarely get to see the black swan events before they hit, but this one is quite predictable.

Desktop 3D printing.
http://electronicdesign.com/videos/Video/TabId/317/VideoId/434/MakerBot-Part-1.aspx for a video on the kit version (2 parts) or http://www.reprap.org/wiki/Main_Page for an open source project that has been going for years.

Right now, you can buy a 3D printer that will make you plastic parts in a 4x4x6 envelope for under a k-buck. High end industrial systems go in tens of k-bucks. Yeah, for a thousand dollars it's a kit and the only ones playing with them are hardware geeks, but it's entirely open source and that means all the forces that make digital stuff half the price and twice the performance in a couple of years are at play.

That means that in a few more years, the price will be $500 and the envelope bigger. That means all the stupid plastic junk that comes from China will be made at your home, cutting out a massive chunk of the trade imbalance. It will progress from there. If the TEOTWAWKI doesn't complicate things, I'll guess that by 2020 when you need a a toaster or small home gismo, you'll either download a freeware set of plans or buy the plans like you do software or other intellectual property, then print it out at home. Some assembly certainly required.

Closest thing to a Star Trek replicator on the horizon.

In the meantime, if China were to suddenly shut us off in retaliation, virtually everything is made in the US in some quantity except the cheap crap these printers can make. (What? No more bamboo umbrellas for our drinks??) Heck, there's something like 25,000 people with a home/hobby CNC machine shop that could start a cottage industry making pretty much anything.

Jenny said...

Graybeard - ayup. 3D printers short term, most likely molecular assembly not too long after that...

I'm sure there will still be a niche market for handmade and bespoke stuff but I think you're right that the market for a lot of the Walmart-grade mass produced cheap stuff is going to collapse.

(Along with - assuming we survive so long - a chorus of a personal matter compiler is a human right)


To China, honestly.. I think it's less a matter of currency manipulation (which I'm not disputing) than labor manipulation. You can produce lots of goods priced for export when you use near slaves in State run factories.

But as to why this fuss now? Honestly, I suspect Anon has the root of the fuss when he says Well, they SOMEBODY to blame for this mess, and it sure can't be themselves.

Borepatch said...

I'm waiting for my copy of "The China That Can Say 'No'" to show up at the local bookstore.

Sabot said...

Do you need a permit for Black Swan shooting?

Lewis said...

Black swans make the best foie gras.

monkeyfan said...

Swanist!

Ian Argent said...

Lest we forget, though, there are two ends to the The Sam Vimes "Boots" Theory of Economic Injustice. There are people to whom the lack of $BIG_BOX cheap-crap goods means not that they would have to pay a little more for better-quality crap; but that theey would have to go without. For big-screen TVs this isn't a hardship, but for the shoes, perhaps not so much...

The SVBTEI holds true in my experience for many things. Both for shoes, having finally saved up for some non-Payless shoes, and for stuff like furniture etc. Basically, anything that *doesn't* have Moore's Law acting on it. Moore's Law complicates things because there's no reason to build it to last, because it'll be obsoleted and replaced soon enough.

That having been said, it you don't want to keep it forever, the high-quality stuff can bite you too. I *just* freecycled a couch older than I (hand-me-down from the in-laws from when *they* got married - the only thing wrong with it was a stunning example of early-70s upholstery) in favor of a couch that had better last at least as long for what I paid for it.

James Nelson said...

The Chinese are riding the tiger right now, and don't know how to turn loose. They have a real estate bubble that will make ours look tame, the government is "stimulating" the entire economy and hiding debt left and right. They are a net importer now and if things slow down even a little bit, it'll be back to the days of Mao if they are lucky. If they are not lucky, it'll be back to the days of the 20s with war lords and competing factions and civil war. How's a civil war with nukes sound?

Ian Argent said...

Like a good reason to be on the other side of the world...

Other than that - I'm a lot less worried about a civil war in China than Iran flipping a few at, in order, Jerusalem/Tel Aviv, Ridyah, Bahgdad, Istanbul, and then points west and north (do they have missiles that can reach Moscow?) Chinese nuking each other is an economic annoyance and a humanitarian disaster (though I'm sure the Japanese and Taiwanese would be a lot more worried - they've got seats at the grill and an axe-murderer for the Hibatchi chef). Middle East going up in nukes has all of that plus disrupitons in oil.

tickmeister said...

OK,3D printers. Maybe they will print out our flying cars so we can commute between domed cities.

George said...

I have to say...I think the value of a stronger yuan is overstated. If the currency mismatch becomes too great, low end goods (ie. sneakers) won't be produced in China anymore. But there is no shortage of other countries with willing low-wage workers. India immediately comes to mind.

For higher end manufactured goods (ie. iPods and big screen TVs), sure, final assembly is done in China, but a huge percentage of components are imported into China from the US, Japan, etc. In a $300 iPod, maybe $5 of the value is added by China. The rest is the value of imported parts, and the value of the Apple design itself. At the end of the day, China exports an awful lot of value...but very little of that value originates in China.

Yes, China holds a lot of out debt. But they have exported a LOT of goods in exchange for that debt. If inflation rises (and it pretty much has to...there are billions of dollars in excess reserves in the system, and the only think keeping them from entering the M0 money supply is the utter unpredictability of the Feds) the value of that debt will go down, and the value of the goods will go up. I've heard people talking about China "calling" our debt. China can't "call" the debt. They are invested in specific instruments. They CAN do two things:
1) Stop buying new debt instruments.
2) Sell their existing debt holdings.

In the short term, this would cause long-term interest rates to rise...the fed would have to offer a higher real interest rate in order to get investors. This is already happening. (Remember, prices move opposite to interest rates. So, when the media report low prices on bonds, or prices dropping, that means the Fed is paying more in interest, and the dollar is weaker. Likewise, if bond prices are rising, less real interest is being paid.) You would pay more for a mortgage, or anything else that is indexed to long term interest rates.

Would short term interest rates be affected? That's less certain. Historically, short term rates have been related to long term rates, but the demand for American debt is still very high. As much as our economy sucks right now...it sucks less than anywhere else. The "flight to quality" has kept US interest rates low for a long, long time.

Finally, the reality is this...China has deliberately kept their currency as weak as possible in order to ensure that assembly is done there, and not another country with large numbers of semi-literate, starving people willing to work for slave wages. The sad reality is that there are a lot other folks willing do to what China has done to their people and their economy in order to reach American export markets.

Beaumont said...

Ian's right -- Sam Vimes has a better grasp of economics than anyone currently working in DC.

Ian Argent said...

My wife pointed out to me a facebook post from a friend of hers in Seattle visiting Boston. He had no need of a winter coat suitable for withstanding a Boston Winter Weekend; but there he was, shivering in the cold. He hied himself over to Wally World (a place unto which he had never been) and discovered that the coat he was expecting to pay $70 for, could be found for $7... Sure, it would only last a season, but he didn't even need it to last that long.

Contrariwise, I once bought a bookshelf there, and *it* didn't last out the season. For around twice what I paid, I had bought some precut scandahoovian particle board which I still have.

So it all depends on what you're looking for; and whether you expect to have people teething on it or not. I'll bloody well spend the extra money (or time) to not have my childrens' toys made in China at least until they're beyond the "discovery by mouth" age.

There's times and places for cheap chinese ... stuff; and times and places where it's not so appropriate. Hence, the .gov shouldn't be messing with stuff they can barely control, and don't really understand. (Yes, even if the Chinese are messing with their side as well - they don't understand or control it much better than our .gov does; they just have a "safety valve" with a lot higher test pressure. Eventually, enough peasants will commit some crime for which the penalty is the same as revolution. And China has had plenty of experience with what happens next.

staghounds said...

I love the way the Chinese write government news releases:

http://www.safe.gov.cn/model_safe_en/news_en/new_detail_en.jsp?ID=30100000000000000,223&id=2

monkeyfan said...

Ian Argent: "Eventually, enough peasants will commit some crime for which the penalty is the same as revolution."

That right there is gold.

Ian Argent said...

It's the punch line to an old joke; usually told about chinese peasants. (OK - technically, the punchline is "I've got news for you. We're late.")

og said...

I think you're right about the Chinese- if the Japanese couldn't dominate us- and who the hell is more efficient than the Japs- then the Chinese will struggle too. The problem with the chinese is their sheer numbers. They could easily defeat us in a war by simply dropping Chinese citizens out of planes onto us.

imelda said...
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