Killing the Wrong Pig

October 11, 2012
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Winston Churchill is perhaps the most quotable world leader of all time. There are many tales of his memorable remarks.

One such story, possibly apocryphal, regards the bulldog’s regret at partnering with the Russians to defeat the Germans in World War II.

On comprehending the awfulness of Stalin, and the mistake of letting him consolidate power, Churchill reportedly exclaimed: “We have killed the wrong pig!”

In our estimation, all the recent hand-wringing over Western debt levels — see “Hey Bill Gross” for reference — is tantamount to killing the wrong pig.

The pig to be focused on at this point is protectionism risk, not excessive concern over safe-haven debt-to-GDP ratios…

Consider the following (via WSJ):

The world’s two largest advanced economies, the U.S. and Japan, face growing long-term risks from investors fleeing trouble spots around the world, the International Monetary Fund warned Wednesday.

Safe-haven flows into the U.S. and Japan are pushing interest rates down and lulling investors and policy makers into complacency, the fund said in a report on financial-stability risks released ahead of its fall meeting here.

The IMF’s warning is part of its broader global effort to sound the alarm about government deficits and debt across advanced economies, hoping to spur governments to take action before those economies potentially plunge into sovereign-debt crises.

“These are levels of debt where things can go wrong very, very quickly,” IMF chief economist Olivier Blanchard told reporters here. “We are in a zone where we really don’t want to stay.”

To which we say, “Dude. Seriously?”

Sober awareness of future problems is all well and good. But here is why such talk could be more dangerous than constructive:

  • Deficit reduction has a strong political (read: demagogue) component.
  • One way to bring down the deficit is to focus on trade imbalances (read: reduce trading flows).
  • As such, the views of deficit hawks conveniently dovetail with anti-trade groups.
  • This creates a tempting electoral approval path for shift-with-the-wind politicians:
  • Gain popularity through protectionist stance (in the name of cutting deficits)…

In the upcoming U.S. elections, “get tough on China” is a resonating message on both sides of the aisle. Mitt Romney has made the China crackdown message part of his election platform, and on the democratic side, pols like New York senator Chuck Schumer have been beating the anti-China drum for some time now (with the full-throated support of labor unions).


China, too, is taking a particularly nutty path, as shown via “China snubs financial meetings in Japan:”

Two top Chinese officials will not attend international financial meetings in Tokyo this week, in an apparent snub aimed at showing China’s displeasure with Japan’s handling of a dispute over islands claimed by both Asian nations.        

The last-minute cancellation, confirmed by Japanese officials on Wednesday, came as a Japanese news agency reported that Tokyo may try to defuse the standoff by officially acknowledging for the first time that China also claims the uninhabited islands in the East China Sea, known as the Senkaku in Japanese and Diaoyu in China.

China is playing a dangerous game of economic brinkmanship with one of its largest trading partners.

The calculation among the mandarins may be that China is more important to Japan than vice versa. And Japan has to be alarmed by developments like this (via WSJ):

Japanese automakers suffered plunging sales in China last month and have cut manufacturing by up to half in China this month after violent anti-Japanese protests against Japanese-brand cars and even their owners.

Toyota announced on Tuesday that its sales to dealerships in China dropped 49 percent in September compared with those in the month a year earlier, while Honda said that its sales had fallen 40 percent and Nissan said that sales were down 35 percent.

Regardless of who has the upper hand, this has the potential to end very badly. It may be, too, that China’s leaders are losing the plot, forced into more aggressive posturing over the Senkaku Islands than is healthy or even sane, as a result of the populist sentiment whipped up among China’s citizenry that has now grown into a monster of its own making.

And then of course there is the Huawei flap between China and the United States:

The Chinese government hinted Tuesday at a potential setback in relations between Beijing and Washington over mounting U.S. suspicion of Chinese telecommunications companies.

China’s commerce ministry warned that relations between the two countries would be hurt by a congressional report that said two Chinese telecommunications firms pose national security threats to the U.S….

China’s forceful response shows how the highly-critical bipartisan report, released in the midst of a political season, runs the risk of aggravating tensions between the two powers. Both countries are facing leadership transitions that tend to strike stronger nationalist stances.

Relations may be strained further by a coming U.S. intelligence report on intellectual property theft, which focuses heavily on China, according to people briefed on it…

Bottom line: The recent focus on Western (and Japanese) debt levels is an example of myopic fixation on a conventionally popular topic that overlooks real and mounting risks to the global economy in the form of protectionist threat and trade war outbreak. The debt-to-GDP obsessed authorities, bolstered by pandering politicians, are fighting the last war — or perhaps not looking back far enough, to the Smoot-Hawley led debacle of the 1930s — and killing the wrong pig.

JS (jack@mercenarytrader.com)

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