Friday, April 11, 2008

Fire Sale

I learned something interesting in a meeting this week. I was sitting in an demand planning meeting for one of my products and discovered that we had a few orders that were delayed. It seems that booking export containers and ships is getting increasingly difficult. What with the devalued dollar and everything, U.S. exports look pretty cheap and stuff that normally would never leave the country is flying off the shelves. Sure enough I found a similar article that day in The Wall Street Journal, Container Shortage Puts US Export Boom in a Box. For those of you who didn't know, exporting US goods to places such as Asia used to be dirt cheap. So many inbound containers from places like China were piling up that freight rates were held very low just to find something to put in them so they wouldn't head back to China empty. Now, there's a shortage!

That's great right? Sales. Revenues. Profits. The economic stimulus the FED has been doing must be doing the trick. Wrong. This is simply a temporary spike and the brick wall we're going to slam into on the other side of this spike is made worse by the FED's recent attempts to keep the domestic economy going.

Here's how it works. The FED has devalued the dollar. US goods look cheap to other countries. They buy lots more than they normally wouldn't. US volumes spike up, and revenues and thus profits are higher. All looks great. Until US firms have to buy new raw materials to replenish those goods they sold. Guess what. It's a global economy. A lot of those raw materials come from overseas. A ton of finished consumer goods also come from overseas. We have to pay more to get them because our dollar is devalued. Oops. That means the prices we were charging before have to be increased. It takes a while for all those costs to trickle in, but if you watch key import commodities like oil you'll see what we're headed for. Now we're forced to increase prices and hoping to continue selling our goods. But wait, our prices will eventually get back to the levels they were before the dollar was devalued, and foreign countries won't want our exports any more.

Sure enough the signs are there. Today's Wall Street Journal, "Dollar Slips Below 7-Yuan Barrier". We used to blame the Chinese for messing with our currency, but releasing the Yuan from it's peg to the "boat anchor" of the dollar was smart, and now we see the devaluation clearly.  And from yesterday's "U.S. Trade Deficit Widens" - import volumes ticking up along with exports. And the most telling, "Import Prices Show Broad Rise"

Import prices surged in March, lifted by not only oil but also the biggest jump in non-petroleum costs on record, a worrisome sign for inflation.

Petroleum import prices increased 9.1% last month and fell 1.9% in February; prices soared 60.0% in the 12 months since March 2007. Between March 2006 and March 2007, petroleum import prices climbed by 3.1%.

Excluding petroleum, all other import prices rose 1.1% in March, after increasing 0.7% in February. Prices excluding petroleum increased 5.4% in the 12 months since March 2007, nearly double the 2.8% climb between March 2006 and March 2007.

The FED has done the equivalent of announcing a "fire sale" on the US economy in the hopes that all while all that merchandise is going out the door no one will notice that we're actually destroying value by selling our goods too cheaply. On the other side of that is an even deeper slump. All the while the FED keeps pumping more money into the economy, and demanding greater regulatory authority. Argh.

We're headed for Jimmy Carter-era stagflation folks, and the FED is putting its foot on the accelerator to get us there. All the while they blame the financial markets for the woes that they directly caused. The solution is not going to be pretty. I wouldn't be surprised if we see double digit interest rates again before this is all over.

The real solution is not more government regulation over the economy, it's less, nay no government regulation of the economy. Lasseiz faire! The FED caused this mess. Had monetary policy been privatized, this wouldn't have happened. It's going to get much worse before it gets better, folks.


Elisheva Hannah Levin said...

Now that the Yuan has "unpegged" from the dollar, are you expecting the dollar to plumet or do you think it will fall more slowly?

This is all very worrisome, but as you say, it was all very predictible as well.

Kendall J said...

A lot of the future depends on the future actions of others so the end result is quantitatively hard to predict. However, I think the trends and effects are predictable. When this post reached the meta-blog, a good friend of mine pointed out that the Chinese peg served to mask or make more sluggish the actions of the Fed. As a result, the release of that peg will make the FED's actions more noticable, meaning that the dollar will fall more rapidly, not because the peg was released but because the FED has already taken actions of a magnitude to cause such a fall, but the peg was "hiding" it. I think the most recent run up in oil and raw materials is in part due to the unmasking of hte FED's actions by release of the Yuan from the dollar.