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The Daily Reckoning | Tuesday, January 25, 2011 More skewed data and the need for golden transparency, House prices keep falling...while other prices continue to rise, Plus, Bill Bonner offers his own State of the Union comments and more... ------------------------------------------------------- Why China Is About To Bring America To Its Knees... The world is 97% dependent on supply of these little-known resources from the red dragon. At stake is America's ability to create cell phones, hybrid car batteries, even our high-tech military equipment... They are about to shut supplies of this vital resource off from the rest of the world... FOREVER! Click here to see how to make 8,577% gains or more from the greatest global supply squeeze in modern history. Purchasing Power of US Assets Declines With the Dollar Why the “good as gold” days are as good as gone Bill Bonner Reckoning today from Baltimore, Maryland... Many a tear has to fall But it's all, in the game "It's All In the Game" - Music by Charles Dawes As far as we know, only one American vice president ever made a contribution to public life worth remembering. That was Charles Dawes, vice president under Calvin Coolidge. Mr. Dawes was a Chicago banker who was also a songwriter. He wrote the tune for what became a popular song - "It's All In the Game." Oh... And he also won the Nobel Prize for coming up with a plan - the Dawes Plan - for ending the reparations arguments following WWI. As with so many Nobel Prizes, the committee probably acted too hastily. The Dawes Plan never worked. Dawes operated in a different world. The US dollar was still as good as gold. And any money that wasn't backed by gold was suspect. Said Dawes after composing his song: "I know that I will be the target of my punster friends. They will say that if all the notes in my bank are as bad as my musical ones, they are not worth the paper they were written on." Banks issued money back then - bank notes. Sometimes the banks were good for the money. Sometimes they weren't. But at least customers knew where they stood. If a bank failed, they'd lose money. Now it's not so simple. Banks no longer issue their own notes. Now, we all use dollars. But what are the dollars worth? Are they going to be the cause of tears and suffering? Yesterday, stocks rose 108 points on the Dow. Gold up $3. "House prices expected to decline for a fifth successive year," says The Financial Times. Foreclosures are rising and will continue to rise until March of 2012, according to the projections in the FT, wiping out possibly trillions more in household wealth. Sales are at a 13-year low. Houses are Americans' most important asset. And the average house is down about 25% since 2006. But that's in terms of dollars. In terms of gold, the loss is over 60%. Hey, it's a Great Correction. After such a big run-up in housing prices in the bubble years, what would you expect? Housing prices are bound to run down. So much the better. Americans are having a hard time making ends meet; they'll need cheaper housing. Their incomes are falling in real terms. Measured by the official core CPI, incomes are about flat for the last 10 years. Measured by raw cost of living numbers, household incomes are going down by about 3% to 5% per year. But look what has happened in terms of real money. The average US household has lost about 70% of its purchasing power. Whoa! You're probably thinking: "Who cares what happens in terms of gold? Gold is in a bull market...it's fickle...it could go up...it could go down. So what?" But some of the world's most important commodities - including oil and food - are priced in real terms. Oil has soared in terms of dollars. But in terms of gold it has barely moved. Food prices go up and down. People may pay a lot more for their wheat and corn in dollars. But if you have gold, almost nothing is more expensive. The point is, gold is real money. It is not a fiction. It is worth as much today as it was when Charles Dawes was humming tunes. And gold is telling us that the average US family is getting poorer. Meanwhile, the feds keep pretending that the problem is not enough paper money. People don't have enough money to spend? No problem. We'll print up some more Ben Franklins and more Andrew Jacksons. The average lumpenconsumer might not be able to tell the difference. But gold knows. And gold tells. More below, after today's guest essay... Advertisement Double Your Money in Oil by June... Oil's headed up...but please don't pile into ExxonMobil or Chevron. The real money this year is going to come from Oil Field Services. Directional-drilling... IT infrastructure... reservoir imaging... 3D seismic surveys... artificial lift... flow-rate measurement... One company has it all, and we predict an easy double by June. Just go here to get instructions on how to play it. The Daily Reckoning Presents Gold, More Relevant Than Ever Charles Kadlec When Chinese President Hu Jintao visited the White House Wednesday, President Obama made sure to raise the contentious issue of currency values and press the Chinese leader to allow the renminbi to rise against the dollar. Not least among the reasons given was China's $226 billion trade surplus with the US. The problem: The Obama administration's weak dollar policy is based on official trade data that grossly misrepresent the bilateral trade balance between two countries. According to the World Trade Organization (WTO), the actual US trade deficit with China is less than half the official number, or less than $115 billion. The official trade data are based on a 19th-century world in which it was reasonable to assume that goods, from wine to machinery, were produced in a single country. If a bottle of French wine were imported to the US, the entire cost of the wine was credited to France in the calculation of the US-France trade balance. While that simplified view of trade generally still holds for trade in agricultural products such as wine, it no longer reflects the 21st- century reality of global supply chains in all things manufactured. Take, for example, the case of the Apple iPhone. Using the 19th-century approach, the entire $178 estimated wholesale cost of the iPhone is credited to China, because that is the place of final assembly. As a consequence, imports of the iPhone in 2009 contributed $1.9 billion to the US trade deficit with China. In other words, official trade data imply that the invention of the iPhone has cost the US jobs, reduced our competitive position and made us poorer relative to the Chinese. That alone should cause any policy- maker to question the use of trade data in the development of international economic policies. Here is what they would find: What the 19th-century approach ignores is that Chinese workers contribute only $6.50 to the value of the phone. According to a study by Yuqing Xing and Neal Detert of the Asian Development Bank Institute (ADBI), this is far less than the value add provided by Japan ($60.60), Germany ($28.85), South Korea ($22.96) or the US ($10.75). When the value add from the US is taken into account, every iPhone imported into the US in 2009 actually contributed $4.25 to the US trade balance with China - the difference between the $10.75 of parts China imported from the US and the $6.50 in payments received for assembling the iPhone. That turns the $1.9 billion iPhone trade deficit with China using official trade data into a $48 million trade surplus. Although this example is extreme, it does reveal how absurdly misleading current trade data are. In a speech last October that explored this issue, WTO Director General Pascal Lamy reported that "a series of estimates based on true domestic content cuts the [US-China trade] deficit by half, if not more." Moreover, the focus on the bilateral trade with China ignores that the overall US trade deficit with Asia has remained "at something like 2% to 3%" of US GDP for the past 25 years. Lamy goes on to point out that the current methodology for measuring the bilateral trade also misleads policy-makers with regard to the impact of trade on employment and income. Of 41,000 jobs associated with the manufacture of the iPhone, 14,000 were located in the US. However, those American workers earned $750 million, while less than half that amount-$320 million-went to non-US workers. Current bilateral trade data are simply not a reliable basis for understanding the competitive position of various countries, nor for the development of trade or exchange-rate policies. Imagine, for example, the Obama administration got its wish and the Chinese renminbi rose relative to the dollar and all other currencies by 20% in the year ahead. Using the example of the iPhone, such an appreciation in the value of the Chinese currency would reduce the price of all of the imported components by 20%. As a result, only the cost of final assembly in China would be affected, rising 20% to $7.20. Assuming a full pass-through, that would increase the imported price of the iPhone by a mere 70 cents, or less than 0.5%. Hardly enough to alter trade flows. In addition, such an appreciation of the renminbi would reduce the price of all raw material imports, including oil, iron ore, scrap metal and agricultural products, as well as all other imported materials necessary to feed its manufacturing base, thereby enhancing China's competitive position relative to the rest of the world. There may be valid reasons for the Chinese to allow the value of the renminbi to rise against the dollar, but attempting to reduce the bilateral trade account with the US is not one of them. A strong Chinese currency, however, would offset the inflationary forces that have been unleashed in its economy by the Federal Reserve's pursuit of an inflationary monetary policy. Reducing US soft power in Asia by offering a more reliable currency than the dollar would also be consistent with China's long-term strategic interests. The results of the research at the WTO and the ADBI mean that the entire US approach to international monetary reform needs to be rethought. In a global economy with integrated international supply chains, the underlying assumption that changes in exchange rates can ameliorate trade imbalances no longer makes sense. An approach far more coherent with the actual world in which we live would be to seek arrangements that lead to increased stability in exchange rates. Such an approach would reduce the disruptions, financial risks, and windfall gains and losses associated with the current system of gyrating currency values, leading to increased growth and employment in the US and the rest of the world. Such a system would need a neutral reference point that would provide both an anchor of price stability to the entire international monetary system and a reliable indicator of which governments need to take action to adjust the value of their respective currencies. In that regard, World Bank President Robert Zoellick's suggestion that gold be restored as a critical reference point in the international monetary system appears more relevant than ever. Regards, Charles Kadlec, for The Daily Reckoning Joel's Note: Mr. Kadlec is a member of the Economic Advisory Board of the American Principles Project, an author and founder of the Community of Liberty. The (common sense) Truth about Inflation... If you think inflation is good for the economy, why isn't Zimbabwe the wealthiest nation on earth? In Chris Mayer's brand new video presentation he destroys the popular myth that inflation stimulates the economy and create jobs. He also reveals the sickening truth behind Washington's endorsement of runaway money printing. Please, don't do anything else until you've learned the TRUTH... Click here to watch your FREE presentation now. Bill Bonner A Few Suggestions to Improve the State of the Union by Bill Bonner Tonight, Barack Obama issues his State of the Union address. We are tempted to send him some ideas: "My Fellow Americans," we would begin. "I've got good news. And I've got bad news. "The good news is that we've eliminated the paperwork associated with the Food Stamp program. "The bad news is that we've eliminated the program too. Well, that could be good news too, depending on how you look at it. I don't know how the US federal government got into the business of feeding people, but now it's getting out. "And the good news is that the troops are coming home from Iraq, Afghanistan and 100 different other countries. We have so many troops overseas, we've lost track of them; for the life of me, I can't figure out what they were supposed to be doing over there. "The bad news is that they probably wouldn't be able to find jobs in America today. "But the good news is that we're doing something about that too. I'm eliminating all the labor legislation and all the nonsense regulations that keep people from hiring. You want a job? Get in line behind all those Hispanics waiting on a street corner. You want a job done? Find yourself a good worker. "Oh...and here's some more good news. The US isn't going broke. Not on my watch. "Why... I'm proposing a balanced federal budget. What was the matter with George W. Bush, anyway? It's not that hard. You just figure out how much you've got to spend and you don't spend a penny more. Simple arithmetic. The budget deficit for this year? Zero." Of course, if we were delivering a State of the Union address, we'd probably be impeached before we got to the end of it. The nation wouldn't accept a president that didn't go along with the game. What's the game? Well, the US government has a mission. Its mission is survival. And as the years go by, more and more people want the government to survive. Because more and more people have a stake in it. Like the 43 million people who get food stamps. Or the thousands who get rich on military contracts. Or the millions of retirees who are counting on Social Security. Not that we begrudge these people their ill-gotten gains. Not at all. They're just playing the game too. But over time, the game comes to be more and more expensive. More votes to buy. More people to pay off. More favors to pass out. More and more deficits. More and more debt. More and more interest to pay on the debt. Then, you have to borrow just to cover past borrowings. And eventually, you can't continue. Lenders balk. You run out of money. Game over. Regards, Bill Bonner, for The Daily Reckoning ------------------------------------------------------- Here at The Daily Reckoning, we value your questions and comments. If you would like to send us a few thoughts of your own, please address them to your managing editor atjoel@dailyreckoning.com Budget Cuts in the Irrational Financial System $2.5 trillion sounds like a lot of money. But it’s over 10 years. That’s only $250 billion a year. And the budget deficit this year is supposed to be over $1 trillion. So, unless we’re missing something...even these cuts are only a quarter of what they’d have to be in order to bring the budget back into balance. Long Term Investments for Continued Family Wealth China is to Gold as the US is to Paper Currency A Three-Minute Lesson in Gold Investing I could go on and on about how the decline looks like Peak Gold [but]... A better reason, perhaps, as to why gold will go higher is found in their interesting statistic that in 3 minutes, the banks create $6.4 million in new money, while in the same 3 minutes, only 266 ounces of gold were produced. China’s US Assets Fall With the Dollar The Surprising Price of Wheat US Economic Data Begins Today The currency market was on the tame side for the better part of the day. The dollar index fell on the day as the euro (EUR) finished well above 1.36, however gold and silver didn’t see the same type of love and sold off even more... Outlook 2011: Everyone Needs Commodities A Three-Minute Lesson in Gold Investing The Daily Reckoning: Now in its 11th year, The Daily Reckoning is the flagship e-letter of Baltimore-based financial research firm and publishing group Agora Financial, a subsidiary of Agora Inc. The Daily Reckoning provides over half a million subscribers with literary economic perspective, global market analysis, and contrarian investment ideas. Published daily in six countries and three languages, each issue delivers a feature-length article by a senior member of our team and a guest essay from one of many leading thinkers and nationally acclaimed columnists. Cast of Characters: Bill Bonner Founder Addison Wiggin Publisher Eric Fry Editorial Director Joel Bowman Managing Editor The Mogambo Guru Editor Rocky Vega Editor