America: Wake up! How are we going to compete with China?

By Eric Jackson, Senior Contributor03/02/11 - 06:00 AM EST

Former GE(GE_) CEO, Jack Welch, was on CNBC Tuesday, saying, "This is still the best country in the world."

Those words make us all feel warm and fuzzy. We're the best. We have been and we always be. Politicians like to invoke these same feelings in their speeches.

But the words are hollow. We're not the best anymore. Our time at the top is coming to a close, unless we take drastic actions which we seem unwilling to consider. China is about to pass us. The Chinese work harder, for less money and benefits.

We need a wake-up call.

I had a long car ride last weekend and was listening toSirius(SIRI_) satellite radio with an endless loop onCNN and Fox News Channel. If you only got your news from these two channels and the politicians and pundits speaking on them, you would assume our leadership atop the global is unassailable.

The biggest question facing our country, according to the talking heads, is whether we should have more or less government and more or less taxes.

These debates miss the big picture: China is eating our lunch economically. Are we, as Americans, going to come together as a cohesive team and think about how we can better compete with the Chinese or are we going to keep fighting ourselves?

Americans have had it good for a long time. Our standard of living is the best in the world. We borrowed money over the last 20 years because our expectations of continued prosperity were assured. But the party is over. We've collectively maxed out our credit cards. It's time for us to look at ourselves critically in the mirror.

We don't need politicians who act like polite Saks(SKS_) sales clerks telling us that our butt doesn't look fat in a new pair of jeans we're trying on when it does. We need politicians who talk to us like a personal trainer at the gym: We're fat and out of shape --- and we need to get on a program.

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[** This post is an excerpt of the full article, which is available on TheStreet.com by clicking here. Free Site.**]

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Canada's Curious Case

By Eric Jackson, Senior Contributor01/05/11 - 06:00 AM EST

Canada's economy has been the best performing of the G8 nations coming through 2008 with flying colors.

It has been heralded by many in the U.S. business media as being an example for the U.S. to follow. It's common now to hear pundits suggest Americans to seek the safe haven of the Canadian dollar from the risk of the US dollar's debasement. Recently, no less an authority than Bill Gross suggested savvy investors buy Canadian debt as a hedge to what's on offer here in this country.

Canada deserves pats on the back for its ability (and good fortune) to steer itself through the last few years. However, there are some ominous warning signs on the horizon for its economy and it's not entirely clear where it -- or its currency -- is headed next.

First, let's review what Canada's done right.

1. In housing, Canada kept strict oversight of income verification and documentation. You just never could walk in to the equivalent of a Countrywide in Canada and get approved for an obscene amount of money.

2. All mortgage loans in Canada are "full recourse," meaning that the borrower is fully responsible for the mortgage even if he or she defaults. Banks can keep coming after the individuals who took out the loans, long after the property has gone into foreclosure.

3. No tax deductibility of mortgage interest. Although some Canadians complained about this in 2005 when house prices were booming in the U.S. but flat in Canada, this conservatism looks very wise today. What's the point of goosing as asset-class with a tax break, when it contributes to the devastation we've had in America in housing for the last three years?

4. More conservative lending and fewer mortgage brokers. Canadians often like to say they don't/didn't have subprime mortgages in Canada. That's not correct. Subprime mortgages exist, but are far less common than in the U.S.

Part of the reason is that the five Canadian banks are the major way most Canadians originate their mortgages. Only 35% of Canadian mortgages are originated by mortgage brokers, whereas the equivalent number in the U.S. is 70%. Therefore, there were far fewer subprime mortgages made available in Canada over the last decade - another conservative point for the housing economy.

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[** This post is an excerpt of the full article, which is available on TheStreet.com by clicking here. Free Site.**]

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QE2's Unintended Global Consequences

By Eric Jackson, Senior Contributor11/10/10 - 06:00 AM EST

Fed Chairman Ben Bernanke did the right thing in launching QE2 last week. Nevertheless, it's spawned a rash of criticism from the likes of Kevin Warsh, Germany's finance minister, and Sarah Palin.

On a recent trip to China, I got a chance to read the excellent In Fed We Trust by David Wessell about Bernanke and his recent years at the Federal Reserve. What was clear in the profile is that, while Bernanke acknowledges that he was slow to see the extent of the subprime problem coming in 2006 through the first half of 2008, he has been aggressively doing "whatever it takes" ever since to slay the dragon of a deflation-driven recession.

After a life in academia studying the Great Depression and -- more recently -- Japan's travails from a 20-year deflation slide, Bernanke has good reason to fear an economy falling back into a quicksand pit.

Bernanke knows two things about his public perception. First, he, like politicians, gets no credit for any actions he took that prevented problems from happening two years ago and second, there's an inherent bias that the Fed and certainly among the mainstream press and the public to fear inflation much more than deflation.

As late as early September 2008, Bernanke was fighting fellow Fed governors' hearts and minds against the imminent threat of inflation. Runaway inflation is a much easier concept for Glenn Beck to diagram on a chalkboard compared to runaway deflation. What's the schematic for that?

So, three cheers for Bernanke taking action last week. He and the Fed governors have a dual mandate: full employment and price stability for the US economy. Given the data and where we are in this recovery, the Fed made the right call.

But Ben Bernanke doesn't have responsibility for the rest of the world and, unfortunately, there will be challenging unintended consequences of his actions last week on other emerging economies.

Specifically, China and other economies -- like Hong Kong -- with their currencies pegged to the US dollar will feel added inflationary pressures on their already strong economies. Simply put, Bernanke's explicit prescription for healing the U.S. economy is now gas being poured on to already hot economies who bounced back remarkably quickly from the crisis two years ago.

In a recent letter to his investors, renowned hedge fund manager Paul Tudor Jones complained about the Chinese yuan's peg to the US dollar: "On January 1, 1994, China devalued its currency by 50% in a single day, and since then has experienced a manufacturing boom. After 15 years of impressive productivity gains relative to its trading partners, though, it now resists the smallest appreciation.... "As someone who has traded foreign exchange since 1980, I believe the RMB/USD rate is currently the single most important of all exchange rates. It not only drives the largest foreign trade relationship in the world, it also drives virtually every other exchange rate globally. Dozens of other emerging market countries suppress their exchange rate against the US dollar because the RMB is effectively pegged to the dollar."

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[** This post is an excerpt of the full article, which is available on TheStreet.com by clicking here. Free Site.**]

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Be Careful Dogging the Dollar

By Eric Jackson
RealMoney Contributor
10/8/2010 7:45 AM EDT
Click here for more stories by Eric Jackson

The negative chatter about the U.S. dollar's decline is overdone. As we've learned twice already in the past year, just because a crowd of people says something is inevitable does not make it so.

At the end of 2009, the level of pessimism around the U.S. dollar was very similar to that of today. There was no shortage of people saying we were on our way to debasing the currency. The Fed had rolled out its quantitative easing (QE) program, taxes were going to rise, there was no plan to rein in entitlements and the president's health care plans took up much of the headline space available in newspapers.

Back then, I suggested in these pages that the dollar's weakness would probably reverse course and that the currency would rally for most of 2010. I also argued that the dollar would always be a "safe haven" for investors to store value in. That turned out to be the case for the first four months of this year -- and that was when the stock market was also going up. Imagine that: it is possible for the U.S. dollar and equities (not to mention commodities) to rise at the same time. Who knew?

Of course, when the European sovereign debt crisis stole the headlines in late April and into May, we saw a knee-jerk response as investors fled out of equities and into the dollar. The U.S. Dollar Index Future (DXY) bounced from near $74 in early December last year to over $88 in early June.

However, the dollar has since slumped back down. The DXY is back to $77 at the moment and the Cassandras are echoing the same arguments we heard last year. This time, however, there's a slightly new spin. Instead of simply making the case that the U.S. dollar is doomed, we are hearing (with increasing regularity), that all world currencies are in a race to the bottom.

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