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Troubling Economic Developments

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Stay tuned for more worries.

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Editor's note: The following is a free issue of The Lavery Insight economic newsletter by Jack Lavery. Sign up for a free two-week trial.

Prospects for global economic recovery very much benefit from a free-trade climate, which is why I'm troubled by President Barack Obama's recent decision to impose a 35% tariff on Chinese tires. This will increase prices paid by the American consumer, and it quickly resulted in reciprocal action by the Chinese against US exports of chicken and auto parts.

I'm not saying these developments replicate the Smoot-Hawley protective tariff legislation signed into law on June 17, 1930. Smoot-Hawley, and the reactions to it by our trading partners, resulted in deepening and lengthening the Great Depression.

For the head of the free world to fire an initial salvo on Chinese tires is not prudent, in my view, though it does achieve the political goal of currying favor with labor unions. The World Trade Organization (WTO) has issued a report that warns of, and expects, more protectionist measures within the global economy.

Next we see the shift from the planned missile sites to protect nations such as Poland and Czechoslovakia to an alternate approach of ship-based weaponry. While this was received as good news by Russia, it raises concerns in many other places.

The US is seeking the successful completion of a new Strategic Arms Reduction Treaty with Russia. While these moves are doubtlessly well-intentioned, and, at some level, decidedly laudable, the timing can be questioned in view of the long-range missile programs in North Korea and Iran. These nuclear ambitions can threaten not only South Korea and Israel, but much further targets as well.

It's portrayed as great news that the household sector enjoyed a 3.9% rise in financial net worth, per the release of the Federal Reserve Flow of Funds data for the second quarter of 2009 -- the first quarterly advance since the third quarter of 2007. It's certainly not bad news, but it must be recognized that household sector financial net worth is still down 19% from its peak in the third quarter of 2007.

It follows that the American consumer sector, even with its recent record reduction in debt outstanding, is only in the top of the third inning in its deleveraging process. The consumer credit outstanding figures don't include mortgage debt or any loan secured by real estate, such as home equity loans.
No positions in stocks mentioned.

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