Notes From Underground: Wen to meet Obama Thursday; Zapatero gives the European debt crisis the boot

As the United Nations convenes for its fall meetings, world leaders gather in New York, which creates the opportunity for traffic jams and face-to-face bilateral meetings for heads of state. Chinese Premier Wen Jiabao will take the time to discuss serious issues with President Obama–and, of course the trade issue will take center stage. Premier Wen will make his case that the Chinese trade surplus is not a question of currency value but rather economic structure. Wen will argue that the huge trade surplus will correct as the structure of China’s economy becomes more domestic demand driven. The Chinese believe that capitalist history is replete with trade surpluses as a part of any capitalist society’s development. The U.S. and Great Britain both ran massive surpluses as their economies transitioned from agrarian-based to industrialized nations.

The movement of people to city from farms means that there are huge pressures on wage rates, which push wages low, while simultaneously pressuring people to save as capital formation is badly needed. Wen appears to be teaching economic history and while he does we hope he brings up the 50 percent currency devaluation that took place on January 1,1994: The day NAFTA took effect. The reminbi fell from 5.80 to 8.70 and the impact is another chapter of economic history. Congress seems to be in no mood for tutorials so we hope that Wen follows up on his statement that U.S.-Chinese differences are easy to resolve. Here’s hoping.

Spanish Prime Minister Zapatero also made headlines today when he declared that the “EUROPEAN DEBT CRISIS IS ALL BUT OVER.” This is as full of HUBRIS as George Bush’s MISSION ACCOMPLISHED banner. If this claim wasn’t so sad it would be laughable. Mr Zapatero, Spain has 20 percent unemployment and is about to begin a major government austerity program. Greek, Irish, Portuguese and Spanish bond rates are all significantly higher than Germany’s. The European bank stress tests have been the subject of international ridicule. The DEBT CRISIS is far from over and to believe so is an illusion of which Timothy Leary would be proud.

Spain and Europe have much work to do to escape the burdens of a self-made NEGATIVE FEEDBACK LOOP. The elements of high debt, high unemployment, austere budgets are just the beginning. Toss in an appreciating currency and the possibility of monetary fines levied by the European Commission for budgetary non-compliance and we would have to say the “CRISIS” is far from over. Now that the FED is on alert for further QE and the DOLLAR is dropping, the renewed pain for the European PIIGS is very real. The U.S. and Japan are going to provide a new sort of stress test. Prime Minister Zapatero, it is no time to take your shoes off and put your feet up. Declaring victory does not make it so.

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6 Responses to “Notes From Underground: Wen to meet Obama Thursday; Zapatero gives the European debt crisis the boot”

  1. james sinclair Says:


    The US is not the major trading nation with China.
    Do you really think
    china in the great scheme of things gives a rat shit about the US legislative.

    add up all the
    us dollar purchase made by china of international mineral companies and minerals themselves and a long way towards hedging their long treasury positions has occurred.


  2. newtcanute Says:

    There’s a story being told (the EU countries DEBT/GDP and DEBT/REVENUE Ratios are–with the exception of Greece–so much “better” than the US ) that seems to imply the EU and its Euro are in better shape than the Buck. Can these numbers be believed? Can they be meaningful in the absence of a “national” Bank of Last Resort (which Zapatero does not possess either…) and how does the absence of gold mining and most other mining on the European continent play into the respective longer term valuations and survival probabilities of each?

  3. Arthur Global Practice Says:

    Zapatero is listening to Otmar Issing, president of the Center for Financial Studies and a former ECB board member. He told CNBC that “Euro Future Doubts are ‘Silly’

    Yra, maybe you and I are silly 🙂

    From Spain.

  4. Paul M Says:


    Thank you once again for providing your insight.

    I was as well shocked upon receiving Zapatero’s grand revelation, but have over the years come to terms with the perennial problem of enshrining political authorities as adjudicators of national economic affairs. Aside from reiterating this truism, he has initiated the death knell of a currency held in large quantities as a reserve instrument, though the ringing will remain at the tone of a whisper until we are somewhat closer to June of next year.

    The importance of humility in both the markets as well as daily living should never be underestimated. It remains as fundamental as the concept of capital flight from a location where it is undervalued to one anew which provides an adequate market value. Hubris remains the natural counterbalance for ignorance and arrogance: that the honest and humble man may always have a natural advantage in a world devoid of ethics. In character, he (Hubris) is rapidly approaching the desk of the Western World with a margin call, and as per Jim’s suggestion reiterated since the inception of his website, he is demanding to be paid in gold.

  5. yra Says:

    Jim–it is great having a post from you as it enhances the intelligent response that NOTES attracts.I agree with you that as time marches on the impact of the U.S. will be less and less in regards to China.The bigger problem is CIFIUS which has blocked Chinese attempts to acquire U.S. assets under the guise of strategic rationals.This is pure B.S.–you are either the beacon of global capitalism and all that role entails or you are just another Janus faced entity changing the rules in mid stream for short term political expediency.Yes China is taking its dollars and buying hard assets around the world.I laugh when I hear the concern over China in Africa[not the Darfur issue of the Congo ] but China has been a prime alternative for African nations since the cold-war when the U.S.–U.S.S. R.-were involved elsewhere–just check who built the Tan-Zam railroad

  6. yra Says:

    Arthur and Paul–usual good posts.Will check out Issing but he is not the same Otmar since is became an advisor to Goldman.I sat a small group discussion with him about 3 years ago and was quite amazed at how he had softened.I am him his view about the role of central banks counter-cyclical actions and said it would be politically very difficult–I was shocked by this view for it was not the Issing of previous decades.
    Paul –I think the front page story in the WSJ over the weekend says quite a lot.A committee so secret that even its members didn’t know it existed.What would Dean Wormer have to say about that–huh double secret probation.

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