Thursday, May 12, 2005

More Airlines Crashing and Burning


We are supposedly in great economic times. This "good times are rolling" happy talk news constantly has to strive against the really bad bad news that threatens this general feeling of goodness. Delta Airlines is joining United Airlines in going bankrupt. As they feverishly try to sell off whole sections of a failing company, it never works since the older airlines are "crippled" by union contracts. Ever since the airlines have been "deregulated" upstart lines with no unions and few benefits have brought down virtally all the pre-deregulated lines.

“Unless they sell at least one of their regional carriers, they will be forced to file for bankruptcy within the next six months,” Standard & Poor's analyst Jim Corridore said. “And if they did sell a regional carrier, it still wouldn't change their overall situation. It would just buy them more time out of bankruptcy court.”

Shares in Delta, which issued a similar warning in March, fell 9% in early afternoon trading on the New York Stock Exchange.

Delta, the No. 3 US airline, also said it did not expect to achieve its goal of US$5bil in cost cutting till the end of 2006.

This force America unleashed, uncontrolled capitalism and free trade, continues apace. It certainly has brought down prices, most astonishingly. For a while there, everything seemed to be cheaper and cheaper. People on fixed incomes were very happy and workers that were not getting pay raises didn't complain because not only were things they wanted cheaper, so was money which was being lent to all and sundry. Let the good times roll!

But all is not well. Inflation of necessities is way up and climbing. Obviously, things are increasingly out of kilter as is witnessed by our trade and budget deficits which, even when they drop, do so insignificantly. Since the free trade/uncontrolled capitalist ideologues also believe in monetarism this means they will manipulate the currency to get what they want: eternal self generating wealth. This troika of greed has spawned many children all of whom are like the legendary birds coming home to roost.

A clamor of similar complaints from America's industrial heartland is galvanizing official Washington into action. Whether such action will benefit manufacturers like Zeus, however, is a matter of considerable debate.

At issue is China's policy, which it has maintained since 1995, of keeping the yuan pegged at 8.28 yuan per dollar. That value for the yuan, Beijing's critics assert, is substantially lower -- by 15 to 25 percent, or perhaps more -- than the rate that would prevail if China allowed the yuan to rise and fall with supply and demand as most other major currencies do. The result, they say, is a sharpening of China's competitive edge that has been a major factor behind the explosive rise in the U.S. trade deficit. China accounted for one-quarter of the record $651.73 billion trade gap in goods in 2004, and in the first two months of this year, the U.S. deficit with Beijing surged to $29 billion, up about 50 percent from the same period a year earlier.

Oh, how dare those Chinese practice what we preach! Even as out government professes indifference when old fashioned American companies go belly up these same officials suddenly get all hot under the collar because the Chinese use their power to practice...monetarism. We can manipulate the currency like when we decided to punish Old Europe for not supporting our war in Iraq by dropping the value of the dollar vs the euro! Only America may deliberately suppress the value of a currency!

Thanks in part to the groundswell on Capitol Hill, the Bush administration is also stepping up pressure on China. Until recently, the administration was taking a patient stance in the hopes that China would act on its own. But in the past couple of weeks, top U.S. officials have adopted a tougher tone. A fresh statement of the administration's new line came last week at the Asian Development Bank's annual meeting, where Bobby J. Pittman, the chief U.S. representative, declared that China "should move to a more flexible regime now."

Moreover, the Treasury Department is planning to release a report soon on the foreign exchange policies of other nations, which is almost certain to take a more critical position toward China's practices than past years' reports. Manufacturing industry groups are urging the Treasury to formally brand China a "manipulator" of its currency, which would require the department to initiate negotiations with Beijing. For their part, Chinese officials have hinted that they may alter their policy at any time but will probably do so in a series of modest steps.

Some economists caution that a change in China's currency regime could boomerang on Washington. That is because under its fixed-rate system, China's central bank constantly buys billions of dollars on currency markets, which are invested in U.S. Treasury bonds and provide a major source of financing for the federal budget deficit. If the flow of money from China into the dollar and Treasury bonds were to dry up, financial turbulence might well ensue, including a sharp upward spike in interest rates.

It is touching to see how the propaganda about using monetarism to control trade and make things happen is biting back. Whenever Americans do what other are doing to us, we crow about it and pat ourselves on the back for being oh so clever. This is the Friedman legacy. A childish delight in using currency values as a tool to get rich at someone else's expense. When we couldn't pay for the Vietnam war with taxes, for example, the government merely cranked out money until inflation forced everyone into much higher tax brackets. Then gleefully told the victims they were being over taxed!

Now no Americans want to pay any taxes at all. It irritates us. We know we are being cheated. This grumpy attitude has created a worse deficit than the origional Vietnam war deficit. So, to fix that, we decided to invade Iraq and get the oil profits there. This has been a spectacular Vietnam-sized disaster which has made our accounts much worse off than before. So we are now trying the impossible: get someone else to play the monetarism game in our favor. Sorry, but that will never happen.

And again, in all the news we perused today, not one official or spokesman or entity or even economic writer mentioned the yen. We obviously can't persuade our allies to stop plotting against us. How on earth are we going to persuade our competitors?

And worse, isn't rank capitalism all about exactly what the Chinese are doing to us? Why shouldn't they? According to all theories, the best outcome is for greed and self interest to run its bitter course. We should be happy to be run over.

Welcome to Darwinian Economics 101.

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