The Great Divergence

[kandrathe]

Due to the counteracting inflation caused by the Fed, peoples wages and income are not being reduced. AND, the prices of goods and services are not falling (at least in aggregate).

Either prices of goods and services are falling, or they aren't. Understanding the point that there are different commodities behaving in different ways, you still have to pick one story and stick to it.

The bailout is not painless, the stimulus is not painless, quantitative easing is not painless. They are only less painful than the alternatives. Nothing comes without a price.

What does this chart tell you about the overall trend of inflation?



And... That is across a basket of goods less food and energy. If you dig into the BLS numbers by commodity, you will see some are flat, and some are dropping in price.

Correct me if I'm wrong here, but you believe the Yuan is being kept undervalued by China, no? If that is the case, how would a revaluation that promotes US exports help China become powerful? It would make them richer in terms of US products, but then, that's what everyone (except consumers) wants - more US exports to China, and fewer imports. And since they're already holding a hojilion US dollars, anything that makes those less valuable makes them poorer, not richer.

China won't allow the trade imbalance to change, and that means they will keep the yuan weaker than the dollar. If anything, since they unhinged their currency from the US dollar, they've made it worse. Back in 2002, the imbalance was about $70 billion, representing a US job loss of about 900,000 US workers. The latest figures for 2010 show us to be on track to hit $240 billion. A trade balance would put a pretty big dent in our unemployment situation.

At the present time, China doesn't seem to be managing their economy to cater to the needs of their own people (their QOL index 116th in 2006 to 97th in 2010 out of 144 nations). It is an exercise in capturing economic power, for external purposes.

Ok, so back to your question? Which would make us more powerful, debt or production capacity? We are not purchasing China's goods on our dime, with our own productivity. We are borrowing the money (some from China itself) to purchase goods we cannot afford. Does that make us stronger or weaker? Meanwhile, due to the cheapness, and quality of China's labor, all manufacturing in the world is flowing to their shores. They've become the largest manufacturing nation in the world. Think of quintessential American products. Levis and Reeboks? Where are they made now? Essentially, for any nation, your power is based in your people. China's got more, many are very well educated, and they are unified behind their leadership.

Here in the US, we can't even get behind the Democrats when they want to make some tax cuts permanent. How messed up is that? (I'm personally against it, because we are at the point of needing all the revenue we can get. Even then, we need to reformulate our social spending to reduce our expenses as well.)

Militarily, we still live in nuclear stalemate. No matter how wealthy China becomes, they cannot escape that fundamental position. Even conventionally, the US still spends nearly seven times what China does on its armed forces. I don't see their relative military positions swapping anytime soon.

Given the capacity for capital investment (which they now have), and the manufacturing capability (which they now have), it would be a matter of time before they build the capability that we now have. And, given we are facing a decade of malaise and crushing debts, we will probably curtail military programs and put much of our used junk into moth balls. And... Just because we spend the most, doesn't mean we are are investing it. Most of the money is spent housing our armies in other nations.