Unpalatable realities

10 November 2010

Much like the adrenaline needle administered to Uma Thurman after a drug overdose in Pulp Fiction, Europe and the US are flailing around for "magic bullet" style solutions to what are essentially intractable problems. Unlike Uma, it is hard to see either economy sitting bolt upright eyes blazing with life any time soon. The ongoing recession in the US (I don't care what the GDP numbers print, when unemployment is circa 10 per cent you are in recession) has triggered some predictable protectionist policies from Congress. Essentially a bill was passed allowing authorities to impose penalty tariffs on Chinese imports to the US.

The reason? Well it's because China is keeping their currency artificially weak to make their exports super competitive.

As my 12 year old would say "and your point is?"

Of course the Chinese want to keep their exports as cheap as possible and no amount of bleating by the US will get them to substantially revalue their currency. I suspect it is a bit like the way the Chinese view global warming.

"Sooo let me get this straight. You guys in the West have been polluting the planet flat chat for the last 200 years and got rich off the back of not pricing carbon. Now just as we are beginning our industrial revolution, you want us to curb that wealth creation process to pay for your past sins?"

Yeah... Not going to happen.

My main concern about this style of American thinking is that there seems to be an undercurrent emerging fingering China as the source of many US economic problems. Even the well respected economist Paul Krugman wrote about the need for the US to finally get tough with China on its currency. It is AN issue, but ridiculously high debt is THE issue. It's hard to see how China is to blame here other than they finance most of it, which may prove to be a dumb long term investment.

Many countries, politicians and commentators may not like it, but sadly that won't change the reality of the situation. The US and most of Europe is in relative decline, and from problems of their own making.

Support Matthew's movember effort here

Read more of the latest Investments Insightz news articles.