China, Emerges

Today, Standard and Poors issued an advisory that the credit rating of the United States was on a negative outlook. They didn’t drop the rating, currently AAA, they just said that a budget deal was unlikely because of politics. Republicans, predictably, seized on it as evidence that we must cut when in reality even S&P is saying that cuts have to balanced with tax increases. In fact, many in business believe taxes should be higher.

We understand that because if we don’t make money, we can’t live. Republicans, on the other hand, don’t have that problem so they can believe in fantasy like this

Amanpour continued to press him, expressing skepticism that Congress can really balance the budget just by cutting social programs. Walsh insisted that tax cuts consistently help the economy grow and therefore raise revenues for the government.

“In the 80s, federal revenues went up,” said Walsh. “We didn’t cut spending. Revenues went up in the 80s. Every time we’ve cut taxes, revenues have gone up. The economy has grown.”

That’s true, but not as result of the tax cuts. The economy was recovering. In fact, Reagan’s tax cuts actually worsened the federal deficit and debt not because spending dramatically climbed but because tax revenues never rose to the level that would meet our obligations. In the real world, where we live, there is no free lunch.

The most shocking thing is not that Republicans continue to believe in supply side fairy tales or that S&P tried to rattle folks in DC. Interest rates actually went down today, which shouldn’t have happened if S&P had any stroke. China was the far bigger news today with the Bank of China tightening bank regulations and reiterating that they would do whatever was necessary to rein in inflation.

Even better, they’re starting to say no to the demands of Wal Mart.

“China is moving into a new era, a new norm,” said Dong Tao, an economist at Credit Suisse in Hong Kong. “In the previous decade, inflation was about 1.8 percent a year; in the next decade, it may be closer to 5 percent.”

The implications of such a shift are huge, not just for domestic consumers but perhaps even more so for exports. As wages and production costs rise, coastal factories are demanding higher prices for the goods they ship overseas. That means Americans, Europeans and other buyers will have to pay more for those goods or seek lower-cost suppliers elsewhere. In some cases, retailers are bidding for goods at prices the exporters consider too low.

“I hear that many Chinese exporters are rejecting orders from Wal-Mart and other Western retailers,” Mr. Tao said. “I’ve been covering the Chinese economy for a long time, and I’ve never heard that before.”

This was always inevitable and considering the strength in the rest of the developing world, and the weakness here at home, there’s really only one place for much of this to go…home.

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