Drywall (Plasterboard) consists of  gypsum (plaster of Paris) sandwiched between two sheets of paper. It sells for around 25 cents a square foot, or about a dime a pound. It is generally made as close to the point of use as possible, because otherwise the cost of transportation is prohibitive. So I was amazed to see articles about stinky Chinese drywall in Florida. It wasn’t the stinky part that amazed me, it was the part where builders had been  importing drywall, a dirt (literally) cheap commodity, from China. Now it may have been that they had no alternative, but it, together with yesterday’s post from Mish’s blog, got me thinking about the impact of imports from China and elsewhere.

Imports are subtracted from GNP to calculate GDP. But these import costs don’t really convey the benefits to the US economy, which are much larger. Goods and services are imported from China, India and elsewhere because they are typically much, much cheaper than if they were produced in the U.S. Not 5 or 10% cheaper, but in many cases 80 or 90% cheaper. This explains, in part, why US corporate profits have been so strong the past few years. Not only that, these folks are aggressive savers and have turned right around and lent much of the money they’ve received from the US right back to us. So the US has been able to live the high life on the backs of the workers of the third world. Thise workers have chosen to restrict their consumption (or the choice has been made for them) for future benefit.

But the US is producing less and less. How are we going to pay off this debt? More importantly, how long will our credit be good with these folks? As we buy less from China, there is ample room of the Chinese people themselves to buy more. They have the savings, and the income, and they can slow down the huge investments in plants and equipment as well as technology and infrastructure that they have been making the last few years. But that means the US will have to make do with less. That will be a bitter pill to swallow, indeed.

The economic crisis is justifying (apparently) the most extraordinary expansion in government in the history of the United States.

No matter how people feel about the plans, they are undoubtedly ambitious—and expensive. Tomorrow’s taxpayers will still be paying for them long after Obama is out of office.

So far in his month-old presidency:

—Congress passed and Obama signed into law a record $787 billion mix of tax cuts, job-creating projects and aid to struggling states.

—The president pledged up to $275 billion in federal aid to help stem a tidal wave of home foreclosures.

—The Treasury Department and the Federal Reserve announced financial-rescue steps that could send up to $2 trillion coursing through the economy.

In all, the plans would raise the federal portion of the U.S. economy to some 31 percent, more than twice the level after eight years of FDR’s historic New Deal spending.

This is the government bubble, I guess.

Interesting post on Mish Shedlock’s blog about the state of play in China, from an artist living and working there.

I think if poor times were to come, the resourceful, tough, patient, communal, hard working Chinese lower classes would do just fine compared with urban Americans. China is not a socialist country like USA. If you get sick and need oxygen in the hospital and you cannot pay for it, with cash, you may die. It’s the same with food and hunger. In America we have one poor indigent person for every nine working and making it. In China its flipped. You have nine poor people working for $5 a day, maybe even $2 a day, for every well-to-do middle class $20K per-year person. It’s a very Darwinian, Dickens-like capitalist world, perhaps like US in 1880.

Gold touched $1,000 this morning and I sold much of my positions. Gold is getting a lot of press, but gold stocks are still acting poorly, in relative terms. Historically, the XAU gold stock index has wandered in a range of 0.2 to 0.35 times the price of gold. Currently, it is at 0.13 which is a low extreme. Assuming this divergence is going to be closed at some point, the amount of positive retail sentiment for gold makes me nervous that the divergence will be closed by a falling price for gold, rather than rising prices for the gold stocks.

The CPI report this morning showed prices rising on a monthly basis, and flat on a yearly basis. Given that the CPI is structured to provide a low estimate of inflation, it seems likely that price inflation is still with us. The money supply data shows that monetary inflation is alive and well, despite the debt repudiation that is ongoing. According to yesterday’s report from the St. Louis Fed, both MZM and M2 are continuing to rise. Even though bank reserves are falling and taking some of the steam out of the recent huge expansion of the monetary base. I have to conclude that Ben is still winning. However, this has all the signatures of a Pyrrhic victory.

The armies separated; and, it is said, Pyrrhus replied to one that gave him joy of his victory that one more such victory would utterly undo him. For he had lost a great part of the forces he brought with him, and almost all his particular friends and principal commanders; there were no others there to make recruits, and he found the confederates in Italy backward. On the other hand, as from a fountain continually flowing out of the city, the Roman camp was quickly and plentifully filled up with fresh men, not at all abating in courage for the loss they sustained, but even from their very anger gaining new force and resolution to go on with the war.

In this context, Ben’s new sovereign debt bubble is likely to be fatal. The previous bubbles have, indeed, destroyed the conventional credit mechanisms, as well as the “financial innovations” that were instrumental in creating the bubbles.

Now all the way getting here, I’ve thought that the debt repudiation would overwhelm the Fed and the Treasury. But I’m not seeing it happening. I see a lot of sentiment that says deflation is a problem, and of course that only encourages Ben to print more. Not on my watch, says Ben. Faster, faster, master printer, says Ben. And the presses spin ever faster.

The scary thing is that when I look at the stimulus package the largest single feature is support for government employment. It is clearly intended to allow state governments to run deficits, prohibited by most state constitutions, by papering them over with the Federal government’s borrowing power. Maintaining government employment and compensation while private output is shrinking is a signature of the hyperinflationary crashes. In these situations, money is printed to pay the public employees – the Zimbabwean army, for example – that form the power base of the regime, and ends up chasing a diminishing flow of goods and services. With any private savings being immediately consumed by inflation or government, the private sector continues to dwindle through lack of investment. While it is not yet too late to avoid this scenario, it is an ugly portent that is worth taking note of, for the record. This is not yet the beast, but these are its tracks. They are fresh.

Rick Santelli of CNBC gets it. A little common sense. Thanks to Calculated Risk for picking it up.