World's Alpha Nation in Shock

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We’re having another “fin de bubble” feeling. The absurdities seem to be building up pressure, like a major steam pipe under the sidewalk; we thought it might burst up through the sidewalk at any moment.

What set us off was the rush of comment on China’s $19.5 billion bid for Unocal.

The whole premise of America’s system of empire finance is that an American should be able to get what he yearns for, rather than what he actually earns. This desire is, of course, universal. It is like the desire to eat a lot without getting fat…or to take a trip to Las Vegas with your pretty secretary without upsetting your wife. But when you are the world’s Alpha Nation, getting something for nothing seems not only possible, but ordinary. It comes as a shock to realize that you may not be able to get away with it.

It was a “rough week,” said Reuters.

What made it rough was that both stocks and the dollar fell. Gasoline, meanwhile, rose to a record high early this morning and then came China with an offer to buy one of America’s leading oil companies. China is good for the money. It makes more than $100 billion from its trade with the United States each year. And China has a strong motive to buy; its economy is growing rapidly.

The rough part is that the Chinese offer comes as a blow to Americans’ amour propre. They have wanted to believe that they were getting rich…that they are on top of the world…and that they have the world’s most dynamic and productive economy. And then along come the Chinese with billions of dollars in their hands, and a plan in their heads to take away a substantial part of America’s vital energy industry.

We read the papers everyday. Hardly a day goes by without a comment on outsourcing, globalization, or America’s global trade imbalance. But we doubt we have read more than one or two remarks that were not completely moronic. We checked again this weekend; the spell of imbecility continues.

First, our favorite columnist, Thomas L. Friedman, can’t understand why politicians are opposed to Cafta, the Central American Free Trade Agreement. He even turns to the consulting firm that advised Enron — McKinsey — to make his point: “Early movers in offshoring improve their cost position and boost their market share.” He goes on to say that it is better to compete with the Latin Americans than the Chinese, because when “a shirt that says ‘Made in Honduras’ might contain 60% U.S. content, while a similar shirt that says ‘Made in China’ most likely would have none.”

What Friedman does not understand, among many other things, is that a man always desires to be richer than his neighbors. He desires free trade only when it offers to widen the gap in his favor. Cafta will almost certainly make everyone a little richer; but it will probably do more for the Latin Americans than it will for the Norte Americanos. Relatively speaking, the yanqui will get poorer while the Latino gets richer. If the trend continues long enough, people in Great Falls will send their boys to Mexico City, not to manage hedges, but to trim them.

• The International Herald Tribune makes Friedman’s point in its weekend editorial: “The United States needs open, accessible markets.” In this, it is completely mistaken. The empire’s commercial peak has already crested. In open markets, it loses out to the faster-moving, lower- cost competitors — in Latin America as well as in Asia. This does not mean that it is really worse off because of globalization. Everyone is better off when people are free to work and trade as they please. But the empire suffers. It loses money. It loses good-paying jobs. Its absurdities are exposed. Its hallucinations…its delusions…its preposterous yearnings and conceits — all come to look a little passé and pathetic.

The IHT is particularly concerned about the Unocal deal. America imports 60% of its oil. Already, the oil price has risen over $50 a barrel and looks like it will stay there. Gasoline is getting more expensive. And now China is competing for U.S. supplies directly — in the homeland itself.

The IHT’s solution to this "problem" is for the U.S. to use less oil. What a good idea! When the Chinese buy our grain and food companies, we suppose the paper will advise us to eat less, too. But while we laughed at the suggestion, the IHT came up with another solution that practically made our sides split: to raise taxes.

Not that there isn’t a certain logic to both suggestions. But it is the same kind of logic that led to the problem in the first place; rather than let nature take her course; we will make the situation worse. Chinese growth will mean higher oil prices. Higher prices will mean that Americans will be able to afford less of the stuff; they will use less. The IHT recommendation, that we use less oil, is no help. The other proposal — that taxes be raised — is similarly useless and unappealing. If you are afraid that Chinese competition will reduce Americans’ purchasing power, taking it away immediately — by taxation — doesn’t seem like much of a solution.

• Oil breaks the record high and creeps closer to $61 a barrel…

Over the weekend, Iran chose a highly conservative president, Mahmoud Ahmadinejad, which leads to concerns that already strained Iran-U.S. relations could worsen.

“‘The Iranian election was just enough to get the market over the $60 hump,’ said Phil Flynn, a senior analyst at Alaron Trading in Chicago, referring to Ahmadinejad as a ‘hardliner’ whose election may ‘raise tension in the region.'”

The demand for oil is not waning in the United States, and Marketwatch.com asked Resource Trader Alert’s Kevin Kerr what he thinks about the refinery capacity state of affairs:

“The situation is grim, with refinery capacity and the condition of those refineries left in question,” said Kevin Kerr, president of Kerr Trading International.

“Bottom line is that these facilities have been running full tilt for months, and the [chances] of a repair problem or major outage or even a catastrophe are not only likely but highly probable,” he said.

Added to that, “if this week’s inventory levels show dramatic declines, we could be looking at $63—$65 crude oil,” he said.

• “My girlfriend in China informs me that the Shanghai residential property market is dropping like a stone. I rubbed my eyes when she emailed me that it has recently dropped 50%,” writes a faithful reader.

“It appears that many new developments remain empty, having been built on the back of a speculative market, and I surmise that oversupply is significant and visible now that demand is dropping.

“It made me recall for some bizarre reason a visit to the Forbidden City in Beijing. Many of the buildings on the inner courts of the City’s Palace complex are closed to visitors, and the buildings interiors can only be viewed through their windows. On my visit I was busy looking through one particular building window at some artifact of Imperial decadence, when I heard an excited commotion yards away from me in front of another window to the very same building.

“A growing crowd of about twenty people were bustling each other in a friendly but slightly manic way, to look through this one window, despite the fact that several other windows were adjacent affording a view of the same room. This window in question had the best view of the artifacts, but clearly any view was obtained by people at the expense of being bumped off by yet another person from behind trying to get through. The people at the back of the queue were steadily being joined by more people anxious to push through and find what they were missing out on.

“I looked on at an increasingly comic scene whilst more people attracted to the commotion pushed and shoved to get a view through this one window. This knot of good-humoured, but fevered human beings, boiled and surged in a self-sustaining thrash of human curiosity, despite the fact that the courtyard to the building was relatively empty and at least two other windows afforded an alternative view.

“It made me smile, and love the Chinese a bit more for being so silly, but it also seemed like a living metaphor for a bubble mentality. Needless to say, half an hour later you could gaze through the same window in perfect peace.”

Bill
Bonner [send
him mail
] is the author, with Addison Wiggin, of Financial
Reckoning Day: Surviving the Soft Depression of The 21st Century
.

Bill
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