At Arm's Length - Financial Commentary about Money, Investing, and How It Affects the Average Investor

At Arm's Length: 06.12.05

The Differences are Startling
China is the Next Heir Apparent

Please note, this is a response/rebuttal to a columnist of far higher renown than me. I walk on, as Greenspan has become fond of saying, "reasonably firm footing" when I wrote Floyd Norris about his piece in the Friday, 6.10 New York Times Business section. And in doing so, either one of two things will happen as a result: he will respond with a reinforced argument which will set the record straight or he will agree to some degree that I might be more right than wrong.

Dear Mr. Norris,

Please correct me if I'm wrong, but I tend to disagree with your argument about the similarities between the U.S. and China. While their economies seem to be at the same point, I believe that it is because they are simply passing while headed in two different directions. The U.S. might even ponder as the Chinese pass, whether they would be destined to a future of rise and fall economics that have undermined so many economic empires such as ours before.

China's problems are ones we once had in a post World War II era when production was outpacing the workforce. The surprise increases in the Chinese infrastructure beginning with a wealth seeking influx of provincial workers are creating the same problem for their industries this country once enjoyed. Farm to city workers looking to increase their standard of living are arriving to work in factories that, as the current American trade deficit numers can attest, are barely keeping up with consumer needs both in their homeland and abroad.

They are producing goods for a worldwide market with barely a glance at the cost of producing those products. They make up those lost costs by financing their customers in much the same way car manufacturers did in headier and more profitable times past. Oil over fifty dollars a barrel, no problem. Copper and any of the other multitude of commodities that are being sucked into the Chinese production machine are being costed as relevant prices.

Which is one of the reasons they continue to peg their currency against ours. This point of inflection will provide us with a glimpse of what we have done in the past as well. I think it is relatively safe as well to say that our dollar's recent strength is mostly because the EU is not worth the trouble.

China's promises to its people are being made now and will, much like us, be paid for in the future but on a much smaller scale. That future is now for us and we are seemingly ill prepared for it. Economic policies have given rise to an accepted opposite of the pay-go suggestions that the chairman of the Federal Reserve likes to tout. But China is not funding a war nor is it likely to in the near future.

Our pension problems/promises are result of the Pension Benefit Guaranty Corporations misguided charter. Acting as an insurer, the PBGC should have been allowed to step in and aid companies with pension problems and guide them towards a lower risk status. But they act more like the IRS. The premiums paid by companies do little to meet the problems of pensions because of more than just accounting shortfalls and poor actuarial study. By lying, many companies are able to keep their premiums down while masking the true status of their obligations, often until it is too late.

What would accomplish the greatest measure of success might be held in the charters of multi- employer/union pension plans. These pensions are run like trusts, with members from both groups watchdogging each other to the benefit of their pensioners. There are usually certain levels of contribution that need to be maintained by a board of trustees, responsible representatives from each party making sure that the plan is fully funded.

The government could act as a partner in these plans, stream lining them and making more efficient in the process. The first caveat to that thinking might be the general inability of our federal government legislating anything with any efficiency in the past but when you have business minds also on the panel, calmer heads will prevail as they look for full funding at the least amount of impoact on the bottom line.

The government would act on behalf of the employee, not the taxpayer as they are doing now, requiring all pension reporting and actuarial estimates to be submitted as part of the process for insurance. Plans would be revised to include the minimum promise levels to be funded by corporations.

What about the airlines? We can't fix many of the problems that have already occurred due to poor foresight of far too many regulatory agencies than space allows to mention. But moving forward, the boards of such companies should be allowed to relinquish a majority of seats to pension guarantors appointed by the President to ensure that all pension obligations will be met with good accounting techniques. If the shareholder suffers somewhat during the process, so be it. They have been willing to buy those inflated numbers that added to profits of dubious nature for years.

The adjustment will allow us to possibly regain some footing on the way down. We will feel the impact of this shift in the coming months regardless of who is telling us otherwise. Unfortunately the U.S. economy is heading in a direction that bares no similarity of the months and years of economic prosperity ahead for the Chinese.

We should envy their success and stop acting as if our insistence at consessions carries some importance. China has many developing markets to explore, a growing surplus which is providing for unprecedented economic growth that will some day not need the benefit of cheap money, and a workforce whose sheer size will keep their class system cleaning divided between lower and upper - which might be the only real similarity in the works.

The promises the Chinese are making do not reflect our capitalist notion of success but remain quite a distance from communism as well. The promise the United States made to its people are both worthy of keeping and filling, albeit on a lesser schedule than originally agreed upon.

The United States in now in a concessionary era while the Chinese make no excuses for their growth and refuse, even if it is silently, to make any concessions at all.

Best always,
Paul Petillo
Managing Editor

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